Can Japan Escape Its Relentless Slow-Growth Trap? by [email protected]
Japanese Prime Minister Shinzo Abe was able to claim some quick victories after he launched his “Abenomics” economic strategy three and a half years ago. The combination of government spending, monetary easing and promised reforms hastened a decline in the value of the yen, helping exporters. The stock market began surging, and spurts of growth appeared as the economy started to recover from a recession that began before Abe took office. Consumers also stepped up purchases to beat a sales tax hike in 2014.
But those early gains are about all Abenomics has accomplished — at least so far. Promises to “drill down into the bedrock” of the structural obstacles to growth and productivity have fizzled, and ordinary folks have yet to see real gains in wages that would justify stepping up spending in times of uncertainty, and rising costs for health care and retirement. Meanwhile, even these early gains have been eroding: The yen has strengthened 17.3% against the U.S. dollar since May 2015 after weakening 35.3% from early 2013 to May 2015. The benchmark Nikkei 225 stock index fell by 21.14 % from June 24, 2015 to Sept. 15 after gaining 95.61% between early 2013 and June 24, 2015.
Japan watchers and economists concur on the prescription for sustained growth: a hefty dose of deregulation and structural reform to cope with its growing public debt, and the shrinking and aging of the population. But Abe is failing to deliver on his ambitious pledges of such sweeping reforms. “Abe stimulated the economy a bit and achieved a weaker yen and higher share prices, but now the yen is strengthening and stock prices are coming down. We are back to where we used to be,” says Yasuo Kofuji, a finance professor at Senshu University.
Given the steadily declining population, Japan needs a nominal growth rate of at least 3% to 4% to make up for the shrinking labor force and rising social services burden posed by a growing pool of pensioners. “We have to do something about this and implement structural reforms to ensure long-term stable economic growth,” Kofuji says. He and most other analysts agree that even if Japan opened its doors much wider to immigration, it could not achieve the pace of growth needed.
Oddly enough, foreign observers seem more disappointed with Abe than the domestic public. That’s largely because even though the economy is sluggish, it is still growing, albeit at a snail’s pace. While a growing poor of part-time and contract workers struggle on meager salaries and minimal benefits, for most Japanese, lifestyles remain stable. And after two decades of stagnation, most Japanese have very low expectations, especially of their political leadership.
“From a domestic perspective, (Abenomics) has been pretty successful compared to the economic policy beforehand,” says Martin Schulz, a senior economist at the Fujitsu Research Institute in Tokyo. He notes that most Japanese, having grown accustomed to prices remaining flat or barely rising, never wanted to see the central bank hit the 2% inflation target that Abe and Bank of Japan governor Haruhiko Kuroda said was needed to get consumers to loosen their purse strings.
“Instead of a big ‘arrow’ of sweeping reforms … changes in Japan are bound to be more akin to ‘small needles at all levels.’” –Martin Schulz
International investors, on the other hand, were persuaded by the hype surrounding Abenomics and puzzled by the lack of progress. “International financial markets are disappointed because the promise of Abenomics and initial gains of stock prices have not been supported by the success of additional economic growth,” Schulz says.
Japan’s recovery has been hindered, also, by weaker-than-expected exports since much of the country’s manufacturing capacity is already based overseas, and China’s slowdown has proven more severe than anticipated. Growth remained so weak by mid-year that Abe put off, for the second time, a hike in the sales tax that many observers say Japan needs to clean up its national finances: At about 250% of GDP, the country’s public debt is the biggest among OECD countries. The most recent tax hike, to the current 8% from 5%, in April 2014, pushed the economy back into recession.
Postponing the tax hike due for April 2017 to October 2019, helped Abe’s Liberal Democratic Party in a July parliamentary election, though the lack of a credible opposition challenge was likely the bigger factor. But confidence in Abe’s policies has wavered, especially since the Bank of Japan took the unprecedented step of imposing a negative interest rate.
With that, Abe alienated one of his key economic constituencies: the financial institutions that are a key pillar of the economy. Banks, insurers and other institutional investors have weathered a protracted spell of near-zero interest rates by shifting investments overseas or into riskier, higher-yielding assets. But the “negative interest rate policy” seems to have pushed them beyond their limits, says Franklin Allen, an emeritus professor of finance at Wharton and a professor of finance and economics at Imperial College in London.
Japan may prove to be a textbook example of the limits of financial and monetary stimulus to foster sustained growth when other key ingredients such as rising productivity, population growth and significant technological innovation are missing. Ever since the country’s financial bubble collapsed in the early 1990s, the government has sought to spend its way into boom times, with scant success.
“On the fiscal side, Japan has been trying to do this for over 25 years and it has never worked. It never got back to normality. All it has done is push up the debt hugely,” says Allen. He is skeptical about the potential of limited proposed reforms, such as in labor regulations, to spark faster growth. “The structural reforms such as labor market reforms, increasing female participation in the workforce and so forth that they are going to do, will have basically no effect.”
“I would [raise interest rates] with a 25-basis-point increase every six months or every year, so that … firms would have to start competing to pay interest on debt, loans and dividends.”–Franklin Allen
Throwing in the towel obviously is not an option for Kuroda, who insists he will do whatever it takes for as long as it takes to achieve the BOJ’s 2% inflation target. Weak crude oil prices have sapped the consumer price index of its upward momentum, with inflation falling 0.5% in July from a year earlier, the fifth straight month of declines. After the BOJ conducted comprehensive assessment of its stimulus program, most economists are expecting fresh stimulus moves from a Sept. 20 and 21 policy board meeting, on top of the central bank’s 80 trillion yen a year of asset purchases and other policies meant to combat deflation.
Ever since taking the reins at the BOJ in 2013, Kuroda has been lobbying the government and tight-fisted corporations to do their part to boost growth. But in a September 5 speech, Kuroda hinted at his readiness to ease monetary policy further, using “existing or new tools.” He also acknowledged the adverse impact of negative interest rates but said there was room for