Don’t declare victory for Abenomics yet

Author: Tobias Harris, Cambridge, Massachusetts

With the yen falling to below JPY100/US$1 for the first time since 2009 and the Nikkei posting five-year highs, analysts have begun declaring victory for the Abe administration’s campaign against deflation and slow growth.

But it is far too early to draw conclusions about the success of Abenomics — given that deflation continues — and there remain a number of unanswered questions surrounding the Abe government’s economic program.

Ultimately, the success of an economic program must be measured not just in terms of corporate balance sheets but also in terms of the economic wellbeing of citizens. If wages remain stagnant or if Japan experiences a jobless recovery, can Abenomics be declared a success?

It remains to be seen whether monetary stimulus will translate into wage hikes or increased hiring, though the government is trying to encourage corporations to do both. It may also depend on whether the government is able to reverse the rise of Japan’s non-regular workforce: the short-term contract workers who make up between a third and a half of the labour force, and enjoy few benefits, little-to-no job security, and virtually no opportunities for advancement. There’s a risk that without a plan to overhaul the Japanese labour market, exhortations to raise wages might result in corporations’ raising wages for regular workers but maintaining or cutting low wages for non-regular workers, thereby deepening the inequality that exists between regular and non-regular workers. The Abe government and the LDP are not blind to this problem, but it is not clear how they plan to resolve it.

The same goes for gender balance in the labour force. To his credit, in his speech last month at the Japanese National Press Club, Abe spoke of gender equality as not a social policy issue but as a central piece of his growth strategy. Yet pretty much the only specific proposal Abe mentioned in his speech was the proposal to increase the number of women in corporate management positions, which would only affect a fairly small number of women.

Reforming the labour market is part of the so-called ‘third arrow’ of the Abe program, the Abe government’s growth strategy. Once again, Abe’s rhetoric is at least encouraging — he has spoken about public-private partnerships to move Japan from inefficient to high-value-added sectors — but it is hard to evaluate the possible success of the strategy until the government’s detailed plans are released in June. It is worth noting that the Abe government is not the Koizumi government redux: whereas Koizumi talked of moving from the public sector to the private sector, Abe has stressed the role of government in promoting growth in new sectors, with all the risks that come with efforts by government to pick winners.

Abenomics (and the latest round of quantitative easing in the United States) has also raised fears of currency wars breaking out between Japan and its competitors. South Korea’s central bank has already moved to cut rates in light of the ongoing decline of the yen against the won, as did Australia’s central bank recently. European exporters — especially Germany’s — are feeling the pain from the yen’s decline against the euro. If other governments engage in competitive devaluation with Japan, the benefits to Japanese exporters from a weaker yen will be muted (if this isn’t already the case). Though the G7 finance ministers’ meeting in the UK recently did not necessarily single out Japan for criticism, the fact that the meeting was held does suggest that Japan’s policies are under close scrutiny abroad.

There are also lingering questions about Japan’s fiscal situation. With the Bank of Japan (BOJ) stepping in to buy government bonds, the Japanese government can continue to borrow without having to worry about rising interest rates. But the risks of Japan’s ever-growing debt remain — and if the BOJ has in fact succeeded at convincing market actors that it is committed to raising inflation, there is the risk that it will be unable to control inflation once it has met its target, hastening the day when interest payments will rise and break the government’s budget. The government is in a race against time. It needs to trigger sustainable long-term growth that can raise tax revenue before interest rates rise. The Abe government has indicated that if economic conditions are still sluggish it will delay the consumption tax increase, passed by the Noda government, thereby postponing a useful means of closing the government’s annual deficit of 10 per cent of GDP.

Finally, the question of Japan’s demographics looms over the debate about Abenomics. Edward Hugh offers a sobering account of how demographics may forestall the Abe government’s program. If Japan’s persistent demand shortfall is actually the result of a ‘shrinking population trap’, rather than a prolonged balance sheet recession, then the government’s monetary policy experiment risks triggering capital flight as elderly Japanese investors seek higher returns elsewhere.

The point is that it is impossible to know whether Abenomics has succeeded until the whole program is put into action. Abe probably has about as favourable a political environment as a Japanese prime minister could ask for — dysfunctional opposition parties, few challengers within the LDP and high public approval ratings — which suggests that he may well be able to follow through on his ambitious agenda. That being said, if Abe cannot reverse Japan’s economic woes with all of these factors working in his favour, one has to wonder if anyone can.

Tobias Harris is a Japanese politics specialist who worked for a DPJ member of the upper house of the Diet 2006–2007. He is the author of Observing Japan.

A version of this article was first published here in Observing Japan.

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