By Takuma Nakamura
Views on Abenomics become conflicting
It has been three and half years since Japan’s Prime Minister, Shinzo Abe, introduced his economic policy package called “Abenomics” in December 2012. Though it was widely praised by many economists and scholars both inside and outside of the country after the launch, the current evaluation is very divisive.
This is clearly seen in the ongoing campaign for the Upper House election, which will be held this Sunday. How to assess achievements and side effects of Abenomics is the biggest issue for the election. The ruling coalition of the Liberal Democratic Party (LDP) and Komeito reiterates that the Japanese economy is on the right track under Abenomics. They stress that Abenomics has brought more than one million new jobs, the highest jobs-to-applicants ratio in 22 years, and the lowest bankruptcy rate in 24 years.
The biggest opposition party, the Democratic Party (DP), on the other hand, believes it is time to admit that Abenomics has failed. They point out that under Abenomics, Japan has experienced substantially zero GDP growth and the weakest private consumption since World War II. In the DP’s reasoning, Abenomics only widened social income gap and shrunk private consumption. They demand an immediate shift of economic policy toward a “dual approach of distribution and growth”. So the question is: which of the arguments above is the more accurate to describe the current situation of Abenomics?
The initial roadmap of Abenomics
Before discussing where Abenomics is now, let us review the roadmap of Abenomics to see what was expected. Abenomics’ strategy was to combine three types of economic policies, which Abe calls “Three Arrows”, consisting of fiscal policy, monetary policy and structural reform. Needless to say, the most important part of Abenomics is the third arrow: structural reform. Japanese potential economic growth rate is the lowest among developed economies, rooted in its dwindling population and low investment propensity. Accordingly, Japan is in need of a dramatic transformation of policies to complement decreasing labor power and to stimulate companies for new investments.
However, solving these structural problems is a long time project. It takes considerable time to change extremely conservative views of Japanese society on women’s social participation and foreign workers. Also, in the case of investment stimulation, highly political compromises are required to accomplish substantial regulation easing in heavily protected areas of Japan’s economy, such as the agricultural sector, medical industry, and the labor market.
Since structural reform was expected to proceed slowly, the other two arrows were introduced to pump up the economy and buy time. Fiscal policy was expected to create new jobs and directly improve workers’ income. Monetary policy was adopted to improve the performance of Japanese companies through stock price rise and a weak yen, which induces private investment and wage hikes. These visible economic outcomes of Abenomics were also expected to be conducive to continual support for the administrations and give them power to push through tough structural reforms.
Not enough time bought while the structural reform is still at an early stage
How well did the Japanese economy pursue this Abenomics roadmap so far? It started off quite successfully. The Bank of Japan adopted a new monetary policy package in April 2013, with quantitative and qualitative easing (QQE), the yen depreciated nearly 10 percent which pushed up the stock price index more than 20 percent within one year. This improved the balance sheets of Japanese companies, especially those who rely heavily on exports. Consequently, the unemployment rate went down and salaries edged up. Fiscal expansion also provided positive public demand contribution to GDP growth for four consecutive quarters. With such an economic upward trend, the leading coalition won 32 more seats during the Upper House election, held six months after the inauguration of Abe administration. The Democratic Party lost 27. Everything was going in accordance to Abe’s plan.
However, the two arrows did not buy as much time as expected. The Japanese economy started slowing down much earlier than foreseen due to several unexpected events. First, China’s economic slowdown weighed in on Japan’s exports. Second, the backlash of the consumption tax hike in 2014 was much larger and long-lasting than expected. And most importantly, the yen has turned to appreciation on the background of sluggish economic growth in the US. Additionally, Brexit is making the situation even worse. The yen has appreciated about 13 percent since the end of last year.
On the other hand, structural reform is still in its early stages. Although the leading coalition has passed some bills to cut into a rigid system of agricultural and medical sectors, the scale of the reform is not enough yet to have a substantial impact on the economy. The progress of labor market reform is even slower. There is no bill enacted to enhance flexibility of labor market, although it is considered to have a substancial and immediate impact on the incentives for private investments.
Upper House election is the final card left for Abenomics
As discussed above, there is not much time left for Abenomics. It could not make enough time with two initial arrows for structural reform, while the structural reform itself is proceeding even slower than it was initially thought.
In my view, there is only one way to solve the problem: putting the gas pedal to the floor. Fortunately, there is still one card left for Abe to do so. At the Upper House election this weekend, the leading coalition is expected to achieve a massive victory and take as much as two-third of the seats in the house. They already have over two-thirds of the seats in the Lower House, which means they will acquire significant political power. Any amendment to the constitution needs to be approved by a two-thirds majority of both houses of Japan’s legislature, followed by a nationwide referendum on the new text. Moreover, there will be no election until December 2018. Accordingly, Abe will get both power and time he has long wanted to progress structural reform.
What Abenomics has done so far is quite impressive. However, whether this can come to a happy ending heavily depends on what he will do in the next two years. Once Abenomics loses credibility, it is likely that Japanese companies will quickly lose their animal spirits and revert back under their shells like they did in 1990s, which put the Japanese economy into two decades of an ice age – with low economic growth and deflation. To do, or not to do: that is the question for Abenomics.