On November 17th we get news that Japan’s economy has “unexpectedly” shrank from the second consecutive quarter. GDP fell 1.6% from July to September after it had been predicted to rise 2.1%. This is after the second quarter’s revised number of a 7.3% contraction.
Most (Keynesian) economists say this because of the April sales tax increase from 5% to 8% and that Japan’s economy was not yet strong enough to handle tax increase. They note the lower private consumption, which makes up 60% of the economy, was the main reason for this.
BBC Tokyo Correspondent, Rupert Wingfield-Hayes, notes that this plan, known as Abenomics, was started in the spring of 2013 by Prime Minister Shinzo Abe. It was aimed to turn around Japan’s economy after 20 years of deflation. Billions were spent through stimulus spending and the Bank of Japan printed hundreds of billions to buy government bonds.
Rupert says that it lowered the value of the yen, making Japanese exports cheaper and to cause investors to move from bonds to stocks. The Tokyo stock market soared and by mid-2013, Japan’s economy looked like it was back to solid growth.
Then he notes, in early 2014, Mr Abe’s government took a calculated gamble. Mr Abe could now take a risk with a “growing” economy and raise taxes for the first time in almost 20 years. Consumption tax would rise from 5 to 8%, which was needed “to plug the giant hole in Japan’s public finances.”
The result of this gamble, as Rupert notes, has not paid off because Japanese consumers have stopped spending and the economy is back in a recession. He states that is is because the fall in the yen gave Japanese a huge increase in profits, but they in turn did not raise the wages of their employees, and decided just sit on the money.
And lastly Rupert says that the huge stock market rise only benefited a minority of rich people, since only 20% of Japanese people own stocks. The majority of people saw their incomes stay the same or fall and the tax rise has made them feel even poorer and hence they have stopped spending.
Now most Austrian economists were not surprised by this news of and predicted that this most-likely would happen. Government spending, funded in a large part from the Bank of Japan’s printing of new money, would create a short term bubble. In the short term GDP, stocks, and exports would rise. But because this government stimulus did little to create any long-term sustainable growth, the economy shrunk after the stimulus ended. For long-term sustainable grown, investments must be made by businesses who think they can make a profit from they money they invest. Businesses don’t invest in ventures that they think will not be successful. They use the money in way to maximize the return on the money they invest. The sales tax increase just illustrated how ineffectiveness the government spending was.
Governments for the most part have no vested interests in making those kind profit making of decisions. We all have seen that they make most of their decisions based on what they can do to get more votes next election and helping those who donate to their campaign. The money they spent was not theirs too and the amount spent was not based on how much they can afford to risk, but on how much new money the Bank of Japan could print.
Keynesians and most governments think you can just spend your way out of recessions. That if the people aren’t spending enough the government must step in and stimulate (increase government spending) to make up for spending. The book Animal Sprits, takes this lack of private spending even further. The reason stated for public not spending is the people are irrational and they don’t understand that if they just spend money, the economy will improve. And these or the same people laugh at free-market supporters who say the market will regulate itself if there no government regulations.
Mr.Wingfield-Hayes is right that stock market gains only helped a few rich people, but he incorrectly blames exporters for not increasing their employees wages. The exporters most likely saw this as a temporary increase and didn’t see much worth investing their profits in. An employees’ wage is based on what value they can add to the business, the value of work they do.
This type of misplaced blame is an attempt to shift the blame from those responsible, the government, to a nameless group of people. A group easily believed be evil, corrupt, and or greedy so the public would not question these accusations. So then they government could then have to step in and regulate them to fix this along with another round of more stimulus. Stimulate, blame, regulate and repeat until the government gets bored with spending money or until the private sector is able to turn the economy around. We all know the government will never get bored with spending money.
– Source BBC News http://www.bbc.com/news/business-30077122
*** Note: All blogs are a work in process ***