Adviser to Abe Starts to See Risk That Abenomics May Not Do Well

  • Koichi Hamada has been vocal about harm from a stronger yen
  • He says abandoning Abenomics program is out of the question

One of Shinzo Abe’s advisers cast a shadow over the prime minister’s revival program for Japan, warning that he’s starting to see a chance that Abenomics may not do well.

Koichi Hamada, an outspoken former Yale University professor who’s part of a circle of economists that Abe’s drawn on for ideas, has been vocal in recent days about the challenges facing Japan. In his latest remarks on Wednesday, Hamada said that while giving up on Abenomics is out of the question, policy makers must be on guard against the yen strengthening.

"I’ve studied economics for more than 50 years and I’ve believed that what works in the world mostly works in Japan as well," Hamada, 80, said at a seminar in Tokyo. "But, in the past six months, I’m starting to see there is potential that Abenomics may not work well."

Currency markets have moved against Japan this year, with the yen appreciating about 16 percent versus the dollar, eroding the competitive advantage that exporters enjoyed during the first years after Abe came to power in late 2012. Meanwhile, consumer prices are falling again and investors are questioning the sustainability of the Bank of Japan’s massive monetary stimulus program.

"Japan’s falling bond yields should weaken the yen against the dollar, but it hasn’t been the case and I’ve felt frustrated or down," said Hamada. He added that he’s feeling a little more relaxed since the gathering of central bankers at Jackson Hole, Wyoming, over the weekend because there’s "some hope that conditions in the foreign exchange market may be changing."

The yen traded at 103.29 per dollar at 3:56 p.m. in Tokyo, around its weakest in about a month. Federal Reserve Chair Janet Yellen set the tone for a stronger dollar with her comments at Jackson Hole on the outlook for higher U.S. interest rates, while Bank of Japan Governor Haruhiko Kuroda indicated he’s more likely to keep moving in the opposite direction.

Hamada said that Japan’s finance ministry has the right to intervene in currency markets if it sees fit. He also said the BOJ could buy foreign bonds as one way to nudge the yen lower, although the U.S. would probably object to this.

To read more on Hamada’s views, including helicopter money, click here

"Hamada couldn’t help but starting to worry because you have no trouble finding evidence that Abenomics isn’t working as intended," said Takashi Shiono, an economist at Credit Suisse Group in Tokyo. "The strong yen is one of the biggest factors weighing on Japan’s economy and something that Abe advisers didn’t expect."

Hamada also suggested that it may be better for Japan to focus on a consumer price gauge that strips out both food and energy costs, rather than the index favored by the BOJ now that only excludes fresh food. The most recent reading of the former measure was 0.3 percent while the latter registered minus 0.5 percent.

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