Pick­ing up where Abe­nomics left off

The Pak Banker - - OPINION - Noah Smith

IF there's one coun­try that needs cre­ative eco­nomic pol­icy so­lu­tions, it's Ja­pan. With many ob­servers say­ing Abe­nomics has stalled af­ter a year of weak eco­nomic per­for­mance, plenty of peo­ple are ask­ing what's next -- or has Ja­pan run out of ideas? The back­drop doesn't look great. The coun­try is ex­pe­ri­enc­ing an un­prece­dented de­cline in pop­u­la­tion. The na­tional debt is mount­ing. Wages are fall­ing, con­sump­tion is de­pressed and pro­duc­tiv­ity is still stag­nat­ing. China, Ja­pan's big­gest trad­ing part­ners, is slow­ing.

Abe­nomics -- the raft of poli­cies en­acted by Prime Min­is­ter Shinzo Abe -- has had some good ef­fects. Growth and in­fla­tion rose for a cou­ple of years, prob­a­bly as a re­sult of easy mon­e­tary pol­icy, be­fore the China slow­down hit. Un­em­ploy­ment has been vir­tu­ally elim­i­nated, and women have fi­nally en­tered the work­force (though they of­ten re­main con­fined to in­se­cure low-level po­si­tions). A con­sump­tion tax hike, along with zero in­ter­est rates, has im­proved the debt po­si­tion. And a se­ries of cor­po­rate gov­er­nance re­forms prom­ise to make Ja­pan Inc. more prof­itable.

Nev­er­the­less, easy money has its lim­its, as the Bank of Ja­pan is now dis­cov­er­ing, and the neg­a­tive in­ter­est rates it put in place haven't had any no­tice­able good ef­fect, and may have sent stock mar­kets lower. Mean­while, it will be years be­fore the cor­po­rate gov­er­nance re­forms kick in. And debt is still ris­ing, mean­ing that fu­ture con­sump­tion tax in­creases -- which will threaten growth -- are loom­ing.

So Ja­pan needs in­no­va­tive pol­icy ideas. It also needs straight talk about the trade­offs it faces. Un­for­tu­nately, the en­trenched bu­reau­cracy, the main tra­di­tional source of pol­icy ad­vice, has lim­ited abil­ity to do this.

In the U.S., in­de­pen­dent pol­icy ad­vice is usu­ally pro­vided by academics, whose ivory­tower iso­la­tion pro­tects them both from political pres­sure. In Ja­pan, where univer­si­ties are mostly govern­ment-funded, academics play less of an in­de­pen­dent role. But that may be chang­ing, thanks to a new gen­er­a­tion of out­spo­ken pro­fes­sors. One of th­ese is my some­time col­lab­o­ra­tor, Aoyama Gakuin Univer­sity fi­nance pro­fes­sor Akiko Kame­saka.

Kame­saka and I have col­lab­o­rated on two projects since 2011, in the field of be­hav­ioral fi­nance (which puts me in the au­gust com­pany of top re­searchers like Yale's Robert Shiller, who also works with her). But I only re­cently learned that she has a sort of se­cond ca­reer as a govern­ment pol­icy ad­viser. Her ideas may rep­re­sent the fu­ture of Ja­panese eco­nomic pol­icy think­ing. As a mem­ber of the Min­istry of Fi­nance's Fis­cal Sys­tem Coun­cil, Kame­saka ad­vised the Abe ad­min­is­tra­tion on the re­cent ini­tial pub­lic of­fer­ing of Ja­pan Post -- the world's big­gest IPO in 2015. That share sale was highly suc­cess­ful, net­ting the govern­ment a one-year fis­cal boost and rep­re­sent­ing a step to­ward nor­mal­iz­ing Ja­pan's fi­nan­cial sys­tem.

But her ex­per­tise ex­tends be­yond fi­nance. She is also a vis­it­ing re­searcher at the Eco­nomic and So­cial Re­search In­sti­tute, which is run by the Cab­i­net Of­fice. In the past, she stud­ied the eco­nom­ics ofhap­pi­ness and in­ves­ti­gated the prob­lem of death from over- work in Ja­pan. Now, she is study­ing how to re­form Ja­pan's la­bor mar­ket -- prob­a­bly the coun­try's big­gest long-term eco­nomic chal­lenge. I re­cently in­ter­viewed Kame­saka by email to get her in­sights into the most cru­cial is­sues fac­ing the coun­try.

Kame­saka is highly skep­ti­cal of the neg­a­tive in­ter­est rate pol­icy now be­ing pur­sued by the Bank of Ja­pan. Like many econ­o­mists, she thinks this will do more harm than good, be­cause rates below zero make it harder for banks to earn a spread on the money they lend. She views re­cent stock mar­ket de­clines as hav­ing been partly caused by the global shift to­ward neg­a­tive in­ter­est rates, and wor­ries that the pol­icy will make it dif­fi­cult for the Ja­panese govern­ment to sell more Ja­pan Post stock. All in all, she hopes for a swift re­turn to zero in­ter­est rates. On the loom­ing is­sue of Ja­pan's na­tional debt, Kame­saka doubts that the prob­lem can be solved through tax in­creases, such as the re­cent hike in the con­sump­tion tax. In­stead, she sug­gests cut­ting med­i­cal ex­pen­di­tures on the el­derly -- a highly con­tro­ver­sial stance in geri­atric Ja­pan. Though she rec­og­nizes that health is im­por­tant for the hap­pi­ness of the el­derly, Kame­saka says that hos­pi­tal ser­vices are dra­mat­i­cally over­con­sumed -- in ef­fect, some old peo­ple are go­ing to the hos­pi­tal to al­le­vi­ate lone­li­ness. There are surely cheaper ways to ad­dress so­cial iso­la­tion.

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