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.