‘Will Abenomics Succeed?’ Is the Wrong Question

There’s a lot of speculation about how Abenomics will work out in the long run.  I don’t like much of this speculation, because it seems to conflate four quite distinct questions:

1. Can the BoJ boost nominal aggregates?  I.e. is Japan stuck in a liquidity trap?
2. Will the BoJ succeed in reaching its 2% inflation goal?
3. Would higher inflation lead to better outcomes for the real economy?
4. If 2% inflation is achieved, will Japan experience good times?

Before proceeding, let me indicate that I think the answers are:

1. Yes, definitely.
2. Probably not.
3. Probably.
4. Probably not.

Number one is easiest.  The BoJ can clearly devalue the yen, and they would not be able to do so if stuck in a liquidity trap.  That means, ipso facto, that they can boost inflation and NGDP.  There never should have even been a debate on this issue, but if there was it is now resolved.

But I doubt the BoJ will reach an inflation rate of 2%, because the BoJ doesn’t seem committed to that goal:

TOKYO (Reuters) – A rift within the Bank of Japan’s board over how to steer its radical monetary stimulus to end nearly two decades of damaging deflation underlined the early challenges Governor Haruhiko Kuroda faces in his efforts to foster sustained growth.

The differences of opinion were highlighted in the minutes of the April 26 meeting, which showed some policymakers opposed targeting 2 percent inflation in two years and called for more flexibility in guiding monetary policy.

I presume this rift contributed to the recent appreciation of the yen, and the sharp selloff in Japanese equities.

If they do boost inflation substantially, I expect that to lead to significantly faster RGDP growth.  But I’m agnostic on whether the growth will be all that impressive.  I sort of doubt it.  Japan’s problems are probably more on the supply-side.  Long term success there will require supply-side reforms.

As far as “good times,” even if the policy boosts RGDP growth it may be seen as a failure.  Perhaps the growth spurt will be short-lived.  Or perhaps other problems (i.e. fiscal issues) will dominate the headlines.  There are far more ways a macro economy can fail than succeed.  Most of the time the current situation is viewed negatively by most people.  Thus the safest course is to constantly be pessimistic—you’ll sound more intellectual and others will eventually see you as a sort of Nostradamus.  ”He said it would all end in tears, and he was right.”  It’s especially smart to be pessimistic during those rare times when things seem to be going reasonably well, say 1999 or 2005.  It probably won’t last long.

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