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Japan’s economy sinks faster

My Economic Forecast for 2014 tracks solidly on target, event after event. Japan’s economy experienced a massive contraction in the second quarter according to revised figures that are worse than former dismal estimates.

In my “Economic Forecast 2014,” I wrote:

On the other side of the storm brewing in the China Sea stands Japan, whose economy is faltering again. Abenomics (the ultimate in quantitative easing) has reached the reality of diminishing returns that was practically predictable. Abe’s wild stimulus money is stimulating no more. The shine has worn off the coin, and Japan has nowhere left to go. Abe has pushed economic stimulus as hard as he could — probably harder than the world has ever seen — yet Japan’s economy remains still sunk in the mud. Now on the horizon, taxes are set to rise. Japan’s economy has not looked this dire since the 2011 tsunami.

 

Japan’s economy caught in a no-win scenario

Confidence in the prospects for Japan’s economy since the second quarter have deteriorated even further, meaning there is likelihood of further sliding in the third quarter when those results come in. Japan is now caught in a cycle that is likely to ensnare the U.S. and Europe soon. It must increase taxes to reign in its massive debt created by stimulus, and it must raise those taxes at a time when Japan’s economy continues to need stimulus as much as ever before. Naturally, raising taxes snuffs the faltering economy.

In other words, economic stimulus in Japan has run its course. There is a law of diminishing returns for everything economic, as I mentioned this past spring. Japan is on the steep downward side of those diminishing returns. Stimulus comes at a cost that has to be repaid, and the time to pay the piper is arriving when the economy needs more stimulus than ever, and Japan’s ability to provide that stimulus is becoming overtaxed.

Japan is caught in a no-win scenario. It has spent itself into a downward vortex that it is not likely to pull out of, but it had little choice as a result of the tsunami, which added significantly to the impact of the Great Recession.

Nevertheless, Japan’s economists remain optimistic — as optimistic, in fact, as nearly all economists were at the start of 2008 when the global economy crashed. You just can’t stop the florid enthusiasm of economists. So, listen less to economists and more to this blog.

 

More reading on Japan’s economy:

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