Abenomics is alive and well. Japan’s crash into its fourth recession since 2008 is a nasty surprise for premier Shinzo Abe but it tells us almost nothing about the central thrust of his reflation blitz.

The mini-slump is chiefly due to a one-off fiscal shock in April. Mr Abe defied warnings from Keynesian critics and unwisely stuck to plans drawn up by a previous (DPJ) government to raise the consumption tax from 5pc to 8pc.

The essence of Abenomics is monetary reflation a l’outrance to lift the country out of deflation after two Lost Decades. The unstated purpose of this “First Arrow” is to lower real interest rates and raise the growth of nominal GDP to 5pc, deemed the minimum necessary to stop Japan’s debt trajectory from spiralling out of control.

This is a formidable task and may ultimately fail. Public debt is already 245pc of GDP. Debt payments are 43pc of fiscal revenues. The population is expected to fall to from 127m to 87m by 2060. Given the grim mathematics of this, the inertia of the pre-Abe era was inexcusable.

Takuji Aida from Societe Generale said the tax rise was an “unnecessary diversion from Mr Abe’s reflationary goals” but will not have a lasting effect.

The contraction of Japanese GDP by 0.4pc in the third quarter – following a 1.8pc crash in the second quarter - is certainly a public relations embarrassment, but less dreadful than meets the eye.

The economy expanded by 0.2pc when adjusted for inventory effects. Machinery orders rose for a fourth month in September to 2.9pc. Retail sales jumped by 2.3pc. Danske Bank’s Fleming Nielsen says Japan’s economy will be growing at a 3pc rate again this winter.

Mr Abe has shrugged off the tax debacle without much political damage. He is likely to call a snap election for December, win heartily, and suspend plans for a further rise in the sales tax to 10pc next October, ditching a policy he never liked anyway.

The Bank of Japan is learning - after a false start - how to pack a punch. The first round of quantitative easing by Goveror Haruihiko Kuroda was botched. A large chunk of the $75bn of asset purchases each month was squandered on a futile attempt to increase bank reserves and double the monetary base.

“This is completely useless. It has no impact on the economy,” said Professor Richard Werner from Southampton University, the man who invented the term QE as an adviser to the BoJ in the 1990s. “This largely repeats what they did from 2001 to 2006. They need to buy bonds from outside the banking system.”

Tim Congdon from International Monetary Research said QE is potent only if the assets are bought from “non-banks” such as pension funds and life insurers. They typically hold longer-term bonds.

Tim Congdon from International Monetary Research said QE is potent only if the assets are bought from “non-banks” such as pension funds and life insurers. They typically hold longer-term bonds.

David Fuller's view

Here is a PDF version of The Telegraph article.

This column makes sense to me, and the latter stages are also insightful.  The irony is that Japanese governments - entrenched within a destructive deflation of lower output, profits and growth – have worried about debt before their economy had achieved a sustainable rate of GDP growth to help reduce that burden.  In addition to QE, Japan should cut corporate taxes, to spur wages and increase consumption.

Assuming that Shinzo Abe is correct in assuming that he will be re-elected with a workable majority in the snap election that he has called for next month, Japan’s stock market should benefit from continued QE and postponement of the rise in sales tax until next October. 

Subscribers have seen plenty of evidence in recent years that QE will boost stock markets, as intended.  Therefore, the odds favour a strong performance by Japan’s Nikkei 225 during at least the first nine months of 2015.  This will be a much stronger stimulus than we saw from Junichiro Koizumi between mid-2003 and mid-2007, which lifted the NKY briefly above 18,000.  Moreover, there is little reason to expect a repeat of, or the equivalent of, Wall Street’s banking crisis slump of 2008 over the next few years, even though there are still plenty of concerns about the global economy.