Picking up where Abenomics left off
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.