After entering into office, Japanese Prime Minister Shinzo Abe, alongside Bank of Japan head Haruhiko Kuroda, announced an aggressive monetary policy to stimulate the economy and end deflation. Known as “Abenomics,” the government has essentially followed the practices of the Federal Reserve and its chairman Ben Bernanke.
The government has undertaken several measures in the last few months: economic stimulus doubled to 7.5 trillion yen ($81 billion), acquisitions of Japanese government bonds with maturity levels of up to 40 years and an increase in its purchases of financial tools connected to stock and property markets.
During the first phase of the steps, the Japanese economy and markets roared – a sugar high, if you will. Of course, Keynesian economist Paul Krugman, who advocates for heightened government spending and intervention in the economy, deemed the move a success. However, late last month, Japanese stocks plummeted 1,000 points and were the largest drop in more than two years.
Financial experts are now warning that “Abenomics” could very well turn into “Abegeddon.” Alex Friedman, global chief investment officer at UBS Wealth Management, told CNBC Wednesday that the world’s third-largest economy faces a severe case of stagflation, an economic condition of slow growth and higher inflation.
“It’s possible we could see a stagflation scenario, where you see inflation in asset prices but no real growth. The ultimate story is you need a hand off to real growth – in Japan there’s a real question of whether that’s possible,” explained Friedman in the interview. “If you don’t have growth, then you end up with a potential Armageddon story, something we would call Abegeddon.”
In such a situation, investors could become quite concerned over Japan’s maintenance of its enormous debt levels. Eventually, investors would exit government bonds and then cause Tokyo’s debt-to-GDP ratio to soar to 300 percent – presently 226 percent – and the 10-year government bond yield would hit five percent – currently at 0.86 percent.
At the end of it all, “Abenomics” would seriously harm the financial system and regional bank capital would weaken. However, Friedman noted that it would take years before the global financial community can determine if the prime minister’s policy measures were indeed successful.
“With inflation likely to remain close to zero, we do not expect a stampede out of the bond market: any short-term sell-off would likely be met by temporary Bank of Japan stabilization measures,” added Friedman. “We are keeping a small overweight position in Japanese equities over our six-month horizon as we monitor the potential changes in long-term dynamics closely.”
During an interview with Agence-France Presse, the Japanese leader said that his policy “is the only way” to fix the nation’s fragile economy, even though the International Monetary Fund (IMF) warned in a reportreleased Friday that it could backfire.
“The Japanese economy has been stagnant and has suffered from deflation over the last 15 years. Our GNI (Gross National Income) has diminished some 50 trillion yen ($505 billion). Under these circumstances, Japan was losing its position in the world,” stated Prime Minister Abe. “To counter this, I will push through drastic monetary policy, fiscal measures and a growth strategy that will stimulate private-sector investment, so that the economy can be rid of deflation.”
Japan’s Nikkei ended the Wednesday trading session 3.8 percent lower.