As expected, the Liberal Democratic Party (LDP) won a majority in the Upper House in Japan Sunday night. The market has responded with a bit of a yawn in yen and Japanese government bond (JGB) futures. Now we get to see Prime Minister Shinzo Abe fire the “third arrow” of his economic plan.
For those who have not been following the day-to-day musings from Japan, the “Three Arrow” approach starts with a huge surge in monetary policy (check), an expansion of fiscal stimulus measures (check), and now the third arrow will be some structural changes in the Japanese business landscape (lower corporate taxes, international trade agreements and increased market-led competition in certain sectors of the economy). Let me state this clearly so there is no doubting my opinion on this matter. What is going on in Japan is an experiment. It is an experiment that has no basis in economic history.
It is taking the experiment Federal Reserve Chairman Ben Bernanke is currently trying in the United States, and it is doing it on a much grander scale in Japan. It’s Kamikaze-QE!
Could stock values rise in nominal terms, as they have since the announcement of destroying the yen was announced? Yes.
Nikkei May 22, 2013
Could Japan see a short-term bounce in gross domestic product? You bet.
Will debt to GDP levels drop as the result of Abe’s approach? Absolutely not. Not under any circumstances.
Will the Japanese government bonds ever be repaid? Absolutely not. Not under any circumstances.
I will be writing follow-up articles explaining in detail why I think the Abe plan is putting Japan on a collision course with a debt crisis. I will be writing follow-up opinions on the macro effects of “QE infinity” in both the U.S. and Japan. Just ask yourself a simple question: If the Krugmans of the world are right and all this government spending and bond buying is working, then are debt to GDP levels dropping globally?
Absolutely not. Not under any circumstances. QE and increased government spending paints over the bad decisions of policymakers. Government spending serves one primary purpose: winning elections. When studying the "three arrow" approach of the LDP in Japan, I am reminded of a fact of economics: How do you increase GDP? You increase GDP by increasing population or increasing productivity. Does one or do all of Shinzo’s three arrows do either of those in Japan?
— Tres Knippa