You may have heard the phrase Abenomics thrown around on talk T.V. shows during the last few months and wondered what exactly this is: everyone has been making a big deal about it so it must be important right? But it's in Japan so what does it matter for us? Right?
Wrong.
What is Abenomics is a combination of person's name and "economics." Japanese Prime Minister Shinzo Abe promotes a certain set of economic policies, and they have been dubbed "Abenomics" in his honor. This is actually pretty cool if you are into this sort of stuff.
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Abenomics relies on three pillars:
1) A more active central bank (imagine the QE we have here in the U.S., but on steroids)
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2) A huge fiscal stimulus package
3) Structural reforms to the Japanese economy to make it more competitive
All of this sounds very good at first glance, but as with all plans things do not always go according to plan. The Nikkei (the major Japanese stock index) went up well over 50% during the first few months of Abenomics as the market was flooded with money from the central bank and the stimulus program. More dollars chasing a limited supply = rising prices.
The first two arrows were great short term boosts (according to some), but the real excitement was about the third arrow - the structural reforms that were going to make Japan more competitive on a global scale. The third arrow has been the hardest to implement because it is the toughest medicine to administer, and I'll include a link to a great article in The Economist below, but what does this mean for us?
One of the side effects of Abenomics has been rising rates on Japanese debt, and if you think the U.S. has a debt problem (which we do), Japan is at least just as bad with a debt to GDP ratio of over 200%. Rising rates on that amount of debt can do horrific damage to an economy. Rising rates, inflation, and a stock market that has gotten off the sugar high do not bode well for the future of Abenomics.
A question: what other country has a central bank pumping money into the stock market, a federal government promoting stimulus projects, and has interest rates slowly starting to creep back up?
That would be us: the stock market has been wobbly lately, interest rates are slowly rising, and prices are still rising for things like groceries and meals out.
Thoughts?
