Is Abe­nomics work­ing?

Financial Mirror (Cyprus) - - FRONT PAGE -

Last April, Ja­pan’s gov­ern­ment im­ple­mented a long­planned con­sump­tion-tax hike, from 5% to 8%, the first in a two-step in­crease that is ex­pected to bring the rate to 10% by 2015. The hike – a key fea­ture of “Abe­nomics,” Prime Min­is­ter Shinzo Abe’s three-pronged strat­egy to re­vive Ja­pan’s econ­omy – sig­nals the gov­ern­ment’s long-term com­mit­ment to fis­cal con­sol­i­da­tion. But it has also dealt Ja­pan a heavy macroe­co­nomic blow.

Pre­lim­i­nary GDP data show a 6.8% con­trac­tion year-onyear in the sec­ond quar­ter of this year – the largest since the 2011 earth­quake and tsunami that dev­as­tated the coun­try. More­over, con­sumer spend­ing fell by a record amount, con­tribut­ing to a to­tal real (in­fla­tion-ad­justed) de­cline of 5.9% from last July.

But it is not all bad news. Ex­pan­sion­ary mon­e­tary pol­icy – the sec­ond of three so-called “ar­rows” of Abe­nomics, after fis­cal stim­u­lus – has brought down the un­em­ploy­ment rate to just 3.8%. The ra­tio of job open­ings to ap­pli­cants has ex­ceeded par­ity, and the GDP de­fla­tor nar­rowed to close to zero.

Such data have given rise to two op­pos­ing views. Some econ­o­mists worry that neg­a­tive sec­ond-quar­ter data will dampen in­fla­tion ex­pec­ta­tions, thereby un­der­min­ing Abe’s plan for boost­ing growth. Mean­while, the Bank of Ja­pan (BOJ) is em­pha­sis­ing the pos­i­tive out­comes of its mon­e­tary pol­icy – and is hes­i­tat­ing to con­tinue its ex­pan­sion­ary mea­sures.

If the first view proves cor­rect, the BOJ will need to ease mon­e­tary pol­icy fur­ther to counter fall­ing in­fla­tion. If the BOJ is right, it should main­tain its cur­rent ap­proach, while the gov­ern­ment should ei­ther post­pone the next con­sump­tion-tax in­crease or i mple­ment it in two 1% in­cre­ments, in­stead of a sin­gle 2% hike.

Of course, the sec­ond-quar­ter GDP data show the econ­omy’s im­me­di­ate re­sponse to the hike. But no decision should be made un­til the third-quar­ter re­sults are re­leased, pro­vid­ing a clearer pic­ture of what will hap­pen to Ja­pan’s econ­omy after it ab­sorbs the first rate in­crease. For­tu­nately, that is pre­cisely what Abe in­tends to do.

In any case, the suc­cess of mon­e­tary pol­icy is dif­fi­cult to deny. As the de­fla­tion gap nar­rows, how­ever, the over­all im­pact of mon­e­tary pol­icy will weaken, as it in­creas­ingly in­flu­ences prices more than out­put.

That is why it is time for Ja­pan’s lead­ers to shift their fo­cus from the de­mand-fo­cused first and sec­ond ar­rows to the sup­ply-ori­ented third ar­row: a new growth strat­egy.

When there is suf­fi­cient ex­cess sup­ply in the econ­omy, pro­mot­ing sup­ply-side pro­duc­tiv­ity is prac­ti­cally use­less with­out ef­forts to boost de­mand. That im­plies that it was not ap­pro­pri­ate to fo­cus on growth un­til the de­fla­tion gap nar­rowed con­sid­er­ably – that is, un­til now.

The third ar­row is not a tra­di­tional in­dus­trial-pol­icy-based ap­proach. On the con­trary, it em­pha­sises re­form of the labour mar­ket, dereg­u­la­tion, and a re­duc­tion in the cor­po­rate-tax rate.

A key com­po­nent of Abe’s growth strat­egy is to ex­pand the work­force – a ma­jor chal­lenge, given that Ja­panese so­ci­ety is ag­ing rapidly. One log­i­cal so­lu­tion would be to in­te­grate more for­eign la­bor into the Ja­panese econ­omy. But ef­forts to pro­mote im­mi­gra­tion face con­sid­er­able so­cial and cul­tural bar­ri­ers.

A sim­pler so­lu­tion would be to mo­bilise work­ing-age women who al­ready – or plan to – stay at home. By re­mov­ing the bar­ri­ers to em­ploy­ment that women face – whether prac­ti­cal ob­sta­cles, like in­suf­fi­cient child­care ser­vices, or so­cial con­straints – Ja­pan could sub­stan­tially in­crease women’s work­force-par­tic­i­pa­tion rate, cre­at­ing an in­valu­able buf­fer against the grow­ing labour short­age.

The sec­ond im­per­a­tive for boost­ing growth is the re­moval of ex­ces­sively cum­ber­some gov­ern­ment reg­u­la­tions. Un­der the cur­rent sys­tem, it took 34 years to ap­prove the es­tab­lish­ment of a new med­i­cal school – the re­sult of col­lu­sion be­tween gov­ern­ment of­fi­cials and doc­tors.

Abe’s plan calls for in­tro­duc­ing a se­ries of less strictly reg­u­lated spe­cial eco­nomic zones, each with a spe­cific ob­jec­tive – for ex­am­ple, adopt­ing new med­i­cal tech­nolo­gies or at­tract­ing for­eign busi­nesses. Such a move prom­ises to help pre­vent dam­ag­ing ob­struc­tion­ism by the au­thor­i­ties. At the same time, the gov­ern­ment should work with the coun­try’s trade unions to boost the flex­i­bil­ity and ef­fi­ciency of the labour mar­ket.

Fi­nally, Abe’s growth strat­egy de­mands a cor­po­rate-tax re­duc­tion – a pow­er­ful tool for in­creas­ing the tax base in a world in which coun­tries are com­pet­ing to at­tract multi­na­tional com­pa­nies. In­deed, lower taxes are vi­tal to in­crease for­eign and do­mes­tic in­vest­ment in Ja­pan.

Some of th­ese ini­tia­tives, par­tic­u­larly dereg­u­la­tion, will un­doubt­edly face re­sis­tance from bu­reau­crats con­cerned about los­ing their in­flu­ence. But, as long as Abe, backed by Chief Cab­i­net Sec­re­tary Yoshi­hide Suga, re­mains com­mit­ted to his stated ob­jec­tives, Ja­pan’s eco­nomic fu­ture will re­main bright.

Newspapers in English

Newspapers from Cyprus

© PressReader. All rights reserved.