Is “Abenomics” Japan’s Second Economic Miracle?
Shinzo Abe is proving to be a surprise-a-minute prime minister. This week he will announce his intention to enter talks with the US on a controversial free-trade pact called the Trans–Pacific Partnership, according to Japanese media. It is the latest in a series of unusual moves Abe is making to get Japan back on its feet. This could have a happy ending—but it could just as easily end as tearful melodrama.
With a peculiar mix of policies—monetary, fiscal, and now structural—Abe proposes to pull Japan out of almost 20 years of falling wages, price deflation, and miserable corporate profits. If it works, it will be Japan’s “second economic miracle” — a terrific prospect—so long as you believe in miracles.
Apart from the Japanese themselves, who have been living in a state of stagnation since their famous “bubble” burst on New Year’s Day in 1990, the U.S. will be among the big winners if Japan manages to revive. American trade negotiators have broken their picks for a quarter of a century trying to pry open Japanese markets. Now Abe is talking about coming Washington’s way via the Trans Pacific Partnership—opening up, deregulating, shrinking the government’s role, bracing the nation for more competition.
The markets, so far, are proving to be true believers. Since Abe took office in mid–December, shares in Tokyo have shot up by a third percent and the yen has fallen roughly 20 percent—giving needed relief to exporters competing against Korean and Chinese rivals. Last Friday the government announced that the economy reversed another long downturn in the final three months of 2012, growing by 0.2 percent. No, Abe does not get credit for that, but it puts the wind at his back as the first quarter draws to a close.
I should stop right here and tell you: I think Abe faces some serious impediments on his way back to economic vigor. The Japanese economy is now slightly smaller in size than it was in 1990. Bringing it up to positive, sustainable growth is going to be a heavy lift. Equally, there are the politics of the piece. Abe is now riding a 70 percent approval rating. That is unlikely to last once some of his policies kick in.
Abe deserves a word of his own to describe these policies. You cannot call them conservative, although Abe is. They look liberal, although they will probably remain so only for a while. “Abenomics” as we have is a thing unto itself.
Abe set to his task as soon as his governing Liberal Democrats named him to office at the end of last year. He promptly told the Bank of Japan to double its inflation target, to 2 percent. That is a big deal in Japan. Back in the oil crisis of the 1970s, the nation faced inflation of roughly 40 percent, and it has ever since nursed a paranoid fear of rising prices.
Step 1, then, was essentially abolishing the Bank of Japan’s independence—an interesting move in itself—and pushing its conservative governor aside. Last week Abe installed Haruko Kuroda, a long-time Finance Ministry bureaucrat known for his unorthodox ideas. Kuroda is a “whatever it takes” man, as he immediately declared. He has already advised the Diet, Japan’s parliament, that he will increase money supply sharply and broaden the range of assets the BoJ will purchase. It is quantitative easing by any other name.
After the monetary side comes the fiscal side. This consists of a stimulus package focused on public works, through which Abe’s government will spend $117 billion. Japan’s net public debt has climbed from 29 percent of GDP in 1996 to 135 percent now. Gross debt is worse: It is 200 percent of what the Japanese economy produces each year.
These moves are sensible. As certain Americans argue at home, debt is not desirable, but now is not the time to worry about it. Now is the time to stimulate. Inflation, under current conditions, is a long way off. As for central bank independence, it was never more than a fable anyway.
There are risks nonetheless. What if prices rise in response to the BoJ’s stimulus and wages do not? Then you get what economists call “price push” inflation instead of “wage pull” inflation. Abe has spotted this danger. He is already lobbying Japan’s big industrial associations, notably the Keidanren, to start paying higher salaries. We’re all in this together, the song seems to go.
The biggest risk for Abe is failing to bring Japan into the TPP he negotiates with the US. Abe wants to use the pact as cover as he deregulates the economy: “The Americans made me do it.” Without the structural reforms required by the TPP, Abe will simply make the familiar mistake of throwing good money after bad. No amount of monetary and fiscal stimulus will bring Japan back to life on its own.
I see several reasons to worry about this dimension of Abe’s program. One is that he will ask too much of the Obama administration, specifically the right to continue protecting Japan’s ridiculously over-protected rice farmers, and there will not be any ink put to paper.
Two is that he will fail to build a political constituency behind the TPP. A lot of special interests—the farmers but not only the farmers: small businesses, merchants, and numerous others—stand to get their toes scrunched in any deal with the neoliberals in Washington. For this reason, Abe needs a big victory in upper house elections next summer; at present, the opposition holds a majority. Even with a win, there is the job of getting the Liberal Democrats in line. Many are lifelong protectionists.
At the end of last week—a big day, last Friday—the trade pact question took another new turn. A group of Asian leaders agreed at a meeting in Hanoi to begin talks in May on a regional free-trade pact comprised of 16 signatories, including Japan and China but excluding the US. You can expect this to provide the TPP with formidable competition. One or the other of these agreements will prevail—not both.
Each side knows it is competing with the other. And the edge goes to Asia, in my reckoning. Since the crisis of the late 1990s Asians have been well aware that economic policy and economic models altogether have an important cultural dimension. Policy reflects tradition, values, and much else. It is as true in the US as it is anywhere else. Many Asian officials made this point plainly back in the 1990s, with their calls for an Asian Monetary Fund, for instance, to take the place of the IMF in the Pacific.
One other worry hangs over Shinzo Abe’s head. He is an extreme nationalist, as he is happy to make clear. For now he has put his pugilistic thoughts about China and Korea to the side to concentrate on his economy. If he gets that victory in the Diet next summer, the betting in Tokyo is that all these rags and bones will come out of the cellar again, and the Abe government will head toward history.