Under the increasing risk of structural reform after the unsuccessful fiscal policy stimulus, the Central Bank of Japan is enlarging the scale of its QE, which provides further confirmation that Abenomics is facing great challenges right now.

After the Central Bank of Europe formally launched European QE, the Central Bank of Japan announced on Oct. 31 that it would scale up its quantitative easing monetary policy, increasing its annual assets purchasing from 60 trillion yen to 80 trillion yen. This move on QE reflects that Japan's economic recovery seems to be in trouble again after a short period of strong rebound in the economy.

The first quarter of this year, Japan's GDP increased significantly. Compared with the annualized QoQ (quarter over quarter) from last year, it went up to 6 percent from negative 0.5 percent. However, the second quarter disappointed everyone who had been cheered by the great progress Japan had made in the first quarter, with an annualized QoQ of negative 7.1 percent. Once again questions arose about Abenomics, especially on its third "arrow" — structural reform, which trails along behind the other two "arrows", monetary easing and fiscal stimulus.

Abe's government risked an increase in consumption tax, intending to show its determination to consolidate financial strength, ease the market's concern on debts, and build confidence in economic growth. But from a current perspective, the rise in consumption tax is probably going to end up as another mistake from Abe's government. On the one hand, in the first two seasons of this year, the drastic fluctuations in the Japanese market, and especially in the retail market, are obviously consequences of this policy. On the other hand, a rise in consumption tax before Japan actually emerges from its deflationary predicament could lead to inhibited public consumption. And if actual expenditure does not go up with consumption tax, Japan's economy may fare even worse than it is currently doing.

Also worthy of attention is Japan's national debt. With the ongoing rise in the CPI over the past six months, the country's national debt has kept hitting the bottom line. Domestic investors own 90 percent of Japan's national debt. Though the Central Bank of Japan has been purchasing national debt through the quantitative easing policy, domestic Japanese are still the major investors. While the inflation index keeps rising, the Japanese are still more concerned with national debt than with purchasing higher-yielding assets. This abnormal phenomenon indicates that investors are not optimistic about Japan's future economic development - they are still reluctant to shift to riskier, high-yielding assets; what's more, it also shows that these investors have no firm expectations of Japan emerging from its deflation.

Recently, Fitch also lowered Japan's sovereign rating from AA- to A+ with a "negative" for its prospect forecast. The latest World Economic Outlook published by IMF has also changed Japan's economic growth rate forecast from 1.7 percent to 0.9 percent, and estimates that Japan's economic growth rate might be 0.1 percentage points lower in 2015. Seen from the perspective of these statistics, the outlook for the Japanese economy is hardly optimistic. 

This article is edited and translated from 《QE不会是拯救日本经济的良方》，source: Beijing News, author: Luo Ning