An ‘Abenomics’ Scorecard

The December 2012 election gave Japan’s Liberal Democratic Party control of both houses of the Diet as the electorate sought positive, decisive, energetic leadership out of the malaise of the past two decades. Shinzo Abe offered himself as that leader, with Abenomics as his program. Mid-2016 brings the next elections. If things go well for Japan and Abenomics, Abe likely will continue as prime minister until those elections, and probably until late 2018 when his final LDP presidency term ends.

The December 2012 election gave Japan’s Liberal Democratic Party control of both houses of the Diet as the electorate sought positive, decisive, energetic leadership out of the malaise of the past two decades. Shinzo Abe offered himself as that leader, with Abenomics as his program. Mid-2016 brings the next elections. If things go well for Japan and Abenomics, Abe likely will continue as prime minister until those elections, and probably until late 2018 when his final LDP presidency term ends. This provides an Abe administration the opportunity not only to address immediate economic policy issues, but also to vigorously pursue solutions to Japan’s long-standing, fundamental economic problems.

Coming into the 2012 election and since, the Japanese mind-set has been shifting from resignation to a more positive, if skeptical, mix of attitudes, expectations, and hopes. Abe is building on that by stressing Japan’s revitalisation. His first cabinet shuffle, on September 3, reaffirmed his commitment to tackle major structural economic reforms.

The vision incorporated in Abenomics is to restore Japanese self-confidence and national pride, and to have Japan an internationally respected country. A range of economic policy objectives have been articulated, and reiterated in the 24 June Cabinet revitalisation and growth policy statements. The aim is to raise Japan’s profile in international affairs as a constructive contributor to peace in Asia and in the world. The major demographic goal is to stabilise the population at 100 million within 50 years or so. In other words, end two decades of economic stagnation and resignation, end Japan’s inward-looking ‘passive pacifism’, and halt population decline.

Here the focus is on Abenomics, not on national security or foreign policy. However, Abe says that economic pragmatism and ideological commitment are fundamentally intertwined.  To generate a sense of Japanese pride, Abe has articulated views of Japanese colonialism, World War II, and ‘comfort women’ that are inconsistent with the evidence. Consequently, many Chinese and Koreans, as well as Japanese, are suspicious of Abe’s ultimate intentions and national goals. Abe will have to maintain a careful balancing act to maintain broad public support and good relations with its neighbours. So far, he has been somewhat inept.

Abenomics introduced a multi-faceted approach to a multitude of problems. The three arrows of Abenomics are straightforward: fiscal policy (the government’s purview), monetary policy (Bank of Japan), and structural reform (private sector and government).

The objectives are straightforward – price stability, meaning replacing deflation with an indefinitely sustained 2% annual increase in the consumer price index, flexible fiscal stability, implementing a difficult balance both to maintain adequate domestic demand and to reduce the high government budget deficit and government debt/GDP ratio, and a comprehensive growth strategy to achieve 2% real GDP growth. The government’s role in structural reform is to reduce regulations and other obstacles, encourage innovation, provide other incentives to increase private business investment and the supply of labor, and support private consumption.

Abenomics has achieved some success in its early stages. Initial exuberant optimism has waned, but those who say it is a failure are judging prematurely. Abenomics; implementation will take years. Monetary policy has successfully halted deflation, but achieving and then sustaining an annual 2% increase in consumer prices will be a major challenge. Fiscal policy’s major challenge persists: achieving sufficient private consumption and investment demand growth so that fiscal consolidation can be implemented. Structural reform to achieve growth requires a wide range of policies, so it is a thousand darts, not a single arrow.

A fundamental objective of Abe’s growth strategy is to revitalise Japanese enterprise, to awaken their Keynesian animal spirits, and take more risks. The government’s 24 June revitalisation and growth report – representing Abenomics’ third arrow – is an important long-run policy statement. The report lays out major economic and social goals in the context of the coming several decades, not just the next few years. It is thus clearer and more credible than the 2013 report.

Abe’s immediate challenge is how rapidly and how well the economy rebounds from the consumption tax increase, as he faces major policy decisions by year-end or early next year. The April-June contraction was severe. Recent forecasts were for 4.1% growth over the summer quarter, but the most recent data suggest the rebound is disappointing. Hope now seems to be shifting to good final quarter performance.

In the next six months, the Abe government faces some major decisions. Perhaps the most important is whether to pursue the 2% consumption tax increase scheduled for October 2015. If third quarter GDP growth results (announced 17 November) are disappointing, then Abe may delay his decision until early next year.

I think the consumption tax increase will take place. The Trans-Pacific Partnership (TPP) free trade agreement negotiations, now hanging in the balance, are important to Japan for both domestic and international-relations reasons. Moreover, a major immediate issue is that the planned cut in the corporate income tax rate must be revenue-neutral, which means that there will need to be policy changes that increase other tax revenues.

What’s the score on Japan’s Abenomics is republished with permission from East Asia Forum