As Robert Rubin recently wrote in his article, “The Search for a Monetary –Policy Wizard and Political Moral Hazard” (2/23/2015), monetary policy is important, but it is not omnipotent. It takes away attention from elected officials’ failure to act on fiscal/public-investment and structural issues and helps buy time.



In Japan, expansionary monetary policy has helped the Nikkei 225 rise almost to 19,000 in February. However, at the same time, nationwide department sales and convenience stores have continuously fallen since last April when the consumption tax was raised to 8% from 5%. The Japanese economic agenda should focus on a sound fiscal regime (most easily done by reversing the consumption tax rates back to 5% or even lower), robust public investment and structural change in immigration, education, trade liberalization etc.



As we have seen in the US markets, low interest rates in Japan have led Japanese political leaders to being less inclined to work on fiscal policies adn structural reform. Instead, quantitative easing has encouraged investors to reach for yield through riskier assets on a global basis leading to excesses and inflated asset prices.



Regarding the second round of QE announced by the BOJ last October, these measures are not proof that QE works. In fact, it's the opposite - an additional round of easing by the central bank had to be taken because price levels in Japan are still very far short of the central bank’s 2% target. The BOJ had to also reduce its economic growth and inflation forecast for FY 2014 to acknowledge the reality that the Japanese economy condition remains far away from its goal.



The most important and pressing step for Japanese officials to take is fiscal expansionary measures in addition to expantionary monetary policy. As mentioned in the above, the easiest remedy wouldu be to immediately reverse consumption tax rates to 5% or half of the current levels, or 4%.



Otherwise, the consequence is dire for Japan. At current growth rates, by 2020 Japan will be 1/3 of the size of the Chinese economy and a 1/5 of the US economy if we assume that China and the US will achieve 7% and 4% annual economic growth, respectively.



Ironicially, the current state of Abenomics will actually bring forth long-term economic decline to Japan and will have serious implications on Japan's international position, both economically and geopolitically.



Finally, regarding the weak yen, it is true that Japanese exporters would benefit from a boost from the depreciation effect, but the Japanese economy in terms of dollar will only shrink further.



Keysian economists like Laurence Summers continue to argue that in a world of secular stagnation and zero policy interest rates, an active fiscal policy is necessary as Say's law is now reversed - demand creates its own supply.



In 2015, Japan clearly needs to go far beyond Abe & Kurodanomics.

