Abenomics RIP

TOKYO —

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to pretend problems of a sophisticated but troubled economy can be sorted out by using instruments of warfare that were outdated five centuries ago?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.

Author Infomation

Kevin Rafferty for EURObiZ Japan
Kevin Rafferty for EURObiZ Japan
Kevin Rafferty is a journalist and commentator, and quondam professor at Osaka University.
  • 4

    Sensato

    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.

    Monetary easing should never have been one of the arrows of government policy in the first place because the central bank (BOJ) is supposed to be separate from the government to avoid conflict of interest and situations where the central bank is pressured into printing money to fund fiscal spending (as happened pre-WWII in Japan).

    Fiscal policy in the form of taxation and government budgets is supposed to be the realm of the government, monetary policy in terms of taking action to increase or decrease the monetary supply is supposed to be the realm of an independent central bank. Japan has been breaking many of its past rules on central bank independence since Abe became PM, and by buying increasingly more long-term government bonds the BOJ is putting itself into the position of funding fiscal (government) spending. This is dangerous territory.

  • 8

    SenseNotSoCommon

    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

    We've seen what happens when the latter challenge politicians. The majority LDP screams "unfair" and gets them fired.

    Time to throw Abe and his cronies out on their arses.

  • -7

    Afiq Aziz

    Japan needs to go back to its post war economic policy and nationalize the central banks. If the government have huge shares in Japan's mega big companies, just like in those old days. They would have successfully demanded the big corporation to push up wage increases and corporation investments. They would have demanded the corporations to not hoard in as many cash as they had been. The central banks idea that the government needs more privatizations and more reform is not the solution, it is a disaster. The central banks are no good to the Japanese economy, in fact the whole world central banks is not good for the whole world. What we needed right now is not more privatization and put our economic welfare to the hands of private individual. We need more regulation and more nationalization.

  • 0

    shonanbb

    Still does not make sense for such a week economy to have such a strong currency.

  • 4

    Aly Rustom

    Time to throw Abe and his cronies out on their arses.

    the sooner the better.

  • 3

    sangetsu03

    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,

    The author fails to mention that if you subtract stock gains (which are mostly the result of companies borrowing at low rates to buy stocks), the amount held by Japanese companies is much smaller. In the last several weeks we have already seen much of this "cash" vanish into thin air as the Nikkei has slid downward. If there is a major "adjustment" in stock prices, every one of those yen being held by Japanese companies could vanish into thin air.

    The author also fails to mention the reasoning behind this big stock buy-back by Japanese companies. They invested in the market because they expected Abe to enact the structural reforms which were the integral part of "Abenomics". And they believed that these structural reforms would help growth and profitability. Unfortunately, these reforms never materialized, and without structural reforms, Japanese companies cannot hope to earn any return on their stock investments, or further investments in growth or wages. It is Abe and the Japanese government which have not played their part, not companies.

    Unfortunately, the article is garbage, and doesn't address the main reason that Abenomics has failed, and that is the lack of structural reforms, otherwise known as the "third arrow". Two years ago Japan announced that they would participate in TPP only with large exceptions. At this time, a friend of mine from the Japan Development Bank told me plainly that "Abenomics is over". Trade reform was considered to be a critical part of structural reform and deregulation, when it became clear that Japan would not fully participate in the treaty, it became obvious that none of the other reforms were going to occur either.

    Abenomics died a long time ago, funny it took people until now to notice.

  • -2

    JeffLee

    "But Japanese companies have not played their part."

    This is key, and should be at the top of the story. If the private sector used more of its record profits gained thru Abenomics to give back to the people, we wouldn't be having this discussion.

  • 3

    sangetsu03

    This is key, and should be at the top of the story.

    Wrong. Abe promised structural economic reform and deregulation. Without these, there will be no change to the underlying demographics which are pushing down population and decreasing consumption. Companies have been waiting for these changes to take place. If these reforms are not implemented, then there is no point in investing anything in the economy, as simply spending money will not turn things around.

    The government has spent vast sums over the last three years, and what is the result? No growth, increased debt, and continued stagnation of the economy. If companies do the same thing the government has, it is simply throwing good money after bad. You know this.

    If you look at the balance sheets of companies, you will see that almost all of the "record profit"s they have "earned" are from stock gains. Aside from the automakers, these profits are not the result of sales, how could they be when there has been essentially zero growth?

    Companies played their part as expected, to a certain point. When Abe began to tout "Abenomics", they prepared for what they hoped would be an improving economy. They took advantage of the low rates and easy money, and began buying stocks. They knew that once the economy improved, this would put them in good shape to invest, and get the highest possible return.

    But since there is no reform, no change at all in the current economy, which continues to shrink at a frightening pace, it would be foolish for companies to invest anything in it. Spending their money would have the same effect as government spending has had; the downward slide would be slowed down a little bit, but only as long as the companies continued to pour their money in. But, unlike the government, companies cannot borrow without limit, or create their own money. Once they run out of money, the slide will speed up, taking the companies down with it.

  • 0

    JeffLee

    "....the underlying demographics which are pushing down population and decreasing consumption"

    Whereas employers refusing to give raises after many years of salary and bonus cuts is NOT a factor behind lower consumption? Yeah, right.

  • -1

    gokai_wo_maneku

    Many of the changes required to reform the Japanese economy have to be made by Japanese companies. But they have failed to make ANY changes. They just keep repeating what has worked in the past but is no longer relevant to the modern globally integrated world economy (I kinow it is redundant) and doesn't work now. No economic stability = no babies. We tried the US model instituted by Koizumi, now lets make a model that actually strenghtens the economy. Also, integrate with rising China, not sinking US (main symptom: Trump).

  • 1

    sangetsu03

    We tried the US model instituted by Koizumi, now lets make a model that actually strenghtens the economy.

    Really? I guess Koizumi abolished tariffs on all foodstuffs, leather, and luxury goods, and changed company business practices to promote by performance instead of seniority, and rigorously enforced anti trust laws, corporate collusion, and price fixing?

    Wait, he did none of these things, so Japan isn't even close to following the US model, is it?

  • 0

    gokai_wo_maneku

    Actually Abenomics is not "RIP" because it was "DOA".

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