Will Shinzo Abe’s Free Money Policy Fail Too?

Time and options are running out.

Bullion.Directory precious metals analysis 27 November, 2015
By Christopher Lemieux
Senior Analyst at Bullion.Directory; Twitter @Lemieux_26

It is no secret that quantitative easing has yielded little results, and Japan’s economy policies have become the antithesis of success. Following Japan’s fifth recession since the financial crisis of 2009, Prime Minister Shinzo Abe has ordered an expansion of the budget in order to send 10 million, low-income pensioners a check for ¥30,000, or roughly $245.

The ¥3.5 trillion expansion could be the beginning of what some call “helicopter money.” Essentially, it is a fiscal counterpart of a tax cut. Abe issued the expansion to help low-income pensioners as a buffer to an economic downturn, but, let’s be honest, the stimulus check is not large enough to buffer any significant downturn.

Abe is likely looking for the money to be spent in hopes of boosting both economic demand and inflation, since the Bank of Japan’s monetary policy has been a complete failure. The supplementary budget is aimed at increasing the economic climate in the first quarter of 2016.

“Abenomics 2.0” has been outlined by the prime minister last week with the hopes of increasing Japan’s economy to ¥600 trillion by 2020, but analysts are already have their doubts. Masamichi Adachi, an economist with JP Morgan & Chase and former central bank official said “Abe’s administration is supporting the economy, and equity prices are a key barometer of its achievement, but we do not expect much on genuine reforms that would pave the way to achieve the Mission Impossible (Bloomberg).”

Simon Wren-Lewis, Professor of Economic Policy at the Blavatnik School of Government, Oxford University, said (in regards to helicopter money) that if a central bank holds firm on a particular inflation target that cannot be achieved because inflation is too low while stuck in a liquidity trap, inflation will continue to undershoot without helicopter money.

But, will this free money actually kick-start the economy? Probably  not when compared to similar circumstances. In 2001, the effects of the economic downturn in the United States became apparent and tax rebate checks of $300 or $600 were sent out as part of the tax cut plan under the Bush Administration. This was a so-called “counter-recession” policy.

Economists thought such rebates would bolster consumption but were sorely mistaken. In “Did the 2001 Tax Rebate Stimulate Spending? Evidence from Taxpayer Surveys,” by Matthew Shapiro and Joel Slemrod, it was found that a mere 22 percent of rebate recipients were spending the free money while others either saved it or payed down debt.

In conclusion, Shapiro and Slemrod found that the stimulus was too insignificant to stimulate aggregate demand and spur consumption. Although, they did note it was tough to determine whether or not spending habits would have differed absent the rebates.

It is difficult to foresee that a $245 payment to low-income Japanese would buffer, let alone counter, further economic contraction. It, too, is too insignificant to make a real change. And, it makes one think if the major central banks had not rigged financial markets but cut checks to citizens out of the trillions of free speculation money, what kind of consumption would that trigger?

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