Stephen Roach asks: Is this the last chance for Japan?

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Japan is the petri dish for the struggle against the secular stagnation that is now gripping most major developed economies. And, notwithstanding all of the fanfare surrounding “Abenomics,” Japan’s economy remains moribund. In the six quarters of Shinzo Abe’s latest stint as prime minister, annualized real GDP growth has averaged just 1.4% – up only slightly from the anemic post-1992 average of 1%.

Abenomics, with its potentially powerful combination of monetary and fiscal stimulus, coupled with a wide array of structural reforms, was supposed to end Japan’s “lost decades.” All three “arrows” of the strategy were to be aimed at freeing the economy from a 15-year deflationary quagmire.

Unfortunately, not all of the arrows have been soaring in flight. The Bank of Japan seems well on its way to delivering on the first one – embracing what it calls quantitative and qualitative easing (QQE). Relative to GDP, the BOJ’s monetary-policy gambit could actually far outstrip the efforts of America’s Federal Reserve.

And that’s pretty much what happened in Japan over the last 24 hours – with an appropriately positive response from world stock markets.

But the flight of the other two arrows is shaky, at best. In recent days, Abe has raised serious questions about proceeding with the second phase of a previously legislated consumer-tax hike that has long been viewed as the linchpin of Japan’s debt-consolidation strategy. Abe has flinched because the economy remains weak, posing renewed risks of a deflationary relapse. Meanwhile, the third arrow of structural reforms – especially tax, education, and immigration reforms – is nowhere near its target.

Abenomics, one might conclude, is basically a Japanese version of the failed policy combination deployed in the United States and Europe: massive unconventional liquidity injections by central banks (with the European Central Bank apparently now poised to follow the Fed), but little in the way of fundamental fiscal and structural reforms. The political expedience of the short-term monetary fix has triumphed once again.

All the fixes left undone by the end of Barack Obama’s first term became impossible during his second term. The Republican strategy of doing nothing – was implemented and increased in the heart of the worst recession in decades. As if they cared?

The problems of dying infrastructure remain. The only tax structure revisions possible over the remaining two years of Obama’s second term would be in response to corporate demands – with a few sops thrown in for Democrat election campaigns in 2016. Even education at the broadly collegiate level is starting to crumble.

We grow closer to the Japanese model of self-destruction month-by-month. Stephen Roach’s article is as cogent as ever. Though his prime area of expertise is Asia – he may as well apply the same analysis to the United States.

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