Abenomics has only worked because foreigners think it will

Wikimedia Commons
Wikimedia Commons

These aren't the investors they're looking for.

Now, a not-so-long time ago—in 2012, to be exact—Japan finally got serious about ending its decades-long economic malaise. Specifically, it said its central bank would print as much money as it took to get prices rising again, and with them, hopefully, growth. The idea was that they needed to do something this, well, radical to jolt their people out of the deflationary mindset that had made their slump self-perpetuating. Markets, at least, exulted. The Nikkei rocketed up, and the yen dropped down, which was good news since that should have helped exports.

But who, exactly, was exulting? Not, it turns out, actual Japanese people. It was foreign investors. And that's why so-called "Abenomics"—Japan's program of monetary stimulus, fiscal stimulus, and structural reforms—hasn't created as much growth as they hoped it would.

You can see that in the chart below from Shin-ichi Fukuda. Since Abenomics began, the Nikkei has only gone up when Japan's own markets have been closed. Even worse, it's actually gone down during when theirs have been open.

Nikkei Day vs Night

The same is true of the yen: it's only gone down, which is what Japan wants, when other people are trading. Otherwise, it's been flat. Think about that, it's pretty extraordinary. Japanese people don't think printing trillions of yen will make the yen worth any less, even though its central bank has said this will be permanent.

Yen Day vs Night

So what's going on here? Well, it might sound like a hokey religion, but central banking is really a Jedi mind trick. Just saying something can be enough to make it happen. That's because the power of the printing press gives their words a distinct power. Well, that and the fact that the economy is already one big self-fulfilling prophecy. See, when people are confident, they spend and invest more, which then justifies their initial optimism—and keeps them spending and investing. The opposite, of course, happens when people are fearful. So, in other words, the economy alternates between virtuous and vicious circles. Central banks try to keep our positive spirals from getting out of control, and our negative spirals from happening at all. And that means convincing us to believe what they want us to.

But central banks don't just convince us with words. They convince us with interest rates and bond-buying, too. In fact, that's the easiest way for them to do so. The problem, though, is it can also be the costliest. Say, for example, that a central bank raises rates to rein in inflation. That directly increases borrowing costs, and indirectly lowers people's expectations for the future—and prices, too. In other words, the central bank has to hurt the economy to make people think what it wants about inflation. So it'd be better if it didn't have to do this, at least not as much. And it wouldn't have to if people thought it meant what it said. That way, people's expectations would never change that much—they'd be "well-anchored" in monetary policy lingo—so interest rates wouldn't have to change as much to keep inflation where the central bank wanted it. That's why, aside from the obvious, it's so important for central banks to hit their targets: it gives them a credibility that makes their jobs easier and the economy better.

Now, it's hard to get your credibility back once you've lost it. Which brings us to Japan. Its central bank has let inflation stay so low for so long that its people don't believe it will really hit its 2 percent target now. And why should they? Japanese people under 30 have never really experienced rising prices, not in their adult lives. It's almost an alien concept to them. Besides, even when Japan has tried to get back into the Goldilocks zone of low, stable, and positive inflation—like it did in 2001—it's only done so half-heartedly. Who's to say it won't again. That's why Japan has had to do so much to convince people today that this time really will be different, that it will do whatever it takes.

It turns out it's harder to get Japanese people to believe this than everyone else. In other words, Abenomics has only worked by making foreigners think it will. They see the central bank printing all this money, and think it's really committed to getting Japan out of its doldrums. So they buy the Nikkei, and sell the yen—which has, in fact, helped the economy. Just not as much as it would if Japanese people did too. See, the weaker yen has increased inflation, albeit slowly, by increasing import prices, which has then spilled over to others. Indeed, Japan's core inflation is at a 15-year high. But that's barely translated into higher wages. Japanese workers and companies just don't think inflation will go much higher, so it hasn't. The Jedi mind trick hasn't worked on them.

But if Abenomics is going to be much more than a marketing campaign for overseas investors, it's going to have to convince its people that, after 20 years of stagnation, things have changed. Maybe that means buying even more bonds. Or maybe it means explaining in more detail how much they want wages and prices to rise.

So it has to use the force—of its printing press.

Matt O'Brien is a reporter for Wonkblog covering economic affairs. He was previously a senior associate editor at The Atlantic.
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