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The Growing Mess Which Will Be Left Behind By The Abenomics Experiment

According to wikipedia, “overdetermination is a phenomenon whereby a single observed effect is determined by multiple causes at once, any one of which alone might be enough to account for (“determine”) the effect.That is, there are more causes present than are necessary to generate the effect”.  In this strictly technical sense Japan’s deflation problem is overdetermined – there are multiple causes at work, any one of which could account for the observed phenomenon. Those who have been following the debate can simply choose their favourite – balance sheet recession, liquidity trap, fertility trap – each one, taken alone, could be sufficient as a cause. The problem this situation presents is simply epistemological – in a scientific environment the conundrum could be resolved by devising the requisite, consensually grounded, tests.

But I would here like to use the term “overdetermination” in another, less technical, sense, since it seems to me Japan’s problem set is overdetermined in that we always seem to be facing at least one more problem than we have remedies at hand.

The case of the country’s ongoing energy dependency which is producing a growing trade and current account deficit would be a good example. Notionally the problem forms part of the legacy of the tragic tsunami which hit the country in March 2011 and lead to the decision to phase out  nuclear energy capacity.  But now  that decision has been reversed, and starting this summer nuclear generating capacity is once more to be “phased up”. The issue is, from a strictly economic point of view would that be good news? Well, it would certainly help with the deteriorating trade balance:

But what about deflation? Would having cheaper domestically produced energy help here? Wasn’t generating inflation supposed to be the whole point of the Abenomics exercise? Don’t rising energy costs constitute the lions share of the country’s recent, much heralded, inflation? Damned if I do, and damned if I don’t would seem to be the only conclusion to draw. A win-win policy which both closes the trade deficit and foments inflation (if that’s what you think Japan needs) doesn’t seem to be on the table. The trade deficit could also be corrected by reducing the fiscal deficit, but that would lower domestic demand, possibly send the economy back towards recession and almost certainly ignite deflation yet one more time.

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2 Responses to “The Growing Mess Which Will Be Left Behind By The Abenomics Experiment”

Michael551March 7th, 2014 at 4:27 pm

Seems correct, but what is strange is the current Yen exchange rate. Shouldn't the yen fall a lot more given the trade deficit? Don't know if still ongoing, but until recently Japan bought lots of Dollar assets to weaken the Yen against the dollar. Now without a trade surplus this should be difficult, but as of now the demand for Yen seems strong. Maybe the BOJ should not buy Japanese debt, which seems useless anyway ( it couldn't prevent the rise of the Yen before the financial crisis ), but it should buy Dollars instead. And a falling Yen should make the goal to rise wages in Japan a lot more easier: domestic Yen inflation yes, but export price inflation no. This also means, Japan can at least in theory escape the sticky or falling wages domestially. Spain with the Euro, can't therefore as long as the Euro is there the situation in Spain will be a lot worse than in Japan. And it already is: <25% unemployment and no sign of real improvement. Compared to this Japan has not a problem at all.

Michael551March 13th, 2014 at 6:25 pm

maybe the BOJ should buy as much Dollars as it can today. When (and if) the Yen finally crashes it could provide at least a buffer to avoid a depression.