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Economists still puzzle over Abenomics, the experimental mix of policies introduced by Japan’s prime minister, Abe Shinzo, seven years ago, in an effort to ward off the country’s deflation and stagnation. But two lessons are clear.
Japan’s bond market is remarkably docile. And its households are painfully sensitive to increases in the consumption tax, a broad value-added tax imposed on many of their purchases. After the government raised the tax from 8% to 10% on October 1st, the economy shrank at an annual pace of 6.3% in the fourth quarter of 2019, according to figures released on February 17th (see
chart).
The tax increase was an unforced error. The government faces no immediate need for additional revenue. Despite gross debt nearing 240% of GDP, its borrowing remains absurdly cheap. The yield on a ten-year government bond is stuck at about zero, where the country’s central bank, the Bank of Japan (BoJ), has pegged it since 2016. That peg obliges the BoJ to buy as much government debt as necessary to keep long-term interest rates low.
Such an accommodative stance is needed chiefly because private spending has been weak—too weak, at least, to lift inflation, currently at 0.8%, to its target of 2%. Thus the consumption-tax rise was doubly strange. It made it even harder for firms to sell their goods to Japan’s inhibited consumers, so that Japan’s government could sell fewer bonds to an automatic buyer. It was like shifting weight to the waterlogged side of a ship.
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