False Hope For Japan

Can 'Abenomics' fix Japan's ailing economy?
The Nobel Prize-winning economist, Paul Krugman, for one has been singing the praises of Japan's new prime minister. The reason?
A group of economic policies that have already become known here as "Abenomics".
Abenomics is Mr Abe's grand plan to force Japan's economy out of deflation and serial recession. To do so, Mr Abe has two main proposals.
The first is to print lots of money. Monetarist economic theory states that varying the amount of money in circulation in an economy can control the rate of inflation.
The second proposal is to spend lots of money.
Classic Keynesian economic theory states that economies can get stuck in recession when companies stop investing and people stop spending.
In that situation, the government needs to step in to make up for the shortfall. Government spending gets the economy moving again, increases confidence, and gets private companies to start spending again too.
As soon as he came to power, Mr Abe went on the offensive. In just three months, from January to April, he said that his government would spend an extra $114bn (£75.04bn).
Schools and roads would be fixed and flood and earthquake defences reinforced, he said. There would be new money for scientific research and renewable energy.
Takeshi Fujimaki is an economist and hedge fund manager.
He says Abenomics will not work because Japan already has so much debt.
Japanese government debt is already the biggest in the developed world, around 230% of the gross domestic product (GDP).
"Japan's government debt is more than $13 trillion," said Mr Fujimaki. "But its annual revenue is only about half a trillion dollars. If interest rates go up to just 1%," he said, "the Japanese government will have to spend a quarter of its annual income just on servicing its debt".
"If Abenomics works, it will accelerate the bankruptcy of Japan," he added.
My view:

For two decades the Japanese authorities have been trying to lift Japan out of a deflationary economy.

To date, their efforts have been futile.

What is worrying about the latest proposal from Mr. Abe, is the combination of what are arguably the two worst elements to two views of economics.

The combination of money printing and government money spending could have disastrous consequences.

As government spending consumes the remaining savings to the frugal Japanese, a time will come when they need to go to foreign markets to sell their bonds.  

As Mr. Fujimaki points out, a very small increase in interest rates to only 1% would consume 25% of tax revenues.  Attempting to sell low interest bonds to a global market when the nation is clearly overextended seem ridiculous.

How much of the tax revenue would be consumed if rates rose to 2%?

Fifty percent or more?

Clearly, Japan is going to devalue the Yen further at some point, as a soft default on debt grows in certainty.

And that is the sort of thing that could trigger a currency war with Japan's trading partners.