Abe, that is. He’s definitely got three, probably got four, and some might say five if you allow them to include the Olympics. But let’s ignore them (because it’s irrelevant) and allow Citi’s Buiter et al the use of “fourth” to discuss why “the fourth arrow of Abenomics will be fired belatedly and awkwardly, but it will hit its target, and in a way that ought not to re-open the old wounds of persistent deflation and excess capacity.”
If, as we expect, the scope for financial repression may also become more limited as Japan becomes a current account deficit country and its vast stock of private wealth is gradually diminishing because of an aging and declining population, balancing the fiscal equation will either have to come from sovereign debt restructuring or from fiscal austerity.
In our view, it is unclear whether it will be the former or the latter, or in fact a combination of the two. Our base case is that eventually austerity will do the heavy lifting. This is based on the view that, first, there is plenty of private wealth, as noted above, and, second, that the willingness to pay taxes (once they are on the statute books, that is tax compliance) will remain very high. After all, the incidence of sovereign debt restructuring is not simply a function of the debt burden, but usually requires a breakdown in social cohesion as well, and there are few signs of that in Japan.
But there are risks.
The full note makes for thorough reading.