‘Abenomics’: Japan Retests a Failed Experiment
Japan’s prime minister is so confident in his economic policy that he has named it after himself. But will his ‘Abenomics’ cure what ails Japanese capitalism?
Increased stimulus or austerity? This has been the key choice for policymakers seeking to lift their national economies out of the crisis that has dragged on since the collapse of Lehman Brothers in late 2008. It’s the question of whether government should try to cushion the blow of a crisis or rather let it run its course.
But Japan’s Prime Minister Shinzo Abe has put forward an economic strategy, dubbed ‘Abenomics’, that seems to adopt the belief that there is no need to choose. The basic idea is that, first, government should aggressively introduce fiscal and monetary policies to stimulate demand, and that, once the ball is moving, the government can back off and let the free market work its wonders.
More specifically, the prime minister says he has three ‘arrows’ in his quiver to slay economic recession and prod the economic growth that has eluded Japan and the rest of the world. Those three key policies are: monetary policy centred on quantitative easing, fiscal policy aimed at stimulating demand, and structural reforms to deregulate the economy.
For Abe and his government, the root of Japan’s economic problems is thought to lie in deflation. Following a simplistic Keynesian logic, Abe is convinced that the expectation of continued deflation has discouraged investment and led consumers to defer purchases. If Japan were in an inflationary period instead, the argument goes, this would stimulate economic activity and raise consumption.
The ‘first arrow’ of Abenomics in particular aims to reverse the deflationary trend. This has involved the Bank of Japan, under Abe’s yes-man Haruhiko Kuroda, implementing an ultra-loose monetary policy. Kuroda announced in April 2013 that the BOJ would double the ‘monetary base’, aiming to deliver 2 percent inflation within the next two years. This involves purchasing around 7 trillion yen worth of Japanese government bonds and other assets every month, rivalling the amount the Federal Reserve has been pouring into its own ‘quantitative easing’ policy. The BOJ has also left interest rates for commercial banks at around 0 percent in the hope that this will encourage lending.
Abe’s second arrow is fiscal stimulus; the building of more ‘bridges to nowhere’ and other lavish spending on infrastructure. In early 2013, just a few weeks into office, Prime Minister Abe introduced a 10.3 trillion yen stimulus package. And, in January of this year, he announced a supplementary budget of 3.12 trillion yen to fund further stimulus spending.
Given the Keynesian dimensions of the first two arrows, it’s not too surprising that a right-wing reactionary like Abe could win praise from a number of liberal economists, most notably Paul Krugman. In a May 2013 column for The New York Times titled ‘Japan the Model’, Krugman wondered why the ‘Western world’ was ‘overtaken by economic defeatism’, instead of taking a ‘sharp turn toward monetary and fiscal stimulus’ as Japan was doing. ‘A short-term boost to growth won’t cure all of Japan’s ills’, Krugman wrote, ‘but, if it can be achieved, it can be the first step toward a much brighter future’.
In short, for Krugman and other Keynesian economists, Abenomics has been seen as an alternative to the austerity policies that they believe are at the root of the current economic stagnation.
The long-awaited ‘third arrow’
But Abe has had quite a few fans among conservatives and free-marketeers as well. They are looking to the prime minister to follow through on his pledge to carry out structural reforms that will free capital from its chains. This is the aim of the ‘third arrow’ of Abenomics. The non-Keynesian fans of Abe have hoped (although their hope is fading) that the benefits resulting from the structural reforms would make up for the debt incurred from the lavish fiscal and monetary policies.
In June 2014, Abe finally unveiled some of the third-arrow policies he hopes to introduce, including cutting corporate income tax to below 30 percent, creating special economic zones with fewer regulations and lower tax rates, and lifting the ban on online sales of drugs. The list of specific proposals was fairly long, but the combined effect was underwhelming, at least in the eyes of the foreign business press, which had been looking forward to the third arrow with great expectation.
‘Misfire’ was the title of an article in the Economist that described Abe’s structural reforms as ‘timid’. In particular, the magazine’s editors were disappointed that Abe did not promise more measures to reform the labour market and the agricultural sector.
The prime minister’s ‘timidity’ is not surprising, however, since the potential third-arrow reforms concern issues of keen political importance to influential lobby groups within the ruling party itself as well as issues that could divide the public. The LDP is far from agreement on matters related to free trade and agriculture, and cutting taxes for corporations while raising the consumption tax is not likely to win over the public. If the political headwinds are strong enough, Abe could easily end up the target of his own third arrow.
The idea (or hope, really) behind Abenomics is that each arrow hitting its bull’s-eye will have a combined ‘synergistic’ effect capable of lifting the crisis-laden economy out of its rut. The optimistic charts presented to explain how this might all happen tend to look something like the diagram of a Rube Goldberg machine; a chain reaction where the initial steps bring improvements that in turn generate other improvements.
For instance, a chart created by the investment bank Nomura Holdings plots out how the aggressive monetary policy will drive up stock prices; this in turn will boost corporate profitability, which will expand capital expenditures and increase wages; while the lower yen will drive up exports, thereby also boosting capital expenditures. And while this is going on, the fiscal stimulus is expected public investment, thus also raising consumption, wages, and capital expenditures. On top of this, the structural reforms are expected to boost all of the drivers of growth. All of this combining to allegedly raise the level of effective demand and break away from deflation.
It is incredibly convoluted, but then again capitalism itself is an incredibly convoluted system of social production; a system where hardly any problem lends itself to a straightforward solution. The reason in most cases is that all of the production decisions are made by the capitalists who own or manage the means of production; each of these actors making decisions on the basis of their own profit calculations. Any effort to influence how capitalists choose to behave can only be attempted in a roundabout way, since private ownership and the rights stemming from it are sacrosanct under capitalism.
Those capitalists are in charge of production; certainly not society as a whole, or even the government, despite its pretentions to leadership. What the government can do, in attempting to coordinate the private (and fundamentally selfish) activities of capitalists, is to introduce this or that incentive or regulation to encourage behaviour thought to benefit capitalism as a whole. The problem, though, is that capitalists will not budge, no matter how strongly cajoled, if they do not see the point (=profit) for themselves of such behaviour. This fundamental reality leaves a ‘leader’ like Abe with few options except to throw money at the problem in the form of fiscal and monetary stimulus in the hope that it will spur productive activities.
How different the situation would be in a socialist world, where no minority has a stranglehold on the means of production, which are instead held in common. There the questions related to production are transparent; no longer economic problems at all, actually, but mere ‘technical’ issues related to how to go about producing whatever the members of society have determined democratically to be necessary. No need for the domino or billiard-ball approach where every problem is only dealt with indirectly or at an angle.
Dominos still standing
So what has been the effect of Abenomics so far? Initially, the outlook was pretty rosy. Not surprisingly, the aggressive quantitative easing and 0 percent interest rate policy quickly sparked a stock exchange boom. By mid-November 2014 the Nikkei average had risen to 17,490 points, a 70 percent increase compared to the time Abe took office. The fall of the yen was equally dramatic, with the currency losing around 40 percent of its value against the dollar since Abe took office in December 2012. GDP growth also looked promising (at first), increasing in the first three quarters of 2013.
But the first flaw in the mechanistic logic of Abenomics became increasingly clear as the year 2014 progressed. The stock-market boom has done little to lift the real economy. In fact, the boom itself reflects the fact that most of the money pumped into the economy is ending up in speculative (rather than productive) activities. This reality is seen in the figures for Japan’s GDP which shrank in the second and third quarters of 2014 by 7.3 and 6 percent respectively.
Even the dramatic fall in the Japanese yen has not ended up lifting the country out of its trade deficit, as Japan recorded an excess of imports over exports of 893 billion yen in November, marking the its 29th consecutive month for trade to be in the red.
Wages also have not risen much either, despite Abe’s appeals to corporate leaders. In August 2014, real wages (adjusted for inflation) fell by 2.6 percent year-on-year, the 14th straight month of declines. The bottom-line of profit has again proved to be a weightier concern to capitalists than the opinions of politicians or the public.
On top of all these setbacks to the plan, the Bank of Japan is even having difficulty reaching its 2 percent inflation target. This is particularly troublesome for Captain Abe and his obsessive crew, since deflation has been their White Whale that had to be slayed at all cost. Rather than admit defeat in this quest, the BOJ has decided to increase the monetary stimulus by enlarging to 80 trillion yen the annual target for expanding the monetary base, as compared to the previous 60 to 70 trillion yen range.
In short, although the first two arrows may have hit the mark insofar as their immediate goals, few of the expected knock-on effects have materialized. This should not be too terribly surprising to anyone, especially to the members of the LDP, since for well over two decades Japanese governments have experimented with similar monetary and fiscal policies in the hope of economic recovery.
It goes without saying that the experiment failed (again and again). Slashing interest rates to zero was not the answer; nor did previous stimulus packages provide much incentive to the real economy. Japan introduced no fewer than 15 stimulus packages between 1992 and 2008, averaging around 2.3 percent of the country’s overall GDP.
What grew as a result of these efforts was not the economy but government debt; to the point where it is now 780 trillion yen, which is roughly 240 percent of Japan’s GDP, forcing the government to channel around 40 percent of its revenue to the servicing of this debt.
Abe himself seems to be well aware that ‘Abenomics’ will hit the wall sooner or later, if it hasn’t made contact already. His decision to call a snap general election in December, even though he had two years left in his current term, was widely recognized as stemming from his expectation that things are likely to get worse, economically. Better to call an election now, he reasoned, while the opposition is in disarray, than to wait another year or two.
The ploy worked, as the LDP and its coalition partner Komeito preserved their two-thirds parliamentary majority, while around half the population abstained from voting at all. But Abe may have been too clever by half; in making Abenomics the centrepiece of his campaign, he has laid further claim to his responsibility for the performance of the Japanese economy. The prime minister is free to remain in office another four years, but with his ‘three arrows’ looking more like damp squibs he may not last that long.