Walter Hamilton. Crunch Time for Abenomics

Jan 13, 2015

Is it time to declare Abenomics, the recession-busting strategy of Japanese Prime Minister Shinzo Abe, a failure?  If so, was the recent Japanese election purely an exercise for Shinzo Abe to protect himself and the ruling coalition from a half-awake electorate before the deluge?

Launched with much fanfare in 2012, Abenomics promised to cure deflation, revive economic growth, break down structural rigidities in the economy, unlock the talents of women in the workplace and salvage the nation’s deficit-drowned budget. In two years, it has achieved none of these objectives; nor, arguably, has it brought any of them within reach.


After briefly ticking up to around 2% per annum––the central bank’s target––Japan’s core inflation rate has declined again to 0.7%, with some major retailers reporting a further drop in turnover during the recent end-of-year sales. One of the paradoxes of the current situation is that, despite historically loose monetary policy, money in circulation is tight. Japanese households, once famous for their high savings ratio (20%+), are now forced to dip into their savings (i.e. the nation’s domestic savings ratio has turned negative) just to keep their heads above water.


Recent GDP data revealed Japan had fallen back into recession. Domestic demand remained a drag, as was––more surprisingly––private investment. The economy has contracted in six of the past 11 quarters for which official data are available. Manufacturers have lowered their expectations, according to the latest Tankan survey, the most authoritative indicator of future trends. If the GDP figure comes in positive for the final quarter of 2014, as some predict, it will be because a weaker yen has helped to boost external demand. However, with European economies going backwards, Chinese growth abating and the U.S. recovery maturing, an export-led recovery hardly seems feasible.

Structural Rigidities:

Structural change is harder to achieve in any economy and must be considered a medium to long-term objective. The problem is that the Abe Government has not clearly articulated what Japan’s future economy should look like. Though it has declared a willingness to join the Trans-Pacific Partnership––the regulatory and investment treaty being promoted by the United States––negotiations between Tokyo and Washington have been painfully slow. Interest groups hostile to the TPP, from the medical to the agricultural sectors, are doing their best to hold up a deal. Free trade agreements with China and South Korea remain a long way off, partly because of soured political relations.

Lately, Abe has put more emphasis on corporate tax reform. One of the ruling coalition’s first actions after being re-elected was to approve a cut in the corporate tax rate by 2.5 percentage points to 32.1%, effective from this April. Another cut to 31.3% is due to follow a year later. The government also delayed the next scheduled consumption tax increase and unveiled a slew of other tax changes and incentives, although nothing radically new was announced. Whether these measures can stimulate demand remains doubtful, given that less than a third of Japanese corporations, according to Reuters, are actually paying tax (the rest are either unprofitable or making use of credits from earlier losses).


Abe says he wants more women to stay in the workforce (60% quit work when they have their first child) and be given opportunities to advance (female representation on company boards is just 1%). But he is up against a competing lobby among his conservative allies who want greater action to stem Japan’s falling birthrate. Some progress has been made­­––for instance, an expansion of childcare places––but there is a deep-seated cultural bias in the workplace against full female participation. Long hours of overtime remain the norm in companies, big and small. Studies have shown that the overtime ‘phenomenon’ has less to do with lifting productivity than with maintaining male-dominated corporate hierarchies. Anecdotally there is little evidence of change.


Government debt in Japan, equivalent to more than two years of gross domestic product, has continued to climb under the Abe administration. The fiscal 2015 budget is likely to add about 38 trillion yen (A$380 billion) to the debt. Few observers now believe the government can meet its target of balancing the primary budget (excluding debt serving commitments) by 2020. Fiscal hawks, however, are fighting a rear-guard action, and social security spending is being screwed down, further widening the gap between the ‘haves’ and ‘have-nots’ in society. With fiscal expansion apparently no longer an option, there is a growing tension within Abenomics between expansionary and contractionary policy settings.


The most important, and unexpected, wind-shift in favour of Japan, in recent months, has been the collapse in the prices of oil and other natural resources. The depreciation of the yen, engineered by the central bank to help revive corporate profits and support employment, had led to a sharp increase in the prices of finished imported goods and in the input costs of businesses. Energy imports swelled Japan’s large trade deficit, especially after the Fukushima nuclear disaster, but significant relief can be expected in 2015.


For some observers, the key to the success or failure of Abenomics is wages growth. Professor Hiroshi Yoshikawa of Tokyo University is one prominent economist who has argued that reversing falling wage-rates, and not monetary easing (the primary focus of Abenomics Mark I), is the way to break the deflationary spiral. Abe’s own economic advisers have derided Yoshikawa’s thesis, but it seems the more pragmatic Abe is starting to pay attention to the professor. At their annual end-of-year soiree, Japanese captains of industry were exhorted by the prime minister to use higher profits to pay higher wages this year. While pressure from the top will probably have some effect, big companies may hand out larger bonuses (which can be adjusted downwards again later) rather than increase base pay-rates.

The year ahead:

Having just returned from a fortnight in Japan, my impression is that conditions have not fundamentally improved. It is easy to gain a false impression, if you are a tourist who only visits the corridor between Tokyo’s Ginza and Shibuya districts, where glitzy retail outlets always seem to have well-heeled customers. But go to the outer suburbs of the capital or to provincial towns and you will find evidence of continuing economic stress: shuttered commercial streets, miserably low casual wage-rates, depopulation, and decaying infrastructure.

Even in the trendier parts of Tokyo, businesses are struggling to attract customers. One anecdote will suffice. I took lunch at a new restaurant in Aobadai that, judging from the smart décor and linen service, could be expected to leave me $50-$75 out of pocket for my meal, if it were in Sydney or Melbourne. I selected a course that included soup, bread, salad, pasta, dessert and coffee. The food was beautifully prepared, delicious, and in generous proportions. It cost me $11. How the restaurant could pay its rent, wages and materials costs, and still make a profit, was a complete mystery.

Japan seems to be surviving on a mysterious, mathematics-defying, leap of faith. Perhaps what we are witnessing will, in time, bear out the old adage ‘it is always darkest before the dawn’. Though I would never underestimate the capacity of the Japanese to reinvent themselves, it is hard to escape the conclusion that something just doesn’t add up.

Journalist and author Walter Hamilton reported from Japan for eleven years for the ABC.




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