Japan: The ifs and buts of Abenomics

Abenomics has elevated not only Japanese stock prices but also the national mood. The paralysis and despondency that hung over Tokyo like dark clouds around Mount Fuji have suddenly lifted.

There could be another huge fillip from the choice of Tokyo to host the 2020 Summer Olympic Games. Japanese get dewy-eyed whenever they recall the previous Tokyo Olympics, in 1964, a showcase for the post-war economic miracle that was symbolized by the first bullet train between Tokyo and Osaka.

Japanese are realistic enough to know that the promise of those years will not return. The torch of breakneck economic expansion was passed to others, first South Korea, then China. Japan’s rapidly ageing population and its colossal government debt provide ample grounds for pessimism.

Look again, however, and Japan’s glass is half full. Prime minister Shinzo Abe and his close advisers, such as Koicho Hamada of Yale University, understand there is nothing inevitable about Japan’s stagnation and deflation. The country is still the world’s third-biggest economy and its largest creditor.

It has world-class manufacturing and technology, a hard-working and disciplined workforce, and vast reserves of largely untapped resources. Japanese companies have been hoarding money, and are now sitting on a cash mountain the size of Italy’s GDP.

The nation’s agriculture is a lesson in how to waste productive land. There is an abundance of public assets ripe for privatization. The productive energies of millions of workers are dissipated in an employment system that rewards timeserving instead of talent. Releasing this trapped potential is the biggest challenge of Abenomics.

The first two ‘arrows’ of Abenomics – pumping in vast amounts of money via the Bank of Japan and fiscal stimulus – have succeeded in pulling the economy out of a deflationary quagmire. The yen has plummeted, profits are soaring, and inflation is ticking up.

On the other hand, Japanese companies have yet to increase wages to offset the rise in consumer prices. Corporate investment will be just as crucial for a self-sustaining recovery. As a share of ordinary profits, capital expenditure remains at its lowest level since 1985.

Formidable obstacles lie in the path of the ‘third arrow’: structural reforms needed to expand the growth capacity of Japan’s economy. Abe must do battle against a host of vested interests, from farmers and doctors to bureaucrats and political rivals.

In the background, should Abenomics fail, is the constant risk of a crisis in public finance. In the absence of large-scale immigration, reform of elderly people’s entitlements is essential to lessening the fiscal burden of an ageing population. Elderly Japanese could become Abe’s most daunting opponents, for the ‘silver generation’ wield political steel.

Pursuing these economic reforms requires strength and determination. Abe has these qualities, unusual for a Japanese leader. Unfortunately, Abe’s vision for Japan also includes elements of a backward-looking nationalism that even Hamada finds distasteful.

Restoring Japan to stable growth would be legacy enough. Trying to turn the ideological clock back can only undermine that achievement.