Abe­nomics need an over­haul

The Pak Banker - - OPINION - Alexan­der Fried­man

JA­PANESE Prime Min­is­ter Shinzo Abe must re­think his Abe­nomics pro­gram in its en­tirety. So far, only Abe­nomics' third and fi­nal ar­row, re­form, has come in for wide­spread crit­i­cism. But ar­rows one and two - mon­e­tary and fis­cal stim­u­lus - are also flag­ging in their ef­forts to pull Ja­pan out of its eco­nomic funk. An­nu­al­ized GDP growth fell to 1 per­cent in the sec­ond half of 2013 from more than 4 per­cent in the first half. If Abe does not re­fo­cus his re­form pro­gram, the coun­try risks a dan­ger­ous re­liance on the Bank of Ja­pan and its ul­tra-loose mon­e­tary pol­icy. The coun­try should re­sist this 'Hail-Mary' ap­proach.

Bar­ring sub­stan­tial re­forms else­where in the Ja­panese econ­omy, us­ing the 'first ar­row' to re­peat­edly weaken the yen is an un­sus­tain­able source for growth in the long-run. Un­der Abe­nomics, growth in Ja­panese ex­ports has failed to keep pace with the ris­ing cost of im­ports.

Ja­pan saw a record trade deficit in Jan­uary, while ex­ports by vol­ume fell com­pared with Jan­uary of the pre­vi­ous year. While an ever-weak­en­ing cur­rency might stim­u­late short-term growth, it risks pro­mot­ing a self-ful­fill­ing cy­cle of yen weak­ness, greater trade deficits, and fur­ther de­pre­ci­a­tion.

In a coun­try with an ag­ing and shrink­ing pop­u­la­tion, real long-term growth can only be re­al­ized through im­proved pro­duc­tiv­ity. QE re­duces com­pa­nies' cost of debt and sup­ports their share prices with­out re­quir­ing CEOs to make pro­duc­tive in­vest­ments. We have seen a sim­i­lar dy­namic at work the U.S. - the stock mar­ket has reached a record high, but capex and hir­ing has lagged woe­fully be­hind.

To stim­u­late pro­duc­tive in­vest­ment, Ja­pan must re­vamp the sec­ond ar­row of Abe­nomics and fo­cus on tax in­cen­tives rather than govern­ment spend­ing. The new tax breaks tied to cap­i­tal in­vest­ment are surely too small to en­cour­age sig­nif­i­cant new do­mes­tic in­vest­ment, and only ap­ply if com­pa­nies can meet a 15 per­cent re­turn on in­vest­ment hur­dle, a level which may be un­re­al­is­tic in such a stag­nant econ­omy.

Ja­pan has also of­fered limited tax re­lief for money al­lo­cated to re­search and de­vel­op­ment, but needs to go much fur­ther if it is to re­verse its de­cline in global re­search and de­vel­op­ment rank­ings since the 1980s and 1990s. In 2010, Ja­pan was over­taken by China as the world's sec­ond top spen­der.

These kinds of mea­sures should prove more ef­fec­tive, and safer, than fis­cal stim­u­lus. Ja­pan's govern­ment debts are al­ready more than twice its GDP, and con­tin­u­ally tap­ping the bond mar­ket and spend­ing the pro­ceeds un­pro­duc­tively will ul­ti­mately prove prob­lem­atic. With­out more sus­tain­able growth-gen­er­at­ing mea­sures, Ja­pan risks an "Abeged­don" sce­nario - en­trenched stagfla­tion that prompts out­flows of cap­i­tal and a run on the govern­ment bond mar­ket.

The third ar­row of Abe­nomics, re­form, also re­quires re­di­rect­ion. First, Ja­pan needs to en­sure its businesses use its people prop­erly. To do this it will need to ad­dress a rigid­ity that has led to the de­vel­op­ment of a 'dual' la­bor mar­ket. Around 40 per­cent of work­ers are now deemed 'tem­po­rary,' in jobs which pro­vide low pay, a lack of so­cial in­sur­ance, and lit­tle op­por­tu­nity to de­velop skills.

Once in these non-reg­u­lar jobs, se­cur­ing reg­u­lar em­ploy­ment is even more dif­fi­cult - a mass waste of the po­ten­tial of the Ja­panese la­bor force. Sec­ond, Ja­pan should en­cour­age its largest con­glom­er­ates to split. Ja­pan has too many vast hold­ing com­pa­nies op­er­at­ing un­prof­itable non-core busi­ness lines. With in­ef­fi­cient businesses hid­den in con­glom­er­ate ac­counts, it is not sur­pris­ing that Ja­pan's re­turns on cap­i­tal in­vest­ment are the low­est of any ma­jor de­vel­oped econ­omy.

If Ja­pan ex­e­cutes on these kinds of re­forms, it may still need to lean on the Bank of Ja­pan to boost growth. But it would be do­ing so from a much stronger po­si­tion. Coun­tries op­er­at­ing in com­pet­i­tive mar­kets need to make their prod­ucts as well, and as ef­fi­ciently, as pos­si­ble be­fore slash­ing prices.

For in­vestors, how­ever, bet­ting on this out­come is prob­lem­atic. Pol­i­tics tends to fol­low the path of least re­sis­tance, which in this case ap­pears to be fur­ther mon­e­tary stim­u­lus and an ever weaker yen. But it will not make for a strong Ja­pan.

Newspapers in English

Newspapers from Pakistan

© PressReader. All rights reserved.