Abenomics: An American View

Brown Bag Lunch (BBL) seminar No. 872 held at the Research Institute of Economy, Trade and Industry, Tokyo

February 26, 2014

Americans see Abenomics in a few ways. Japanese economic and political developments are still largely ignored or taken for granted in the United States, in contrast to 15 or 20 years ago when Americans viewed the Japanese economy with a combination of fear and admiration and followed it very actively.

There have been three reactions to the Abenomics policy by Washington insiders and the New York markets. The first is a generally positive view of a Japan with a strong prime minister and a strong government. The post-Koizumi era with the rapid turnover in prime ministers was very unhelpful.

The second set of responses tends to differ depending on whether people work on the foreign policy/national security side or the purely economics/market side. Those in the former are very positive. There is occasionally concern about some of the symbolic aspects, including the Yasukuni shrine discussion (a misstep in my opinion), but broadly, the very positive feelings in defense and diplomacy circles is that Japan is lining up with the United States and will more than share the burden on security, and there is much sympathy among Americans for potential constitutional change or a change in attitude. It’s not 100 percent, but people are much happier with that than with the Democratic Party of Japan (DPJ) governments of recent years, which were viewed frankly as somewhat anti-American, and previous LDP [Liberal Democratic Party] governments were seen as irresolute and unable to commit to or make decisions

On the economics side, it’s somewhat different. As those at the Research Institute of Economy, Trade and Industry (RIETI) know, there was a generation of people who specialized in Japan and US-Japan economic relations and US-Japan trade. Many of them were only responding to incentives and have been left high and dry as the perceived importance of Japan has declined over the past 10 years. Many of these people have a vested interest in being cynical and are very publicly dismissive of Abenomics. Meanwhile, a number of the best Japan specialists have moved on to other issues—people with transferrable skills transferred and those without them remained. The unfortunate impact of this is that much of the press coverage is dominated by this group of leftover people who are very cynical about Abenomics and Japan.

It’s a little different in my community: economists who have worked on Japan in the past. Among this group, which includes central bankers from around the world, there is huge excitement and admiration for what the Bank of Japan (BOJ) is doing. An overwhelming majority of central bankers are very strongly supportive of what the BOJ is doing and very impressed with how they are doing it. Broadly speaking, Abenomics has strong support from the central banking community.

This can be seen on the exchange rate issue, where the US Federal Reserve and the BOJ have cooperated de facto by not viewing domestic quantitative easing, in the United States and in Japan, as an attack on exchange rates or manipulation. Former Federal Reserve Chairman Ben Bernanke explicitly stated this on a number of occasions. This wasn’t altruism. The BOJ, the Bank of England, the Federal Reserve, and, in some ways, the People’s Bank of China, are basically on the same line. This part of Abenomics enjoys very great support.

Views are much more mixed among market circles. I have received a very mixed picture from the major hedge fund and fixed income investors and others with whom I’ve spoken. They don’t seem to view the Nikkei as overvalued yet and were bullish through the start of this year. They also believe in the BOJ but are increasingly worried about debt sustainability in Japan. That’s a technical issue. It would be wrong not to worry at all about Japanese government debt, but there is a tendency to overestimate massively the risks. Hedge funds have tried repeatedly to short the Japanese government bond (JGB) market by taking positions to profit from rising interest rates and have lost very large amounts in the process. I have advised hedge funds repeatedly not to bet against JGBs.

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Adam S. Posen Senior Research Staff

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