The Abe administration’s economic policy had three initial pillars, known as the first ‘three arrows’ of Abenomics. The first was bold monetary policy, which saw the introduction of a two per cent inflation target and a program of quantitative and qualitative easing, or QQE. The second — flexible fiscal policy — meant large-scale increases in public spending. The third pillar — a growth strategy to stimulate private investment — equated to a range of measures including regulatory reform, corporate governance reform and the reduction of corporate taxes.
The first three arrows were skewed towards monetary policy. Haruhiko Kuroda announced the policy on his appointment as Governor of the Bank of Japan (BoJ) in April 2013, attempting to realise a two per cent inflation target in two years through radical QQE — including the annual purchase of Japanese government bonds totaling 50 trillion yen (US$452 billion) per year.
Initially, the new monetary policy produced lower interest rates as well as a weaker yen. These results promoted the purchase of Japanese stocks by overseas investors, boosting stock prices and improving the profitability of Japanese companies.
Still, monetary policy failed to boost inflation, and the BoJ had no choice but to pursue further easing. In 2016, the BoJ introduced a negative short-term interest rate and a yield curve control policy that pegged the long-term interest rate close to zero. Yet even after five years of aggressive monetary easing, the inflation rate remains below one per cent and a variety of negative side effects have been generated.
With the decline in loan interest rates among regional banks, more than half have recorded deficits in core business basis. The pegging of long-term interest rates around zero led to a lack of market warnings as debt grew. Considering Japan’s worsening fiscal trend, an exit from QQE is an increasingly difficult prospect.
In 2015, Abe was re-elected as president of the ruling Liberal Democratic Party (LDP) and positioned the next three years as the second stage of Abenomics. Taking up the slogan, ‘a society in which all 100 million people can be active’, Abe announced the ‘new three arrows’ of Abenomics.
These new three arrows are: a strong economy that creates hope, support for child raising that fosters dreams and social security that gives citizens a sense of reassurance. In concrete terms, the policy package continues to prioritise growth but also seeks to halt the decline in Japan’s birthrate and create a society that promotes women’s involvement in the workforce. The aim is a society in which no woman needs to leave the workforce to provide nursing care to a member of her family.
The major elements set forth in the new three arrows’ growth strategy are essential initiatives for Japan — including reform of working styles, fostering human resources and supporting cutting-edge innovation in the digital arena.
The reform of corporate governance is a particularly praiseworthy initiative. A Corporate Governance Code has been formulated. Listed companies in Japan have begun to seriously consider an orientation that would see them enhancing their governance functions while introducing diverse perspectives — for example, through the appointment of external directors — in order to increase their return on equity.
Since the most important policy issue for Japan is higher productivity, rapid implementation of supply-side reforms is urgently needed. Abenomics has not, so far, produced an increase in productivity. A policy of promoting digital innovation has been set out, but greater reform speed is essential against the background of intensifying international competition. There was initial progress in easing regulation in fields such as agriculture and medicine, with holders of vested interests such as Japan’s Agricultural Cooperatives kept in check in part thanks to the LDP’s landslide victory. More recently, however, these initiatives appear to have stalled.
With Japan’s extremely high outstanding debt-to-GDP ratio, further fiscal restructuring is inevitable, even with the increase in consumption tax scheduled for 2019. Of particular importance will be controlling increases in social security expenditure in a super-aging society. Social security-related expenses accounted for 55 per cent of general expenditure in the 2018 budget, 33 trillion yen (US$298 billion) in total.
Increasing Japan’s healthy life expectancy and the efficiency of medical care provision through better coordination of medical data are priorities. In addition, it will be essential to control medical and nursing care-related public expenditure in diverse areas, while maintaining health insurance for all citizens. Eliminating the anxiety about their future that Japanese citizens are experiencing will benefit the growth of Japan’s economy and its society.
Yuri Okina is Chairperson of the Japan Research Institute.
This article appeared in the most recent edition of East Asia Forum Quarterly, ‘Peak Japan’.
Thanks for a succinct summary of PM Abe’s efforts to get Japanese economy going again since he came back to office in 2012. Perhaps it was a lack of space but the author left out some significant information.
For example, Abe’s so called ‘push’ to support women has been almost all rhetoric rather than any concrete action. Yes, Abe has opened up a few more daycare centers for working women with small, preschool aged children to use. But there are still thousands of women who want to work but cannot find daycare for their children. No new centers have opened up in the last year or two.
His call to promote women into more supervisory and executive positions has accomplished little: women executives, including board members, auditors and corporate officers, accounted for a paltry 3.7% at listed companies in Japan in 2017, according to the Cabinet Office. The figures were 34.4% for France, 23.2% for the U.K. and 17.9% for the U.S. in 2015. Abe still has the same number of women in his Cabinet that prior PM’s had. He has not instructed ministries in the government to hire and promote more women into executive positions. What kind of ‘leadership’ is that?!?
Women make 73% of what men do in Japan. While this is admittedly a significant improvement over the fact that women earned 60% of what men did in 1990, it is still woefully less. Women account for a much larger percentage of so called temporary, part time workers in Japan than men do. These workers are paid significantly less and get lesser benefits than so called permanent, full-time workers do. Abe’s proposals to shift more workers into better paid permanent full time employment are so complex and full of loopholes that nothing has really changed for these part time workers.
Japanese corporations are hoarding their larger profits rather than sharing them with their employees via more generous wage hikes. Abe has talked about and encouraged companies to raise wages more. But he has not done anything about it when the companies offer their employees maybe a 2% pay raise even when they are sitting on piles of cash. From 2011-2015 incomes went up about 2+%. But taxes rose 6+% and Social Security and pension taxes increased about 11%. Is it any wonder that the average Japanese consumer refuses to spend more on consumption given that his/her wages have not increased while taxes, etc have?!?
Abe’s so called reform of lifestyle via lowering overtime working hours has largely been symbolic rather than any substantial change. A careful reading of his proposal will find that it basically endorsed what has been ongoing practice for many years now: companies can require up to 100 hours per month of overtime by their employees when there is a deadline to meet, etc. Abe has touted that this is an ‘improvement.’ Can you imagine working 25 hours a week of overtime and not ending up physically ill, depressed, and/or even suicidal?!?
How/why would young people want to marry and have 2, or more, children when the prospects for the future continue to look so grim?!? Japan’s demographic time bomb continues to tick. Abe has done nothing substantial in almost 6 years to reverse this admittedly complex and seemingly entrenched process.