Prime Minister Shinzo Abe’s plan to revive the Japanese economy rests on three pillars – or, "arrows" as he likes to put it. The three include: monetary stimulus through massive quantitative easing; fiscal stimulus through large-scale spending on infrastructure and a "growth strategy" of long-term reforms to open the economy to greater competition and a greater opening to the world by participation in free trade zones such as the Trans Pacific Partnership (TPP).
Of the three arrows, only the first, monetary stimulus, has really got off the ground, although the stated goal of raising inflation to 2 percent will take time to transpire. Funds, totaling ¥20 trillion for the second arrow have been included in supplementary budgets, though as of this summer they were largely unspent. Japan’s large construction conglomerates are already salivating at the prospect of more spending on public works projects.
The third "growth strategy" arrow is still mostly formless, with many provisions requiring parliamentary approval when parliament convenes this month for an extraordinary session. Abe already has announced his intention that Japan join the TPP, considered a politically courageous move as it was announced prior to the July 21 election which Abe’s party won convincingly.
For many commentators Abenomics is a beacon of hope in a world dominated by the politics of austerity. This is the view, for example, of the New York Times columnist Paul Krugman who writes: "in a sense, the really remarkable thing about Abenomics…is that nobody else in the advanced world is trying anything like it. In fact, the Western world seems to be overtaken by economic defeatism."
The other view holds that Abenomics is just so much smoke and mirrors and hype. They are basically skeptical that Abe can get its third arrow aloft, and that without it, the program will ultimately fail. Says Richard Katz, editor of the influential Oriental Economist: "It will end up as thin gruel by the time the bureaucrats and politicians get through with it. Abe may be riding high in the opinion polls now, but "the support is a mile wide and an inch deep."
The first arrow was fairly easy to shoot, as it involved mainly easing out of office the incumbent Bank of Japan governor and replacing him with Haruhiko Kuroda, a former president of the Asian Development Bank and an enthusiastic proponent of inflationary policies. He intends to double the monetary base from 29 percent of GDP to 48 percent by the end of the year and to 56 percent by the end of 2014.This will be achieved mainly by buying Japanese government bonds.
Successes So Far
Even before Abe and his Liberal Democratic Party (LPD) won a smashing victory in the Dec. 26 general election, there were signs of an improving economy in anticipation of the new regime and its well-publicized plans. The stock market had begun to rise, and the yen, which was stubbornly stuck in the 76-77 range all during the previous government, weakened to about 100 to the dollar. That lifted a burden for industries such as electronics and automobiles heavily dependent on exports.
A certain amount of optimism has returned to Japan. In part it is based on some real steps such as the weaker yen and optimism based on optimism itself that Abenomics will work. Summer bonuses are returning after seemingly consigned to history. Civil servants will receive their first bonuses in three years. Purveyors of luxury goods are doing well. Ferrari dealers report a jump in sales as do Ginza department stores selling luxury watches. The government was pleased to report that the economy grew by 4.1 percent in the first quarter of FY 2013.
On the other hand, very few benefits have trickled down to ordinary consumers. Even the weaker yen has mostly benefited exporters’ balance sheets rather than through increases in the sales of actual products. It has not translated into investment in plant expansion, the hiring of additional workers or increases in wages.
Even so, polls show that the Japanese public still has a lot of confidence in Abenomics, which translates into steadily high public approvals rates for the Abe government. Six months after assuming office, Abe’s public approval ratings were still holding at around 60 percent at a time when, in recent years, they would be starting their long fall into the teens leading to resignation. His party has won smashing victories first in the Tokyo legislature in June and the upper house in July. The LDP has essentially extinguished any effective political opposition.
That’s not to say there won’t be opposition within the ruling LDP, the party has remained remarkably unified, but that may change when the rubber meets the road later this year when policy ideas need to be translated into actual legislation. Many MPs are linked to special interests, such as the farm lobby and the medical lobby that may not be eager to embrace Abe’s "growth strategy" if they feel it has an impact on impact directly.
For his part, Abe has tried to encourage these interest groups to abandon their usual defensive crouch and look on change as offering opportunities. In each of his 13 countries he has visited in his first half year in office, Abe took representatives of these groups with him and personally lobbied the governments he visited to pointing out the global benefits of Japanese technology in everything from curing cancer to building nuclear power plants.
But Abe needs to do even more by way of explaining and promoting these moves. His first effort on June 5 at unveiling the third arrow was widely considered a bust by people who expected more details and fewer platitudes and was blamed for a 500-point fall in the stock market. But he has had other opportunities to explain himself. One of the best was June 19 at London’s Guildhall in the heart of Britain’s financial community.
He opened the speech, with a curious homage to an obscure 1930s-era prime minister often called the "Japanese Keynes" who helped Japan weather the global depression. He stressed his determination to change Japan and assured his listeners that he had the political capital to put his program through. He mentioned he had the "political will" to affect change three times in one short paragraph.
But political capital can be an evanescent thing. For the moment the party may be unified, but he faces choices later this year that could eat into this unity. This month the cabinet must affirm the decision to raise the national sales tax from 5 to 8 percent in April (and 10 percent the following year). This tax was passed by the previous government but with much help from the LDP. It is generally believed that the government will reaffirm the tax, although they refrained from committing themselves before the July election was safely behind them.
Such a move would likely give the government a fillip at a crucial time as people rush to buy things before the tax hike takes effect. On the other hand, the government might be moving to implement one of its new policy arrows by cutting the corporate profits tax at the same time it is raising the tax on consumption, which might not go down well with the public.
Other potentially unpopular moves include loosening labor laws to make it easier for companies to shed workers. Reform of labor laws is considered essential to ease out old line corporations and make way for new, entrepreneurial start-up companies, but again it could erode the government popularity in ways that make it hard to implement.
Another major problem is Japan’s massive public debt, the largest in the world in comparison with its GDP. About half of the national budget is financed through borrowing. Abe seems to have a relatively short, one-year window in which to show that Abenomics can, as he proclaims, begin to grow the economy out of debt. If that doesn’t happen, the powerful Ministry of Finance and its bureaucratic allies will begin to pressure the government to turn from spending to debt reduction.
Can Abe Stay the Course?
Abe has taken on an agenda of reform more sweeping than that of his predecessor Junichiro Koizumi, well-known as a reformer, or any other prime minister. But Koizumi was a true believer in the reforms he proposed; Abe is not. "I think that Abe’s view of the economy is old-fashioned, state-led industrial policy," says Gerald Curtis a professor of political science at Columbia University and a longtime Japan-watcher. In his heart-of-hearts Abe would rather be talking about revising the American-written constitution, scuttling its anti-war provisions and, in general, pursuing other long-time conservative hobby horses.
He learned during his first stint as prime minister (2006-2007) that the Japanese public is mostly uninterested in such topics. So he has been advised to suppress his inner id and focus with laser-like concentration on improving the economy. Do that and the public will be more receptive to his personal interests. But will he be able to restrain himself, especially after winning three smashing electoral victories in a half of a year?
Things are currently aligned politically to bring about important changes, but Abe has a relatively short window, extending basically until next year. Up to now most of the moves have been painless; the hard stuff comes later this year as he moves his program through the legislature. If he fails, then the forces of inertia, interest groups and bureaucrats will begin to engulf him. And he may not have another chance.
(Todd Crowell is a frequent contributor to Asia Sentinel. He wrote this for Quantum, the quarterly publication of Qatar Financial Centre Authority)