The renewed promise of Abenomics
Japan’s Liberal Democratic Party scored a decisive victory in the December 14 parliamentary election, with Japanese voters demonstrating their overwhelming approval of Prime Minister Shinzo Abe’s macroeconomic policy agenda. Though voter turnout was relatively low, owing largely to the somewhat technical nature of the issues, the election’s message was clear: most Japanese abhor the prospect of a return to the grim economic trajectory that prevailed in Japan before “Abenomics.”
When the first “arrow” of Abenomics – a fiscal stimulus programme – was launched nearly two years ago, asset markets’ immediate response was positive. The second arrow of Abenomics – monetary easing – intensified these effects.
In the last two years, Japan’s stock market has almost doubled in value, increasing the wealth of Japanese consumers. Moreover, the yen has fallen by nearly one-third against the US dollar, from around JPY 80 to nearly 120 per dollar, invigorating Japan’s export industries.
Even more encouraging are developments in the labour market, which, unlike those in asset markets, reflect outcomes, not expectations. Here, too, the news is good. The labour market has tightened, with unemployment standing at 3.5% and the job-to-applicant ratio above parity.
To be sure, there have been some setbacks: Japan’s GDP shrank in the second and third quarters of 2014. But the downturn, which resulted from April’s consumption-tax hike – from 5% to 8% – cannot be blamed on Abenomics. Indeed, Abe was honoring a law enacted by the previous government, led by the Democratic Party of Japan.
The first two arrows of Abenomics were aimed at stimulating demand – and they were extremely effective. The consumption-tax hike was needed to sustain them in flight. Unfortunately, the hike was too large to keep them aloft.
The good news is that the tax hike’s impact is temporary. Soon, it will begin to taper off, and industrial output will approach full capacity. When demand begins to exceed supply, demand-side stimulus policies will become increasingly ineffective, and it will be time to launch the third arrow of Abenomics: growth-enhancing structural reforms.
Such reforms are essential to raise productivity growth and improve the Japanese economy’s competitiveness. Four imperatives stand out.
The first task should be to eliminate – or, at least, reduce – the thicket of government regulations that is stifling economic dynamism. The current system is so convoluted and complex that it took more than three decades to open a new medical school in Tokyo. Likewise, flights to Haneda airport, a convenient connection to the Tokyo city area, have been rationed. This is no formula for long-term economic success.
Furthermore, Japan’s government should push to complete negotiations for the Trans-Pacific Partnership, which is currently being negotiated among 12 countries, from Mexico to the United States to Vietnam. The TPP would improve Japan’s trade prospects considerably, including in sensitive sectors like agriculture, where exports of fastmoving consumer goods like flowers and vegetables would benefit.
Japan’s leaders must also work to expand the workforce, which faces severe constraints, owing largely to the country’s rapidly aging population. In the absence of large-scale immigration, to which Japanese remain unamenable, one relatively simple solution would be to integrate more women into the labor force. A 10% increase in Japan’s female labourforce participation rate – an entirely attainable goal – would translate into an almost 5% gain in total labour-force participation.
Finally, Abe’s government must reduce the corporate-tax rate to align it more closely with international standards. Amid increasingly intense international competition to attract foreign investment, reducing the corporate tax would actually increase Japan’s tax revenues, by spurring companies to invest their vast cash stockpiles in more productive activities.
Now that Abe’s government has a renewed mandate from Japanese voters, it must deliver on its promises – and that means decisive and comprehensive i mplementation of structural reforms. Of course, this will require some sacrifices. Indeed, households have already endured some hardship, brought about by the consumption-tax hike.
The next step is for Abe’s government to use its political capital to overcome vested interests, both in the bureaucracy and the business community. This means compelling businesses to give up some of the special tax benefits they now enjoy. For their part, politicians must participate in the taxpayer identification system. And bureaucrats must forego some of the power that excessive regulation affords them.
If all of these groups join the Japanese public in accepting reasonable sacrifices, Abe’s government can fulfill its promise and build a thriving economy. For the sake of all Japanese – not to mention a world economy in need of a new source of dynamism – that promise deserves to be met.