Can Abenomics Revive Japan’s Economy?

Yves here. Most readers are skeptical of Abenomics, and for good reason. This post gives an accessible discussion of why it has not worked.

By Junji Tokunaga, an Associate Professorin the Department of Economics, Dokkyo Univeristy, Saitama, Japan. He is the co-author, with Gerald Epstein, of a multi-part series for Triple Crisis on “Global Dollar-Based Financial Fragility in the 2000s” (Part 1, Part 2, Part 3, Part 4). Originally published at Triple Crisis

Japanese Prime Minister Shinzo Abe won a landslide victory in the snap election for the lower house of parliament on December 14, 2014. Abe’s Liberal Democratic Party (LDP), the leading conservative political party, and its partner party in the ruling coalition have won 326 of 475 seats, which enabled the coalition to secure a two-thirds supermajority in the lower house.

Why did Abe win the election? Since the end of 2012, the Abe government has carried out an economic revitalization program, called “Abenomics,” consisting of “three arrows”: more aggressively quantitative monetary easing, massive fiscal stimulus, and structural reforms. The main reason of his emphatic victory is that Abe succeeded in persuading the electorate to stay the course, with slogans like “Abenomics is progressing” and“there is no other way to economic recovery,” while shifting the electorate’s attentions from more delicate political matters such as restarting Japan’s nuclear power plants and bolstering its military forces.

What is Abenomics?

Paul Krugman has deeply supported Abenomics. He stressed that Japan could be the first successful model for getting out of a severe recession like that Western countries such as the U.S. and Europe have faced since the global financial crisis in 2008 (“Japan the model,” The New York Times, May 23, 2013).

Abenomics has been mainly about more aggressively monetary quantitative easing. The Bank of Japan (BOJ), the country’s central bank, has been introducing “Quantitative and Qualitative Monetary Easing” (QQE) since April 2013 in order to reach an inflation rate of 2% within two years. Under the QQE, the BOJ pledged to double the monetary base. At the end of October 2014, it decided to accelerate the pace of increase in the monetary base . With the BOJ being twice as aggressive as the U.S. Federal Reserve in its bond-buying (“Without reforms, Japan’s leader remains vulnerable,” The Wall Street Journal, December 15, 2014), its balance sheet has gone above 50% of GDP. According to advocates of Abenomics, the inflationary expectations driven by aggressively monetary easing could decrease real interest rates, leading corporations to raise investment spending, creating domestic employment. The increase in investment would lead to strong corporate profits, eventually translating into higher wages which increase consumption spending of households. This expected virtuous cycle can be considered a form of “trickle-down economics,” in the sense that strong corporate profits would trickle down to everyone else in the economy. In short, the Abe government believes that Japan could be back, if the trickle-down economics served to lift the Japanese economy as a whole.

What Have Been the Effects of Abenomics So Far?

The effects of aggressively monetary easing have, mainly, been limited to higher stock prices in Tokyo and the drastic depreciation of Japanese yen in foreign exchange markets. Specifically, the Nikkei 225, the stock market index of the Tokyo Stock Exchange, has soared by about 68% and the yen-to-dollar exchange rate has depreciated by more than 42% in two years. Some said the sparked developments in stock market and foreign exchange market are proof that Abenomics works well. But these developments could not contribute to the trickle-down economics which advocates of Abe’s policy expect.

There are two reasons for this. The first is that aggressively monetary easing could not stimulate household consumption spending. The dramatic stock market rally accelerated the “wealth effect” which might lead those who hold a lot of financial assets to consume more. Meanwhile, however, workers’ wages have not kept pace with inflation. In addition, the Abe government introduced a sales tax hike, from 5% to 8%, in April 2014. Such conditions would tend to make households postpone consumption spending, suggesting the benefits of Abenomics have not reached everyone. The second is that corporations, particularly big multinationals, have saved their profits. In the corporate sector, profits have been improving significantly, underpinned by the drastic depreciation of the yen. But corporations have held onto most of these profits as internal reserves, rather than engaging in investment spending that would lift the economy. According to Japan’s Finance Ministry, the internal reserves of Japanese companies, excluding financial institutions, reached a record 304 trillion yen (US$2.95 trillion) as of the end of fiscal year 2013. As a consequence, Japan’s GDP has shrunk for two consecutive quarters, a common definition for recession, since the second quarter of 2014.

What Kind of Policies Will Abe push After the Victory?

The landslide victory in the snap election could not only enable Abe to stay in office until late 2018, making him longest-serving prime minister in Japan since World War II, but also give him abundant political capital for further pursuing Abenomics. On what kind of policies will Abe spend this political capital?

First of all, Abe will likely purse “third arrow” of Abenomics: structural reforms of the economy. The Abe cabinet has already announced “Revision of Japan Revitalization Strategy: 10 Key Reforms” on June 2014. Parts of the strategy, such as enhancing of women’s labor force participation and advancement could be epoch-making in Japan, if they worked well. But most of structural reform plans are based on a neoliberal approach which would accelerate low taxation, deregulation, reduction of fiscal deficit, and free trade.

Broadly, there would be four neoliberal policies that Abe would push: First, lowering corporate taxes, while planning the second stage of the sales tax hike from 8% to 10% in April 2017. The Abe government has agreed on the basic outline of fiscal year 2015 tax reforms, including a 2.51 percentage point reduction in the effective corporate tax rate. The tax cut could be a further boost for big corporations that have already received the windfall from the depreciation of the yen. Second, accelerating the push for labor market “flexibility.” Labor market deregulation would make it easier for big corporations to fire full-time employers, lowering incomes for wage earners even further. Third, radically reducing social security spending on the fiscal year 2015 budget, in order to reduce the massive fiscal deficit. Finally, completing the final stage of negotiations over a free-trade agreement, the Trans-Pacific Partnership (TPP), with the United States. Certainly, the TPP would facilitate opening the agricultural market in Japan to an unprecedented levels of imports, which would inflict big damage on many Japanese farmers.

These neoliberal reforms would lead to rising inequality and the stagnation of the Japanese economy, rather a resilience of domestic consumption and investment spending which lifts the economy as a whole.

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  1. Eduardo Quince

    Whether Abe proceeds with structural reforms remains to be seen, but QQE has been thwarted by the decline in oil prices. BOJ now has no chance of achieving its inflation target any time soon, though Kuroda will never admit it. Dude is a bull in a monetary china closet. He’s liable to ramp QQE up to insane levels unless enough of his fellow BOJ Policy Board members oppose him.

  2. Jackrabbit

    QE tips the scales: making risky investments more appealing and savings (safety) is less appealing.

    But, as Yves has pointed out many times before, companies don’t invest much without DEMAND for their products and services. So the benefits of QE are proving to be short-lived as companies ‘invest’ in their own stock or overseas causing slim ‘trickle down’ benefits. After a time, as more and more QE is applied, it just becomes pushing on a string.

    IMO QE is best after a shock like 2008 GFC when investor’s are “spooked” – not as ordinary economic stimulus.

    In fairness, Abenomics was not just QQE but I’ll bet that the ‘restructuring’ part of Abenomics hasn’t really happened, just as it hasn’t happened in the US where it has become clear that the ‘new normal’ is viewed as just a hiccup of the ‘old normal’.

    At some point, malinvestment requires painful restructuring but politicians don’t want to take that ‘hit’ (accumulated from past years) and instead implement ‘gimmics’ pushed by self-serving financial elites.

    In this way, the political system amplifies system risk.


    Citi’s Chuck Prince in 2007: “”As long as the music is playing, you’ve got to get up and dance.”

    Um, no. The better analogy is that the music gets louder and louder until it ruptures ear drums. But the dancing? Yeah, that is fun.

    H O P

    1. OpenThePodBayDoorsHAL

      Printing loads of money is somehow the road to prosperity? Really? I mean don’t you think that’s been tried before and has failed, everywhere, every time? And by debasing the currency somehow the idea is that the nation gets richer by making its people poorer?
      I get that the Fed needed to inject liquidity into the system in 2009. But liquidity != solvency.
      The most massive credit bubble in the history of the world brought future demand into the present (and now past) as never before. As Yves says “companies don’t invest unless they see the demand”.
      So we get Dutch bond yields at 500-year lows, companies that just borrow at 0% to buy back stock, AND we get impoverishing debasement to boot. Luckily the Japanese have had deflation which has slowed the drop in their purchasing power and thus net wealth. Calling this “Abe-anything” is a joke, it’s a financial parlor trick designed to delay the inevitable and make it much more painful when it arrives.

  3. James Levy

    I’m going out on a limb here, especially as yesterday I lambasted someone for thinking that the attack on Pearl Harbor was some kind of “false flag” operation and not a bold, brilliant stroke that caught the Americans with their pants down, but really, the Japanese electorate are a beaten up, broken-down mule. They vote for the LDP because they can’t imagine change and don’t believe anything they do will bring about change. Japan is owned and run by about 5000 guys. They matter; everyone else, not so much or not at all. Japan make the USA look like a functioning, pluralistic democracy. So Abenomics keeps chugging along because the tiny elite who run Japan want it to keep going, and the people, being beaten down and conformist but not stupid, cast their votes accordingly.

    1. Massinissa

      It wasnt a false flag, but Roosevelt knew the attack was coming and purposefully did nothing.

      Thats not the same as a false flag.

      1. James Levy

        They knew war was coming and issued an appropriate warning, but they thought the blow would come in the Dutch East Indies, Malaya, and possibly the Philippines–they could not imagine it would commence with a carrier strike on Hawaii. In terms of scale and distance nothing remotely like Pearl Harbor had ever been attempted before, and the US Navy did not consider the IJN up to the challenge. They were proven spectacularly wrong.

    2. Massinissa

      In other news, due to the december 2014 elections, the Japanese Communist Party (JCP) now holds 21 seats in the House of Representatives, in addition to their 12 seats in the House of Chancellors.

      ANd the brand new Japanese Innovation Party which just started in 2014 now has 41 representatives in the House of Reps.

      At least a minority of the Japanese are willing to try to vote for something new. Whether these parties would actually do anything if they got into power, which they probably cant short of another fukushima or lehman brothers type event, remains to be seen.

    3. MyLessThanPrimeBeef

      They missed their chance at ‘change’ in 1945 when MacArthur saved ‘old Japan.’

      1. Pepsi

        It’s hard to get away from oligarchic capitalism when you’re under military occupation by an oligarchic capitalist state.

  4. Massinissa

    If Abenomics could revive japan, it would have HAPPENED ALREADY. Abe has already been doing this shit for a year or two now.

  5. Ben Johannson

    According to Japan’s Finance Ministry, the internal reserves of Japanese companies, excluding financial institutions, reached a record 304 trillion yen (US$2.95 trillion) as of the end of fiscal year 2013.

    That’s extraordinary, well in excess of cash reserves held by U.S. businesses. And something not supposed to occur, according to neoclassical economic theory.

    1. Kurt Sperry

      That line was what caught my eye as well. What you might expect in a deflationary environment.

  6. NotSoSure

    Once the whole edifice collapses, a new thing will rise up in its place, so yeah it will be “revived”. Just don’t ask how ugly the revival process would be.

    Not sure if this has happened before, but Japan may be the first country to cancel holding the Olympics due to “restructuring”.

  7. susan the other

    How much of QQE is money down the Tepco rathole. Tepco itself is making zero money these days and it can only be the BoJ who is funding everything going on at Fukushima Daiichi. It represents an enormous investment and an equally enormous capacity for denial. None of their efforts have worked. Massive amounts of radiation pollution have entered the ocean. All Tepco has managed to do is maintain a pretense that this drainage isn’t intentional – no, no, we’re just incompetent. Nobody talks about how if those leaks were stopped from entering the Pacific they would back up and flood the aquifer feeding Tokyo. Nobody discusses the devastating fact that in order to save Tokyo, the entire Pacific will be killed. And it is costing an unbelievable amount of money to do this. Money that will not serve to revive the Japanese economy. It is long since time to simply evacuate Tokyo.

    1. Massinissa

      That wont happen. That would be the biggest embarassment Japan has ever had.

      And the Japanese PTB dont like embarassment.

      And can you imagine how hard that would be logistically? It would be astronomically difficult. Where do you put over 13 million displaced people? What do you do about all the businesses that are there?

      Theyre stuck between two impossible scenarios. I dont see how theres anything Japan can do.

      1. Jack

        Seems like the entire Fukushima affair is the Japanese cultural obsession with appearances, shame and ‘honor’ taken to its inevitable extreme conclusion. It would be an ’embarrassment’ to evacuate Tokyo, just as it would have been an ’embarrassment’ to call for international nuclear expertise and aid with handling the containment and cleanup. In both cases a refusal by those in charge to acknowledge that they had screwed up because it would be bad for image. Okay, but if all you care about is how others view you, consider how it’s going to look if it turns out you’ve killed an entire ocean or thousands start dropping dead from radiation related illnesses in the worlds most populace metropolitan area. And if all you care about is how the party looks, surely you must also be aware that if the latter scenario comes to pass there won’t be a party anymore because you’ll have a full-scale revolt on your hands.

        Not that I’m saying the West is a paragon of morality, but I think on balance the more Western idea of having to answer to your conscience and having a fundamental sense of right and wrong (regardless what you choose to base that sense on) is a superior system to being overly obsessed with how others view you and the kabuki of keeping up appearances.

      1. susan the other

        For the blatant failures of Tepco I refer you to the archives up to the present of ENEnews. A very good and reputable site blogged by Berkeley’s nuclear engineering department. And for the tidbit on the aquifer feeding Tokyo, Paul Craig Roberts about a year ago. Much is censored about Fukushima. For political reasons. But not for the good of the Japanese people, or the planet.

    2. Nathanael

      Thankfully the magnitude of fallout will be substantially diluted in the Pacific, and a lot of it will sink to the seabottom and be buried. The area immediately offshore of Japan is completely screwed, though. And unfortunately, Japan catches a lot of fish there. So… we will see more radioisotope-poisoning-related illnesses in Japan.

  8. Amir S

    I don’t see any further mention of the second arrow, fiscal stimulus. Did this happen? Was it well targeted? Did it have any effect? Was it cancelled out by the increase in sales tax? Any plans for further stimulus? I only see mentions of structural reforms to reduce the deficit, I.e. The opposite of fiscal stimulus.

  9. reslez

    I gagged a little reading this. Doubling the sales tax to 10% in 3 years? A host of neoliberal economic giveaways to the rich paired with a few more boulders piled on the shoulders of workers… uggh. I think I’m getting a little feverish, plutocrat flu is too much for my immune system, not to mention Japan’s economy.

  10. Lune

    The author is a little anodyne in describing the measures so far. This is QE on a scale that is completely unprecedented! In fact, at the current rate, I believe the BoJ is buying almost *all* net government debt issued. And even with miniscule interest rates (30-year JGBs yield ~1.5%), interest payments are a huge component of Japan’s public budget.

    Even under the tenets of MMT, I think Japan is dangerously approaching currency revulsion status. Japan’s current account surplus is trending down; if it turns negative for even a few years, there won’t be enough foreign investors willing to invest at those interest rates, especially in a depreciating currency.

    The hope is that the economy grows fast enough to essentially outrun these forces. With an aging population, I’m not sure that will happen.

    1. Nathanael

      Killing domestic demand by raising sales taxes is likely to trigger deflation. The combination of domestic deflation with no external buying power and vast piles of cash in corporate hands, along with a government nobody trusts, and Tokyo being continuously nuked by Fukushima, is definitely the sort of thing which can cause currency revulsion.

  11. Christer Kamb

    The Era of Inflation(1945-1981) is over since the 80´s. The accelerating internationalization of Big Corp(globalization) as a natural development has really showed us how David Riccardo´s principles of comparative advantage works. The difference is that national economies are no longer important. Corporate interests are only focusing on shareholders, not on social responsibilities “at home”. Together with technological developments and capital&labor-deregulations the world economies are going deflationary. Japan is no exception. The difference is that Japan was the first “victim” due to their massive debts-levels from the 80´s created indirectly by USA(Plaza Accord) enforcing Japan(and Germany) to revalue their currency. High debt(New Era of Financialization) and hard market/labor-competition(supply-driven)globaly creates a disinflationary environment. Supply gets larger than demand. And yes, demographics matters but is not the main culprit in the short and medium perspective. Free markets in a global context are disinflationary (for developed countries) per se.

    Abe(nomic)´s neoliberal politic will not produce expected positive inflation. Only stagflation-risks. Most (monetary-)policy-makers still believes corporate investments can be managed by adjusting the interest-level. That is totally wrong. In the short run it can drive consumers into a debt-driven(asset/wealth)expansion of demand(or by lowering debt-costs). But all research shows corporate investments-plans only derives from demand, not interest-levels. Investment-growth in the developed countries has been stagnating since the late 70´ s(exept from brief period in early 80´s).

    Centralbanks seems to be omnipotent but all they can do in an over-indebted world is to postpone the inevetably. Debts must be negotiated and reduced, not burried in a centralbank tomb indefinitely.

    1. Nathanael

      Naw, it won’t be stagflation: stagflation is caused by real resource constraints. It’ll be the combination of deflation among the 99% with piles of money in the hands of the 1%, which leads to the elimination of the market economy and its replacement with something else (usually feudalism).

  12. Jessica

    The problem with the Japanese economy since the mid-80s has been that everything is organized to encourage investment and discourage consumption. This worked quite well as long as there were markets to which increasing exports could be sent. It has not worked since then.
    To reduce taxes on corporations that are sitting on piles of cash and not investing (at least not in Japan) while increasing taxes on individuals only intensifies the problem.
    Has any country in recent decades successfully shifted from being export-oriented to oriented more to the domestic market? (Naiju kakudai in Japanese) Ever?
    I suspect that once a nation has lived by exports and by funneling funds out of the pockets of consumers into the hands of exporters, then a set of special interests arise that are quite difficult to overcome.
    On, when noting the rise of the vote for the Japanese Communist Party, remember that in Japan, there are two groups who can be counted on to strongly defend democratic rights: Christians and Communists.

  13. David J. Littleboy

    “remember that in Japan, there are two groups who can be counted on to strongly defend democratic rights: Christians and Communists.”

    Well, there aren’t any Christians in Japan (fewer than just about any other country on the planet), so they’re not going to be much help. The Democratic Party of Japan (DPJ) imploded recently, but that was because they became overly dependent on Ichiro Ozawa. (I never understood his being in the DPJ at all: he appeared to be nothing other than the most corrupt of the corrupt old LDP of old. And most of his policies were generic conservative ones. He did oppose the consumption tax, though. (But I suspect that was for tactical, not principled, reasons)).

    Long term, I think the DPJ will recover and Japan will become a two-party country. While the LDP did win the last election, the right-wing splinter parties lost big*. And while the Komeito is currently enjoying playing with the LDP, what they claim to stand for are mostly left-wing-ish ideals. So a DPJ, Komeito, plus communist party coalition would find a lot to agree on. Also, Japan has ridiculously unequal representation, with the rapidly depopulating countryside wildly over-represented. That will gradually change, reducing the strength of the LDP.

    *: Leaving the LDP with no option other than the Komeito with whom to form a super-majority coalition. And the Komeito is not enthused about Abe’s push to remilitarize Japan.

    By the way, nothing in Abenomics is “neoliberal”, everything concrete Abe has proposed (with the notable exception of QE) is pure conservative. And much of the stuff is completely nuts: letting the super-rich elderly give money to their grandchildren without taxation (Japanese gift and inheritance taxes are steep by US standards) will have no macroeconomic effect since the number of super-rich elderly is tiny.

  14. Chauncey Gardiner

    Monetarism has not worked anywhere because the distribution of money has been targeted toward Big Capital rather than stimulating underlying demand. More debt, even if it is “monetized” by central banks, does little but further exacerbate an already imbalanced debt leverage problem and elevate the prices of financial assets. Low interest rates are not the principal driver of demand.

    It is evident from Abe’s sales tax policy and the mountains of cash that large Japanese corporations are sitting on, that policy intent is to continue to suppress household discretionary income and domestic demand, and to further concentrate capital in the hands of a few.

    Why are domestic non-military-surveillance fiscal spending policy initiatives on infrastructure, renewable energy, education, healthcare, etc. so difficult to get enacted nearly everywhere in the world outside a “Public-Private Partnership” framework that tacitly encourages looting? … “Je Suis Japan.”

  15. C

    sales tax hike from 8% to 10% in April 2017.

    I can see, even if I do not buy, the arguments for many of the things they are proposing. But how does raising the sales tax make sense to anyone? I ask this because it has also been pushed in the U.S. as well with many state budget cutters such as Brownback advocating it as a means to close budget holes.

    If your goal is an active economy then stifling consumer spending, which raising the cost of everything by 2% will do, is just idiotic. And it doesn’t make sense from an economic perspective. Even supply siders should hate it. So why is it the neoliberal choice? Are they so corporate-focused that they don’t see any other type of spending or do they expect the magic of the market to somehow compensate?

    For the others, as I said, they make sense. If you view the world through a neoliberal economics lens then savaging your remaining agricultural areas on the wake of a neuclear fallout is fine, so too is making your already precarious workforce feel even more unstable and thus unwilling to invest in the economy. And who doesn’t see lowering the tax rate for companies who are already being given a high stimulus.

    1. David J. Littleboy

      > How does raising the sales tax make sense to anyone?

      Again, there’s _nothing_ even slightly neoliberal about Abe’s policies. Said policies are pure conservatism: take from the poor and give to the rich. Conservatives _love_ sales taxes. It’s really quite simple: Krugman doesn’t get how deeply and profoundly conservative Abe is.

      (There’s a long story about how raising the sales tax first from 5 to 8% (last year, tanking the economy) and then from 8 to 10% (when “economic conditions allow”) was proposed and enacted not by the LDP, but by the DPJ (who are otherwise the good guys), but that’s an aside. The consumption tax is an LDP beast, and the LDP likes raising it, even if raising it was someone else’s idea.)

    1. whitworth

      Demographics are kicking in: there are fewer and fewer young people entering the workforce, and employers are having trouble finding people who will work.

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