Japan Prime Minister Shinzo Abe’s bold economic strategies – nicknamed “Abenomics” – initially started with the Bank of Japan, when he installed a new BOJ governor and started an aggressive easing of the Japanese currency with an influx of funds from the BOJ. This resulted in the yen weakening against the dollar and giving a boost to Japan’s export-driven economy. But Koichi Hamada, professor emeritus of economics at Yale University and one of Abe’s economic advisers, warned that the BOJ must check the “delicate” balance of Japan’s economy to prevent from doing damage instead of the intended improvement.
Further financial easing by the BOJ would indeed be “better for Japan’s output,” says Hamada. “But there’s also a chance that several months or a few years from now, consumers’ mindset will switch to inflationary” from deflationary, he said. “When the mindset of asset holders changes, we can’t rule out the possibility that inflation may appear earlier than expected.” This balance is a “delicate situation,” Hamada says, and taking care of the balance is key. More specifically, he said that the central bank needs to take the time to assess the impact of an April increase in the national sales tax before deciding on any further financial easing. Hamada is known as an aggressive proponent of efforts to pull the world’s third-largest economy out of deflation.
Economists and industry observers all relatively agree that the BOJ would do financial easing in July, when data that shows the effects of the recent sales tax-hike would be available. BOJ Governor Haruhiko Kuroda has expressed confidence that inflation is heading towards his 2 percent target. Hamada himself said that Abe’s government should think of decreasing Japan’s corporate tax rate, while taking its time to decide whether to proceed with the second step of the sales tax increase plan next year to 10 percent from 8 percent.