The Legacy of Abenomics
In 2013, newly elected Prime Minister Shinzo Abe announced a broad set of reforms intended to remedy over two decades of abysmal economic growth, near-zero interest rates, burgeoning levels of domestic and foreign debt, and blunted productivity amongst firms. Dubbed Abenomics, the reforms took a three-pronged approach that encompassed loose fiscal policy, easy monetary policy, and structural reform. Each feature targeted specific weaknesses: loose fiscal policy to boost consumer spending, easy monetary policy to curb decades of deflation, and structural reform to facilitate innovation in the corporate sector and increase Japanese competitiveness. These responses were and remain intimately connected; low interest rates and easy money are unlikely to boost aggregate demand if consumption taxes are elevated, and profitable ideas can’t introduce competition into the Japanese economy if the real cost of capital remains unreasonably high due to deflation.
As Abe reminisces about his second term, he can proudly take credit for some of the revival seen over the past seven years. Multiple rounds of intense qualitative and quantitative easing, characterized by enormous asset purchases that more than doubled the Bank of Japan’s (BOJ) portfolio between 2013 and 2016, were associated with modest increases in inflation, market liquidity, and nominal GDP. Additionally, innovations in the BOJ’s monetary toolkit such as yield curve control have proven effective in introducing some regularity and certainty back into financial markets. Most notably, monetary policy under Abe has thus far avoided major adverse outcomes, such as hyperinflation and asset bubbles, that critics prior to its implementation believed may occur. Fiscal policy has straddled a more tenuous balance as Japan faces an expensive tradeoff between a notoriously high debt-to-GDP ratio and greater purchasing power for businesses and households through tax reductions. Fiscal policy under Abe was characterized by a 10.3 trillion yen stimulus package in 2013, followed by smaller, subsequent stimulus packages. Earlier this year, Japan announced a gargantuan 117 trillion yen relief package in response to COVID-19 which has proven effective in placing cash directly in the pockets of families and individuals, and in creating temporary cushions for small and medium enterprises. These expansions were funded in part by a controversial consumption tax hike in 2014 that doubled the previous rate to 8%, and further increased it to 10% in 2015. Structural reform under Abe is more difficult to identify. Perhaps Abe’s greatest achievement is the spike in the female labor force participation rate from 48% in 2012 to nearly 53% in 2020, probably in part due to the expansion of socialized childcare. Other successes include Abe’s decision to join the Trans Pacific Partnership and some liberalization of key sectors and industries.
Though Abenomics has delivered some praiseworthy economic benefits, it has fallen short on far more than it has delivered. Monetary policy has been somewhat effective in jumpstarting inflation, though the inflation seen in Japan as a result of large scale asset purchases is likely the kind of inflation produced by a depreciation of the Japanese yen and tied to increased energy prices, rather than increased consumer spending. An obstinate obsession with controlling the value of the yen has also blindsided policymakers into believing that the BOJ can manufacture new demand without addressing economic fundamentals. More generally though, policymakers have put too much emphasis on monetary policy with intentions of stimulating the economy rather than reforming it. Monetary policy is indeed a necessary tool in restoring economic vitality, however central bankers must avoid mistaking artificial growth, stimulated by loose policy, with real, structural growth. Going forward, the BOJ should firmly commit to its 2% inflation target to strengthen and reinforce inflation expectations, as well as temper its now-customary habit of quick monetary expansion. On its fiscal front, Japan’s extreme indebtedness poses significant risks to both its domestic economy as well as the global economy. Japan’s debt-to-GDP ratio has ballooned from 228% in 2012 to more than 250% in 2020. Given that more than 90% of Japanese bonds are held domestically by financial institutions and individuals, the likelihood of a mass default is less likely than a comparable debt-to-GDP ratio in a country where foreign investors hold the majority of public debt, such as Greece. Nevertheless, policymakers should start taking the issue more seriously. Research on public debt published by economists Kenneth Rogoff and Carmen Reinhart in 2009 shows that the composition of debtholders in a country has little impact on a country’s probability of default, implying that the likelihood of a massive Japanese default is hardly assuaged by its large domestic share of bondholders. Given Japan’s stunted growth rate as well as a projected rise in expenditures on social welfare especially for the elderly, worries about public debt are not merely alarmist claims, despite what laymen, experts, and even policymakers make them out to be. COVID-19 has further slammed Japan’s deficit and while the welfare of its people is primary, its debt is no longer a trivial concern. More directly, Japan’s fiscal expansion through public spending is, while well-intentioned, problematic for a few reasons. First of all, though an exact specification is challenging, several studies have approximated Japan’s fiscal multiplier to be roughly between 1 and 1.07 (Source: Japan’s Great Stagnation and Abenomics), which implies that fiscal stimulus will have a muted expansionary effect. Secondly, fiscal policy under Abenomics is in some sense self-neutralizing; Keynesian spending over the past seven years has been juxtaposed against steady consumption tax increases. It’s still unclear which effect, if any, dominates, though the policy solution is admittedly uncertain given Japan’s indebtedness. Fiscal policy going forward should focus on overhauling extant tax policy to increase taxes on the wealthy and on bondholders, ease taxes for the young, working-class population, and impose greater fiscal discipline on local governments which rely heavily on federal revenue. The most glaring failure of Abenomics, however, has been its inability to create meaningful structural reform. In fact, the absence of structural reform has severely curtailed the efficacy of both fiscal and monetary policy over the past seven years. To understand what reform would look like, we must first look at the problems. The broad structural economic causes of Japanese stagnation include: reduced firm efficiency and productivity, high financial barriers for start-ups and new companies to innovate, a shrinking working-age population, a population that is less likely than any other East Asian country to send its students to study abroad, a population with a relatively low share of English-speaking workers, a sharp projected decline in its fertility rate, surging urban flight, and a swelling bond market that crowds out other productive investment. From a fiscal perspective, rather than funnelling money into public works projects, many of which now constitute busy work at low levels of efficiency, the Japanese government must instead finance incentives that encourage individuals and firms to adopt behaviors that make the country more globally competitive. Corporate deregulation would allow new entrants into the marketplace and incite competition that challenges established Japanese firms such as Sony, which have grown fat, dumb, and happy churning out iterations of the same dated products without any substantive improvements. Greater innovation would come with heightened productivity, profits, and wages, which represent significant economic improvements, as opposed to short-term benefits such as currency depreciation or monetary injections.
At a deeper level, Japan’s prolonged stagnation is partially rooted in cultural phenomena that are more challenging to address through policy. To preface, I understand culture is a sensitive issue and so I touch upon it lightly and hope to talk of it in a strictly descriptive sense. To start with, Japanese culture is still highly conservative and predominantly patriarchal, and these attitudes permeate into the workplace. While female labor force participation is up 4% since 2012, the disturbing reality is that nearly 57% of working women are in part-time and temporary positions, and salaries for women are trending downwards (Pesek 2014). More subtly, gender pay gaps and the hiring of qualified women at lower rates than of men all point to the conclusion that gender disparities prevail in professional settings. Another problem is that Japan has increasingly turned inwards. Robert Duharric, the director of the Institute of Contemporary Asian Studies at Temple University, found that Japanese enrollment rates at leading U.S. educational institutions have fallen dramatically since the early and mid-2000s. Students who study abroad are the globally minded individuals who often synthesize ideas and create cutting-edge products and technologies; a good example is Masayoshi Sun who studied computer science at UC Berkeley before starting several successful business ventures in the US and later founding SoftBank, now the world’s largest technology-based venture capital fund. Similarly, Japan has failed to emphasize the importance of English, which for better or worse has become the universal language of business. These trends, in addition to broken incentive structures, can explain why modern Japanese firms have ossified and become complacent, doggedly holding on to aged employees and failing to look past domestic markets. Rigid attitudes towards social organization and liberalization surely play a key role in constraining the type of innovation Japan requires. Other views that deserve reexamination include Japan’s willingness to welcome immigrants into its economy as well as young families’ desire to have children. A shift in Japan’s collective attitudes won’t be easy, though it may be necessary in effecting change that inspires economic growth.
Japanese policymakers in the 1990s had resigned to a form of policy nihilism that had convinced them that the lows of business cycles were inevitable and that macroeconomic policy had no role in accelerating recovery. They shrugged off deflation and subscribed to dogmatic neoclassical models that commanded them to minimize market interference and keep interest rates low, thereby abdicating any responsibility for facilitating economic recovery. No longer can Japan afford to cast its economic problems off as predestined. Active government intervention that seeks to restore financial and entrepreneurial vigor while investing in Japan’s future is paramount in ensuring that the nation remains globally competitive and internally prosperous. Cultural attitudes may be slower to change but incentivizing students to study abroad and encouraging immigrants to work in Japan are both likely to force these attitudes to evolve. Abe’s successor, Prime Minister Suga, has a daunting task ahead of him. He must cope with the tremendous pain the pandemic has inflicted upon his people and is responsible for rescuing an economy that had been struggling for long before the pandemic struck. Nevertheless, Japan has proven to be a remarkably resilient state; whether it can adapt this time comes down to how committed policymakers are to fostering long-lasting change and their willingness to bear responsibility for Japan’s economic future.
References:
Japanization: What the World Can Learn from Japan’s Lost Decades by William Pesek
Japan’s Great Stagnation and Abenomics: Lessons for the World by Masazumi Wakatabe
