Abenomics and the Failure of Keynes

Sep 23, 2020

Japan has been suffering from chronic deflation since 1991 after the bursting of their asset price bubble. This is similar in pattern to the secular stagnation in the US after the 2008 Financial Crisis. Both problems persist because they have been given the wrong solutions as quantitative easing (QE) in the US, and QE with fiscal stimulus as Abenomics in Japan.

What is Abenomics?

Abenomics is a set of economic policies organized into three arrows:

• Aggressive Monetary Policy: This pumps money into the private sector (microeconomy) so that businesses will employ people. This does not always work since microeconomics only uses labor if there is something profitable to employ that labor on. An advanced economy will have so much competition and so many products which will then reduce margins and discourage further investment. As such, this situation merely makes the new money go overseas. An easy proof is the Vision Fund of Softbank which invests in non-Japanese companies like WeWork and Uber, and the huge overseas investments by Japanese banks before and after the pandemic.
• Fiscal Stimulus: The profit maximization doctrine of microeconomics prevents businesses from hiring people even when money is available (since that money might not return with profits) and so it goes overseas. Keynes patched this problem by letting the government do the hiring. This creates a “multiplier effect” from the public sector which is similar to, but smaller than, a multiplier effect from the private sector. The government can do this because it can charge taxes to get back the value that it spent. However, this method raises public debt, increases the risk of credit downgrade, and transfers the present burden to future generations who will be born with so many taxes to pay.
• Structural Reforms: To support the two arrows, the government had planned additional policies such as signing new trade deals, raising taxes, encouraging women in labour, improving corporate governance and medical care, and allowing more foreign immigrants. However, these were not given so much focus as the first two arrows, leading to their incomplete implementation and subsequent failure.

The failure of structural reforms is a sign that the influence of corporate Japan is still very strong. Using social cycle theory, we can make analogies between ancient and modern Japan..

We have moved the post here: https://superphysics.one/analysis/taonomics/why-abenomics-and-keynesian-economics-failed/