2017 Update

It's 2017 and I'm reading some of my old posts thinking, "I was way-off base with my predictions and beliefs."

One of the key concepts I've learned in the past 2 years is the futility of predictions. Nobody can predict with any accuracy more than a year into the future. The system is too complex (good YouTube series on complex systems here). I made a page about failed economist predictions that I haven't updated with the outcome but you can see for yourself what they were thinking and how wrong they were.

Rather than go into a long blog post about why and how predictions fail, I'll direct you to a book that summarises the evidence better than I can. That book is Superforecasting by Philip Tetlock and Dan Gardner. I encourage anyone who is interested in predictions to give it a read.

Another key understanding that has become stronger in the last few years is letting go of strong ideological beliefs and particularly beliefs that are part of your identity. These beliefs will make it very difficult to view evidence and information on its merits without confirmation bias coming into play. I wrote an article in late 2014 about this very concept and I think it is very beneficial to any critical thinkers.

The blog going forward

I don't intend to write detailed blog posts simply because most information is already out there on the internet and I would just be rehashing it with my own interpretation.

I will be posting random blog posts about things I want to document and share publicly for entertainment and general interest purposes. I think the next blog post will be a list of finance and trading movies that I've watched.


As always I can be contacted on twitter: @ShervinD

Abenomics

This post will look at Japan's recent economic performance under the policy of Abenomics. Policy recommendations are made at the end.

Japan's Prime Minster, Shinzo Abe

In 2012 Japan's prime minister, Shinzo Abe, ushered in a new set of economic policies which have been termed Abenomics. The policy involves "three arrows": fiscal policy, monetary policy and structural reform.

For further in depth analysis and details on Abenomics please read: Abenomics and the Japanese Economy.

Japan's recent performance

The latest GDP print is disappointing; Japan's economy shrank 1,6% (annualised) in the last quarter. Exports where down 16.5% (annualised) highlighting the flaws the export reliant model. When global growth or export markets slow, the export economy suffers.¹

Private consumption fell 3% (annualised), which is significant given Japan's economy is 60% consumption. The falling Yen added to problems for the Japanese consumer with food prices rising.¹

The large drop in growth seen in 2014 (see above chart) was the result of an increase in the consumption tax from 5% to 8%. 

Is Abenomics a success?

The rise in the consumption tax hurt consumer spending at at time the economy didn't need it. The result was a recession in late 2014 (two quarters of negative economic growth). Increasing government spending while increasing taxes is like having one foot on the accelerator and the other on the brake. The government must focus on generating growth today and address fiscal sustainability in a few years or expect the jittery economic growth to continue.

Raising domestic demand is paramount and the government should not only cancel future consumption tax increases but also reverse the previous increase. Additionally, the government could lower taxes for low-income earners to increase disposable income. It must be noted that Japan's income tax is very progressive.

Relying on a currency devaluation to boost exports is a less effective tool to boost growth. Firstly, the gains are marginal given the increasingly global supply chain. Secondly, it acts as a consumption tax on imports which reduces household real incomes. As mentioned above, rising food costs have become a problem for Japan.

The demographic challenge Japan faces must be addressed either through higher birth rates or net migration and getting more women into the workforce. This is one of the major aims of the structural reforms proposed under Abenomics.

Conclusion

The failure of Abenomics is political (not economic) with the deficit hawks continually demanding policies to reduce the deficit when the exact opposite is needed to propel Japan out of its protracted economic malaise. The more difficult task will be establishing the structural reforms which challenge the politically strong vested interests. If Japan can overcome these hurdles, they will be the shining example of an economy that escaped the debt deflation global epidemic.

References

1. Warnock, E. and Obe, M. (2015). Japan’s Economy Shrinks in Second Quarter. [online] WSJ. Available at: http://www.wsj.com/articles/japans-economy-shrinks-annualized-1-6-in-second-quarter-1439769883 [Accessed 23 Aug. 2015].