Almost three years after we first explained why Abenomics is a failure, the reality of Japan's sad economic state is finally starting to seep in, and overnight none other than one of Shinzo Abe’s most trusted advisers warned that he’s starting to see a chance that Abenomics may not do well. One day after Koichi Hamada, an outspoken former Yale University professor who is among the circle of economists that Abe’s drawn on for ideas, suggested that the BOJ should monetize foreign bonds, admitted that "I’ve studied economics for more than 50 years and I’ve believed that what works in the world mostly works in Japan as well," Hamada, 80, said at a seminar in Tokyo. "But, in the past six months, I’m starting to see there is potential that Abenomics may not work well."
Having found some initial success in the early years of the program, when the Yen plunged as a result of the BOJ's unprecedented monetization campaign, only the send import price inflation soaring, the Japanese currency has since moved against Japan this year, with the yen appreciating about 16% versus the dollar, eroding any competitive advantage that Japan's exporters enjoyed during the first years after Abe came to power in late 2012. Meanwhile, consumer prices are falling again and investors are questioning the sustainability of the Bank of Japan’s massive monetary stimulus program.
This "paradox" has shocked Hamada, who said that "Japan’s falling bond yields should weaken the yen against the dollar, but it hasn’t been the case and I’ve felt frustrated or down," said Hamada. He added that he’s feeling a little more relaxed since the gathering of central bankers at Jackson Hole, Wyoming, over the weekend because there’s "some hope that conditions in the foreign exchange market may be changing."
He is referring to the spike in the USDJPY, which has bounced over 200 pips since the weekend with the Yen trading at its weakest levels in a month, not so much on any renewed jawboning by Kuroda which appears to have lost its market moving credibility, as much as a return to the hawkish tone by Janet Yellen and various Fed members. He will probably be disappointed when the Fed once again folds and ends up not hiking next month.
Hamada also added that Japan’s finance ministry has the right to intervene in currency markets if it sees fit. Also, as noted previously, he also said the BOJ could buy foreign bonds as one way to nudge the yen lower, although the U.S. would probably object to this.
Quoted by Bloomberg, Takashi Shiono, an economist at Credit Suisse Group in Tokyo said that "Hamada couldn’t help but starting to worry because you have no trouble finding evidence that Abenomics isn’t working as intended," said . "The strong yen is one of the biggest factors weighing on Japan’s economy and something that Abe advisers didn’t expect."
Sure enough, with everything else failing, Hamada suggested that it may be better for Japan to move the goalpost and to focus on a consumer price gauge that strips out both food and energy costs, rather than the BOJ's preferred index which only excludes fresh food. Why the change: the latest print of the former indicator was a positive 0.3% while the latter registered a negative 0.5 print.