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Abenomics: A Critical Assessment of its 5 Years

Ⅰ.   Introduction

   Just about five years have passed since the economic policy package of Abe administration of Japanese government, often called “Abenomics” has been launched. Abe administration has been enjoying the one of the longest rein of Japanese history of politics. It started in December 2012 and has kept its operation for 5 years and 4 months by March 2018.

   The administration, soon after its formation, announced that it will deploy comprehensive economic policy package consisting symbolically by three arrows, namely, monetary policy, fiscal policy and growth strategy. The main objective of this package was to salvage Japanese economy from the long lasting period of deflation which has been continuing since the beginning of 1990s. The first arrow, the monetary policy, was the most symbolic to show this strategic intent of the administration. The main content of the monetary policy was disclosed dramatically in the first press conference of Mr. Haruhiko Kuroda, the newly appointed governor of Bank of Japan, which was held in April 2013. If we interpret this event as the initiation of Abenomics, just about 5 years has passed from its launch.

   In this essay, I would like to review the main contents and outcomes of Abenomics during these five years. I will first review the first stage of Abenomics from 2013 to 2015 consisting of the three arrows and then review the second stage of Abenomics from 2016 till now(March 2018), and evaluate the performance and outcomes of Abenomics for the five years.


Ⅱ.   Abenomics: the First Stage

    Shortly after the onset of Abe Administration, we, the members of Shimada-juku, a study forum of business leaders, had a luck of having been able to invite Mr. Yoshihide Suga, Minister of the Chamber, to our meeting. His following message was very impressive: he said that Japanese economy has suffered seriously by so-called “the lost decades” (20years of the1990s and 2000s)of extremely low or none growth and persistent deflation. He regretted that during this period political leaders really did not take initiative to fight the deflation. They  simply delegated their authority of monetary policy to Bank of Japan and fiscal policy to Ministry of Finance. Now, this is the time for political leaders to take initiatives to fight against deflation, and this is the prime objective of Abe administration.   

   To achieve this goal, Abe administration formulated a comprehensive economic policy package comprising of three major policies, namely, arrow 1: “extra-ordinary dimensional monetary policy, arrow 2: active and dynamic fiscal policy, and arrow 3: growth strategy pursued by structural reforms of the economy.

   Now, let me explain briefly what each of these three policies means and attempts to accomplish.

Arrow 1:  “Extra-ordinary dimensional” monetary policy

 Mr. Haruhiko Kuroda, the newly appointed governor of BoJ(Bank of Japan) declared at the first major press conference in April 2013 that within 2 years, BoJ will attain the normal pace of 2% inflation, and to achieve this goal, BoJ will double the supply of the base money for the coming 2 years, namely, the stock of the base money will be increased from the level of about 130 trillion yen in spring 2013 to about 270 trillion yen by the end of 2015.

  By this extra-ordinary monetary easing, he meant to brew up inflationary expectations among people to stimulate investment, side by side with the decline of exchange rate of the yen expecting the consequent increase of export which will help increase economic growth rate.

   Responding Mr.Kuroda’s declaration, major speculators sold the future yen expecting the decline of the exchange rate which indeed accelerated the decline of the yen. Within a few months, the yen rate declined as much as 20%. This stimulated the expectation of increase of sales and thus profits of Japanese export oriented companies. Major investors and speculators of the world invested huge amount of funds into stocks of such companies which drove up stock prices of Japanese market acutely. 

   Within half a year, average stock prices of Tokyo exchange increased by 80%. The stock prices have fluctuated since then. However, they followed basically the upward trend to reach more than 20000 yen recently from the level of 8000 yen at the end of 2012. Side by side with this trend, corporate profits increased markedly, which seemed to have given a confidence for business leaders and momentum for Japanese economy for a long awaited recovery. This is an appreciable success of the first arrow of Abenomics.

   Aside from this successful result, the basic intent of the first arrow has not been accomplished. The basic intent of the first arrow has been to promote inflationary expectations on the part of business and the public by attaining on-going pace of 2% level inflation, and thus expect them to consume and invest more which will lead to higher economic growth.  The prices seem to have increased somewhat during the first half of 2013, but then the movement became only sluggish and from the mid 2014 price levels began to decline, suspectedly reflecting the sharp decline of crude oil prices, and did not show upward movements  until 2016, making the inflation target of 2% look practically hopeless. Since 2017, prices began to show some upward changes, perhaps reflecting general upturn of global business trend. Although BoJ’s target seems to have been disturbed by external factors. it is undeniable so far that the most important aim of the first arrow has not been achieved so far.

   Another serious issue is the exit strategy. Due to repeated purchases by BoJ of JGB under BoJ’s extra-ordinary, the outstanding accumulated government debt in the form of JGB is  almost as equivalent of Japan’s GDP. How to exit from this situation is a very large and pressing issue for the management of Japan’s economy in the medium and long term horizon. The US has promoted extra-ordinary easing of money supply up to 2012, it is still carefully promoting the exit from the aggravated balance sheet of FRB even though the  accumulated debt was as much as 20% of US GDP at its peak time. The outstanding monetary base is just about the size of Japan’s GDP. It may well take as long as even  40 to 50 years to finally normalize the expanded BS of BoJ. The course to reach the  goal will not necessarily be smooth. This is much too much bigger cost for the policy of  trying to attain 2% pace of inflation which, though, has not been attained. Viewed in this way, the first arrow of Abenomics attained only a “mixed success.”

2. Arrow  2:   Active and dynamic fiscal policy

   Abe government kept large scale fiscal spending both as usual annual budget as well as extra-ordinary budget with special purposes as helping the recovery of flood hit North-east Japan or mitigating the negative reaction of increasing consumption tax rate etc. The large scale and “dynamic” fiscal spending has had some positive effect of supporting the stable performance of the economy during rampant economic changes stemming from external forces. However, it is becoming increasingly evident that achieving the target to attain normal fiscal balance is difficult, one of the primary objectives of Abenomics side by side with terminating deflation. Japanese government has committed as an international promise since 2008, at the time of the administration of Mr. Naoto Kan, to achieve fiscal balance by 2020. However, as even recent government reports predict, this objective will almost certainly not be achieved.

   More recently, there emerges within the Abe government new arguments that attaining fiscal balance is not an important policy objective, or the current objective as defined by the “primary balance” might be changed by a new index of the government debt relative to GDP, which can be improved with economic growth. This seems to reflect the weakening of the will of government leaders to tackle the issue of controlling the growth of fiscal debt. Such attitude of political leaders may well lead to a serious issue of fiscal collapse as I  discussed in the earlier essay of this blog entitled “Aging and Possible Fiscal Crisis: Are There Remedies? “

3. Arrow 3:   Growth strategies: structural reform

 Arrow 3 is growth strategy.  The growth strategy has been formulated in the form of a comprehensive package and announced three times consecutively, in 2013, 2014 and 2015. Let me briefly depict gists of the packages.

(1) The 2013 package. This package was admitted by Abe cabinet in June 2013, which consists of 3 plans, namely, 1) industry recovery plan which aims at renewal of industry and human resources. To achieve the goal, industrial competitiveness act was enacted, for example. 2) strategic market creation plan which means to foster industrial activities to promote health, energy, future generation infra-structure, and regional development to enhance regional earning capability, and 3) international development strategic plan which means to increase the proportion of Japanese trade which is covered by free trade agreements from 19% as of 2013 to 70% by 2018.These plans look nice. However, these plans are more of slogans rather than  substantial policy prescriptions, and have not been really well implemented.

(2) The 2014 package was revealed in June 2014 by the cabinet. In order to propel economic growth, prime minister Shinzo Abe took a strong initiative to organize a comprehensive package consisting of many concrete policy prescriptions. Foreign observers commented this package as “1000 needles” rather than an arrow. 

   Out of such many policies, let me list a dozen of major policies: 1) corporate governance and reform of capital market, 2) strengthening competitiveness act, 3) participation to TPP, 4) agricultural reform, 5) regulatory reform of work ways, 6) encouraging female workers to work, 7) renewing regional development, 8) social security reform, 9) medical reform, 10) designation of national strategic economic zone, 11) wage hikes, 12) reduction of corporate income taxes.

   Of these items, such items as 1), 2) 3) and 4) achieved some appreciable results, while most of others went a half way or ended up with negligible results. We need to understand, however, that structural reform takes time to yield any visible results unlike such macro economic policies as monetary and fiscal policies.

(3)The 2015 package was announced in June 2015. It consists of some major policies such as productivity increase, innovation, development of service industries, and local Abenomics, employment reform and strategic use of universities etc. which somehow resemble the content of the 2013 package although he naming is different. Frankly speaking, I was disappointed by reading carefully the package document. The content of the package did not seem to bring about the progress relative to the proceeding 2015 package, and if fact much of the policy prescriptions did not have concrete steps for execution.

   One of the members of the committee told me that it was difficult to write prescriptions which go beyond the statement of previous report because the previous prescriptions have been in the process of legislation. But this is an excuse for not writing something which go beyond the previous ideas. 2015 was the year prime minister Shinzo Abe spent much of his attention and energy to legislate “new National Security Law” by which to authorize the use of weapons to protect American force under special cases. Perhaps, Mr. Abe’s  interest and passion toward economic policies may have been weakened.

4.   Interim evaluation of the result of Abenomics

   What has been described above is the first phase of Abenomics which covers three years since the end of 2012 to the end of 2015. Before explaining and discussing about the second phase of Abenomics, let me evaluate the performance of Abenomics at this stage.

   On economic growth, the performance of Japanese economy has been very slow except until mid-2013 when the impact of Arrow I, extra-ordinary monetary easing,  jerked up corporate profits and promoted investments. Toward the latter half of 2015 the economy slowed down and at a point statistically recorded  minus growth, which was quickly corrected for the reason of statistical error and the record of the non-negative economic growth has barely been maintained.

   On real wages, the performance has been pessimistic for the most part of the first phase of Abenomics.  From the latter half of 2013, wages increases lagged behind price increases and real wages have been eroded. After the increase of consumption tax in April 2014, real wages have been further eroded by the amount of tax increase. It is amazing that workers and population in general did not quite accuse the government on this score.

   On fiscal balance, the targeted restoration of fiscal balance seems to be getting increasingly hopeless due to rather massive fiscal spending as discussed earlier in this essay, and also more deeply in the previous essay of this blog, entitled “Aging and Possible Fiscal Crisis: Are There Remedies? “


Ⅲ.   Abenomics: the Second Stage

  In November 2015, Abe administration put forth a new concept by the name of “100 million population all active.” This is a comprehensive social campaign of the Abe administration. The concept is defined as to make a society in which all people, men and women, young and all, normal or disadvantaged, can be all active and spend a good life of their own. To create such a society, the following 3 objectives are pursued 1) encourage people, particularly females, to raise kids while working in the market with public support of child care, 2) abolish discrimination and squeeze differentials between regular and irregular workers, 3) enrich public services for old age nursing so that relatively aged people will be liberated from family care and thus can participate to market work. 

   These objectives can be fulfilled by integrated actions of plural number of government branches. Mr. Katsunobu Kato, the closest and long time aide of Mr.Abe in prime minister’s office, was appointed as minister in charge of this inter-ministerial campaign. Under this umbrella of the campaign, three new arrows have been decided by Abe cabinet in June 2016, and this signifies the launching of the second phase of Abenomics. Let me explain each of the three new arrows.

    1.  Arrow 1: Strong economy

   Arrow 1 intends to create a strong economy which can grow up to the GDP of 600 trillion yen by 2020. To achieve such a goal, comprehensive policies to enhance productivity of many industries by utilizing the merit of advanced IT technologies.

    2.  Arrow 2: Supporting child rearing

   By enriching public services for child care which make child rearing easier than before, help and encouraging young mothers having children to participate to work in the market so that labor supply will be increased. Abe administration adopts an objective to increase TFR or total fertility ratio up to 1.8 from the current level of 1.3.

    3.  Arrow 3:  Build safer social security services

   By enriching public services for old age caring, liberate relatively old family members from in-house old age care so that they can participate to the labor market as experienced workers. This system will provide the society a  social safety network that they can rely on.

    4.   Emphasis of supply side: labor force and productivity

   Primary emphasis of the second phase Abenomics is on 1) expand and empower the supply side capability of the economic, the most important is quantity and quality of labor force, and 2) increase productivity of the economy by introducing advanced technologies such as AI, IoT, big data, robotics etc and create “society 5.0” where new and advanced technologies will be organized together to provide a distinctively nice and friendly social and economic conditions for people to enjoy their lives.

   The second phase Abenomics is the focus of attention of some international experts such as economists who are interested in knowing whether Japan will succeed in this challenge of increasing labor supply in a matured economy suffering from decline of labor force as well as population, a phenomenon  commonly experienced by matured advanced economies in the world.


Ⅳ.  Interim Evaluation of Abenomics after 5 Years

   Now, let us review the performance of Abenomics for its five year experience.

     1.  Stock prices and corporate profits   

   Stock prices are perhaps the indicator which shows the most successful achievement of Abenomics. Average level of stock prices increased from the level  of around 8000 yen at the end of 2012 when Abenomics has been launched, The level increased sharply afterward and has been staying at the level somewhat higher than 20000 since 2015. This sharply increased stock prices reflect the improvement in corporate profits and increased spending of luxurious consumption items.

     2.  Economic growth

   As noted above, economic growth has been very sluggish for 2013 till 2015. However, the growth performance began to be positive markedly from the mid-2016. One may say that this is a lagged effect of growth strategy of Abenomiccs, but more fundamentally, this is a spillover effect of the general up turn of the economic performance of the world economy for the recent few years.

     3.  Prices: inflation target

   Attaining 2% level on-going inflation has been a primary objective of Arrow I,an extra-ordinary easy money policy proposed by BoJ. This target has neither been attained or even has become closer until 2016. Only after 2017, prices began to show some positive movement. It is too quick, though, to interpret this recent movement as a sign of the success of Kurodanomiccs.”

     4.   Employment and wages

   Employment has been increasing markedly for the last few years. Unemployment rate has been kept extremely low. Strange is the fact that in spite of very tight and ever tightening labor market, wages have not increased appreciably except for marginal workers such as part-time workers and those for casual jobs. This rather puzzling phenomenon reflects the fact that large part of recent increase of employment is not for regular full-time workers but rather for irregular part-time workers.While Abe administration asks strongly with even some tax incentives employers to increase wages of their workers, it is more important for the government to squeeze differentials and abolish discrimination among workers of different employment status such as regular vs. non-regular by legal and institutional regulations.


Ⅴ.  The Appeal of the 4th Abe Cabinet

     1.   Human resource development strategy—Free education

   In October 2017, general election of the House of Representatives was executed. The result was an overwhelming victory of LDP or Abe’s party in power. LDP has been emphasizing the importance of human resource development strategy from the time of election campaign. This was shared generally by opposition parties. One concrete slogan which was shared more or less by all the parties was “free education.” 

   In Japan, education for elementary and junior high school students is compulsory.As far as you attend publicly financed schools, fee is free. This means that the slogan of “free education” is to make education for the very young prior to the age of elementary and for senior high and college students as cheap as possible.

   The 4th Abe administration, organized immediately after the election quickly formulated policy plans to reduce fees and tuitions for nursing schools, kinder gardens  and senior high-schools without much research and analysis of the new system. I personally feel worried that this policy will end up with simply a waste of precious tax revenues without intended effect of helping young people to receive education more universally.

      2.   All generation social security system

   Another outstanding policy proposal of Abe administration is to develop an “all generational social security system.”  It is true, as I discussed in some detail in my previous essay of this blog, Japanese conventional social security system is becoming increasingly deficient in satisfying much diverse needs of the current complex society with rapidly aging population. However, the “all generation social security system” as advocated by LDP and the new Abe administration is more of a slogan than a substantial concept. We need to think and discuss the desired new system of social security much more widely and deeply incorporating not only politicians but also experts and commoners of the entire society,

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