Leading newspapers and news media, from the Financial Times to Bloomberg, have been writing the obituary of Abenomics, the special economic policies designed and named after Japan’s Prime Minister Shinzo Abe to lift his country from gloom and restore it as an economic great power.
But if you look carefully, Abenomics is about to be laid to rest because of a lack of care and attention from its progenitor. A contributing factor has been the failure of the Japanese establishment — in which I include banks and big companies, academia and media — to do a proper job in challenging politicians to articulate and shape policies properly.
From the start, Abenomics was controversial. Critics, including Professor Noriko Hama of Doshisha University, mocked it as “aho-nomics” (silly or idiotic economics) and “awa-nomics” (bubble economics). I was surprised that Abenomics was not laughed out of existence for its claim that the firing of three arrows would solve Japan’s problems.
Bows and arrows? What game are we talking about to pretend problems of a sophisticated but troubled economy can be sorted out by using instruments of warfare that were outdated five centuries ago?
Abenomics supposedly consisted of three arrows: monetary policy, fiscal policy and structural reform. Except that Abe did not fire three arrows: he left Bank of Japan Governor Haruhiko Kuroda alone shooting the monetary arrow of quantitative easing (QE), relatively more massive than that of the US Federal Reserve.
QE is like pushing on a piece of string. In the better global economic times when he started, Kuroda managed to weaken the yen to ¥120–¥125 against the US dollar, boosting the stock market and improving earnings of Japanese companies. But Japanese companies have not played their part. They have salted away a record ¥247 trillion in cash reserves, resisting the pleas of Prime Minister Abe to increase wages or invest, which might kick-start the economy, besides raising those animal spirits that could encourage Japan to believe in its economic future.
Now, as the global economy is weakening, the Bank of Japan’s (BOJ’s) QE won’t be as effective. As proof, the BOJ’s desperate resort to negative interest rates succeeded in weakening the yen for a few days before a nervous world sent a flood of money into the yen as a “safe haven” currency; and the yen went to ¥112–113 against the dollar, where it has stayed, enough to pinch exports. As another sign of global headwinds, Japan’s exports fell in January for a fourth consecutive month.
Japan is caught in a vicious circle, with prospects for exports declining, as companies shift production abroad, the global economy slows, and the yen strengthens.
Takuji Okubo, chief economist at Japan Macro Advisors, asserts: “The idea behind Abenomics was sound, but it was badly executed. In theory, the policy package aimed to implement painful structural reforms, while expansionary fiscal and monetary policies played the role of painkillers. In reality, no significant structural reforms were executed.”
Kuroda might deepen negative interest rates. Rates could go to minus 0.5% or even minus 1%, and be applied broadly, with banks charging ordinary Japanese for keeping money in the bank. But this would be the nuclear option, and might lead to the dangerous denouement of Japanese taking their money out of banks. Would foreigners still see the yen as a safe haven then?
Abe might fire another stimulus arrow via more money for boondoggle construction projects, leading to easy pickings for the big companies that fund the politicians and the deeper debts for Japan. But any beneficial effects would be short lived.
The mystery is in how Japan’s leading politicians are seeing the situation. Nobuteru Ishihara, who succeeded the disgraced Akira Amari as economic and fiscal policy minister, confidently declared faith in Japan’s economic recovery: “There have been no major changes in economic fundamentals. No doubt the virtuous cycle of the economy is working.”
Abe himself has forgotten Abenomics in his quest for Japan to be a “normal” nation with a constitution to his liking. You have to ask what is the price of being normal with an economy in such a neglected mess.