Legendary Japanese Economist: “Abenomics May Not Work Well”

One of Japanese Prime Minister Shinzo Abe’s most trusted advisors made a sobering confession recently, noting that Abenomics — a policy he himself helped craft — might not actually work at all.

At a seminar held in Tokyo, former Yale professor Koichi Hamada said:

“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. But, in the past six months, I’m starting to see there is potential that Abenomics may not work well.”

Japan’s central bank has cut rates into negative category, while the government pumps trillions of yen directly into the economy via bond and ETF purchases, loans to struggling companies, and big spending on new infrastructure projects. All of these unprecedented measures combined to help produce a meager 0.2% GDP rise in the second quarter.

“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.

On a positive note, Hamada is feeling a bit better after the Federal Reserve’s commentary from Jackson Hole, Wyoming, over the past weekend. Hamada has “some hope that conditions in the foreign exchange market may be changing,” referring to the potential rise in U.S. interest rates, which would strengthen the dollar versus the Japanese yen and hopefully contribute to higher inflation.

So far, the Fed has yet to act, however, and most analysts believe rate increases will be minimal — if they come at all.

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The iShares MSCI Japan ETF (NYSE:EWJ) rose to $12.38, up $0.10 (+0.77%), in morning trading today. The largest Japanese equities-focused ETF with over $14 billion in AUM (Expense Ratio: 0.48%) has now gained about 2.1% year-to-date.