Mr. Abe, Japan’s economy needs more
Editor’s Note: Japanese Prime Minister Shinzo Abe has made reviving the Japanese economy a central part of his second stint in office. He’s been so focused on tackling his country’s deflation that his economic policies are collectively referred to eponymously as “Abenomics.”
The Council on Foreign Relations’ Beina Xu provides a solid overview of his three-part approach:
Abe’s Keynesian-inspired plan, dubbed “Abenomics,” takes a three-pronged approach to reflate the economy through monetary, fiscal, and structural policies. It includes a hefty stimulus package worth 20.2 trillion yen ($210 billion), of which 10.3 trillion ($116 billion) would come in government spending with a focus on infrastructure. The Bank of Japan (BOJ) also doubled its inflation target to 2 percent, and the government is aiming to create six hundred thousand jobs in a matter of two years. Lastly, structural changes—including industry liberalization, corporate tax cuts, and increased workforce diversity—aim to sustain the reforms long-term.
As Xu wrote in June, the first two strategies, or “arrows,” seemed to have worked relatively well. And in what’s been greeted as good news, announced Wednesday, exports rose for the first time in three months, spelling a possible recovery in overseas demand.
Discussing a Brookings Institution paper on Abenomics’ preliminary outlook this spring – before the release of Abenomics’ most recent plank, Justin Wolfers agrees that there are some signs Abenomics is working, but that the progress observed so far is not going to be enough.
“There’s a great deal of uncertainty, really, whether what we’re seeing is a slow adjustment to a policy that will have large, long-run effects, or a small initial effect because it’s only going to be a small long-run effect,” Wolfers says.
But economist Milton Ezrati feels strongly that Abe isn’t doing enough to help Japan’s economy and that the current plan is hardly adequate to deal with the country’s needs. In the following column, he argues that the “three arrows” offer little that hasn’t been tried and failed before, and that instead, Abenomics needs to confront the reality of an aging population and outdated economic model.
Ezrati is senior economist and market strategist for Lord, Abbett & Co. and an affiliate of the Center for the Study of Human Capitol at the State University of New York at Buffalo. He’s written a book about Japan’s economic and cultural transformation, “Kawari,” and previously written for Making Sen$e about how America can overcome the challenges of an aging population.
— Simone Pathe, Making Sen$e Editor
Japanese Prime Minister Shinzo Abe will have to do more to revitalize his country’s economy, or Japan will remain mired in the stagnation that has plagued it for more than 20 years now. He’s recently added to his revitalization plans, but they’re not enough.
Abe describes his policies, commonly called Abenomics, in terms of three “arrows.” The first is a massive infusion of financial liquidity into the economy. The second is a huge program of government spending on roads, bridges, ports, and economic infrastructure generally. The third arrow would address much-needed structural reform. That would include actions to cope with an aging population and to adjust to a world economic order that has changed radically from the one that shaped Japan’s current economic structure.
Abe shot his first two arrows almost immediately after outlining his program last year. His third arrow, the most important of the three, remained in his quiver for months until unveiled with the recent announcement of his economic revival plan this summer. Now that the whole package is out in the open, it is clearly neither as novel as he claims nor adequate to Japan’s needs.
The first two arrows are, in fact, little different from the policies that have long failed Japan. The easy monetary policy may sound new — like a Japanese version of the quantitative easing used by the Federal Reserve, the Bank of England and the European Central Bank — but at base, it is little different from the policies used by Tokyo for over half a century to promote exports by depressing the foreign exchange value of the yen. Monetary stimulus of this sort can have other uses, but in Japan’s case, the currency link is unmistakable. Abe emphasized it during his election campaign. Decades ago, such policies worked well to propel Japan’s economy, making it an unbeatable export machine. Now that aging demographics have disproportionately enlarged the country’s retired population, the effectiveness of these monetary stimulus policies is questionable. Other versions of this tactic have, after all, failed for the last two decades.
Infrastructure spending even more closely resembles the failed policies of the past. Japan has relied on such fiscal stimulus measures for so long now that the country shares a standing joke about how all its rivers have concrete beds. Reliance on such spending and its attendant financing burdens are why Japan’s outstanding public debt has risen to over 250 percent of its gross domestic product (GDP), more than twice the relative size of public debt in the United States and by far the highest of any major nation. Meanwhile, the economic stagnation of the last 20-plus years speaks loudly to the policy’s ineffectiveness.
Perhaps even less appealing is the questionable motivation behind such spending. The Liberal Democratic Party, which has ruled Japan for most of the last 60 years and of which the current prime minister is leader, has notoriously used infrastructure spending to reward firms and regions that support the party. There is no reason to believe that today’s party leaders are behaving any differently. Indeed, the party’s willingness to raise consumption taxes, and then offset the ill effects on the economy with spending on roads and bridges, is of a piece with past practices – using taxpayer monies to pay off political debts.
Abe’s third arrow, delayed and only just announced under the heading, “Strategy for Reviving Japan,” does have encouraging features. At least it recognizes some of Japan’s underlying problems, which is more than any other Japanese prime minister has done. But it is clearly too limited and too narrowly conceived to deal with Japan’s huge fundamental reform needs. These fall broadly under two headings.
Number one is the acute demographic pressure facing the nation. Increased longevity and low birth rates have already brought Japan’s population to the point where the country has fewer than three working-age people to support each retiree, a relative shortage of working hands and minds that will only become more acute in coming years. By 2030, Japan’s government estimates, the country will have fewer than two working-age people for each retiree. Such a lopsided mix of producers and consumers threatens to bankrupt Japan’s pension system. According to officials of Japan’s Social Security System, the overhang of retirees will, if policies remain unchanged, absorb almost half of the country’s GDP by 2040, an impossible financial burden. Meanwhile, the relative shortage of workers will sap Japan of raw labor power, with obvious implications for the economy’s growth potential and future prosperity. It certainly raises questions about Japan’s continuing efforts to remain a broad-based export powerhouse.
Against this huge challenge, Abe’s new proposals look more like a gesture than a policy. He would supplement Japan’s supply of labor by bringing in a small number of workers from abroad — “trainees” his strategy document calls them. The object is to let in foreigners with needed skills. The press release accompanying the announcement mentioned “housekeepers.” While Japan may have a need in this area, there are surely other fields that can offer the economy more of a lift. Even if Tokyo were more willing on this front than it appears to be, Japan’s notoriously xenophobic culture would raise questions about how much help immigration can offer. The proposals also mention plans to exempt higher paid “white collar” workers from over-time rules. Squeezing more hours out of existing workers would fill some of the gap left by a shortage of working-age people. But there are surely limits on how much this measure can help too.
Abe’s strategy shows more promise by seeking to encourage women to participate in the workforce in greater numbers. Here there is potential. Less than 50 percent of working-age Japanese women work outside the home. (The figure for women with children under 18 working outside the home in the United States is close to 70 percent, according to the Bureau of Labor Statistics). To encourage mothers to seek gainful employment, Abe’s new proposals would create after-school programs for 10,000 children and increase the number of day-care centers. They would also modify tax and pension rules that presently favor stay-at-home moms. While this is clearly a useful direction for policy, the prime minister could do more. At the very least, Tokyo could aid child care on a grander scale. Ten thousand children is a lot, but even in a country with a remarkably low birth rate, it is only a beginning. It would surely encourage more women if Tokyo were also to change Japan’s labor laws so that they could command pay equal to men and if workplace rules were to become flexible enough to allow parents time during the day to ferry children from school to other supervised activities.
Nor do the proposals even touch on the potential for encouraging longer careers for older workers. Such an effort would help in two ways: by increasing the number of people available for work and by reducing the proportion of dependent retirees in the population. Yet the Japanese, who are the longest living people on earth, can retire with full benefits from their public pensions at only 60 years. Surely a change in pension law and more flexible workplace rules to allow elders part-time status could add 10 or more years to the average career. Yet Abe’s strategy for reviving Japan ignores all this potential.
The prime minister’s new proposals also ignore ways to alleviate the country’s demographic pressures by re-orienting its economy. Instead of relying on exports as an engine of growth, Japan could turn to consumer spending as an economic driver. Its superabundance of retirees would certainly tend to fuel such an engine. They may no longer produce, but they still consume. Of course, such an economic re-orientation would force Japan to import more, but the country can use that change to its advantage as well. By leaving to China and other emerging economies the output of simpler products that require a lot of labor in their production, Japan could tap youthful, eager workers abroad, even as those workers stay at home.
To trade for these needed, labor-intensive goods, the country could use its advanced technology and well-trained, if limited, workforce to best advantage by re-focusing its domestic production on more complex, high-value-added processes and products. The change, of course, would require an increased emphasis on innovation, training and capital spending. Renewed focus on these areas might gain marginally from a separate, recent decision to reduce the corporate tax rate gradually from 35 percent today to 30 percent in the next several years, but otherwise, Abe has said little about any of this, much less done anything.
A push for innovation and training is that much more desirable because of the country’s second broad reform need: a revamp of its general economic model. Japan’s existing economic approach relies on what the Japanese call the “iron triangle” – a close cooperation between politicians, bureaucrats and big business. In the distant past this arrangement effectively marshaled Japan’s economic resources to meet clear goals based on developments in the United States and other more developed nations of the time. The approach did wonders to bring the country up from the devastation of World War II and then promote decades of development. The problem is that Japan has caught up with the West. Instead of the iron triangle with its singular direction, Japan now needs a more innovative culture, one that encourages hundreds and thousands of economic and technological experiments and then capitalizes on those that work. But because innovation almost always comes from startups and firms that challenge existing business hierarchies, the iron triangle, particularly its big business side, has remained hostile to such a culture. Abe has made no mention of the iron triangle’s ill effects, much less proposed anything to modify or break it.
Perhaps it is too soon to dismiss the prime minister and his program. Perhaps he is well aware of what needs to be done. It is not as if people outside the government – academics, business managers, financial experts, and even some politicians – have not written and discussed these fundamental needs for years. Perhaps Abe recognizes that this last aspect of his plan requires more political and social groundwork before he can implement it fully. There is always hope, but until he does commit himself and his country to a convincing and concrete policy of basic reform, it is impossible to raise much optimism about Japan’s prospects.