2014-45 Japan tries to end a 25-year long slowdown = Abenomics

Since the collapse of the stock market and property bubble in Japan in 1989 the economy has been growing slowly. Two years ago the newly reelected prime minister Shinzo Abe embarked on an all - out effort to improve the economy. It involved three elements
- a relatively small fiscal stimulus
- a massive monetary stimulus, trying to depreciate the yen and changes to the Bank of Japan act.
- structural reforms
The program is popularly known as Abenomics
The fiscal stimulus was necessarily low since Japan has been runnning a large budget deficit in a long time and its debt to GDP ratio is second highest in the world (after Zimbabwe!). The goal of the monetary stimulus was to increase the rate of inflation to the target of 2%. Structural reforms involved reduced regulation and trying to make the labour market more flexible.
Initially the program worked well but now the Japanese economy seems to be experiencing a slowdown. This article describes the current situation.

Yen depreciation and exports. The yen has depreciated significantly, from over 1/80 of the US dollar to  under 1/110 of the US dollar in the last two years. Note that the exchange rate of the yen is essentially always given upside down, i.e. as the number of yen per dollar (which increased from under 80 to over 110 - see the graph). As a result Japanese exports have increased.

Inflation rate and wages. Inflation rate did rise.But nominal wages did not rise and so  real wages declined. This is because the labour market in Japan operates under an implicit contract: workers get jobs for life and are partially shielded from business fluctuations: their wages do not fall a lot when there is a recession, but they do not increase a lot when the economy is in good shape.

Yen depreciation and import costs. The depreciation of the yen had the negative effect of increasing prices of imported goods and the cost of imports, in particular of oil and gas needed to produce electricity, as nuclear power plants had been closed since the Fukushima earthquake in 2011.
Another problem is the planned increase in sales tax, which is to rise to 10% by the end of 2015.

New program of quantitative easing. Solution: the usual one:quantitative easing. Last week the Bank of Japan announced that it will buy $US700 billion of securities a year. That is  twice as much, compared to the size  of the economy, as the quantitative easing program that just ended in the U.S.