Shinzo Abe’s Economic Reforms Could Lead To Japan’s Recovery
Abenomics is uplifting domestic confidence in the economy, and combined with right policies, it could lead Japan to its long-lost road to recovery.
However, this doesn’t imply that Japan has exactly been in the dumps for the past decade; the country has performed quite well in terms of growth of output per employed worker since 2000. Even though the labour force has been shrinking, Japan’s output per employed worker was growing by 3.08% per year before Shinzo Abe’s programme commenced. To put things in perspective, the United States output per worker grew by 0.37% in 2012 while Germany experienced a contraction of 0.25%.
Three arrows approach
Taking the situation from here, Shinzo Abe’s policies are likely to help Japan’s country, as long as the famed monetary policy is backed up by strong fiscal and structural policies. This is exactly what many economists are now wanting – including the Nobel laureate Joseph Stiglitz - for the country as well as Europe and the US, and Abe realises this; he considers the policies as holding three arrows – if taken alone, each can be bent, but together they remain rigid.
I. Monetary policy
Haruhiko Kuroda holds the first arrow as he recently became the governor of the Bank of Japan. Investors should be confident here as he is an experienced veteran when it comes to finance; he previously served as President of the Asian Development Bank where he first witnessed the Asian Crisis of the late 90′s, and with it the failure of IMF and conventional approaches. Indeed, Haruhiko does not subscribe to the old central banking doctrines, and has committed to an inflation target of 2%, ending Japan’s history of chronic deflation.
This is important if Japan wants to recover. Deflation increases the real interest rate and the real debt burden, and even a low level of deflation can lead to significant results over a few years.
Kuroda’s announcements have already done much to weaken the Yen (JPY), allowing Japanese goods to become more competitive and boosting exports. As long as other countries do not engage in a currency war, the weakness should be remain. Maybe in the future countries will come together and and coordinate in creating a global monetary policy, but for now Japan is on the right track by devaluing its currency in the face of other devaluations.
Japan’s new monetary policy could be more effective if credit blockages are addressed. The United States did not address this issue and faced critical problems, such as lack of access to financing for small and medium-size businesses and refinancing issues for homeowners.
But Abe has another trick up his sleeve; actually, two tricks:
II. Fiscal policy
It is generally argued that fiscal stimulus in the past failed for Japan. However, critics fail to consider a key point; Japan faced a financial tsunami in the late 90′s as credit supply contracted following the Asian crisis in the late 90s, so they need to consider what would have happened had there been no stimulus. The answer, as it turns out, is that Japan would have been in a much worse condition. During such perilous times Japan never experienced an unemployment rate above 5.8%, and during the crisis of 2008 it’s unemployment rate reached a level of 5.5%.
This time around Abe has allocated about $100 billion to infrastructure investments as part of his stimulus. Here I do sympathise with critics, and myself argue that such money gone into infrastructure could only provide marginal benefits . After all, $100 billion represents 25% of yearly worldwide infrastructure investment needs – and Japan already has one the world’s best road and railway networks – so it could only result in the development of redundant roads and airports. On the other hand, if Japan allocates some of this capital to other industries, it could be beneficial to companies, and create jobs in the process. Abe would have to use this arrow quite wisely, or experience a few arrows in the back while launching this one forward.
III. Structural/growth policy
This arrow is the last piece of the Shinzo puzzle, which is referred to as “growth” by Abe. Policies included in this arrow aim at improving productivity, restructuring the economy, and increasing labour-force participation.
Some even call for deregulation, but this is not what Japan needs in the long term. Environmental, health, and safety regulations are needed in the future, rolling them back for short term benefits would be a huge mistake.
Abe, therefore, needs to introduce regulations that are beneficial. The government may even need to be more involved in some aspects to promote competition in the industry. In other aspects, Abe can only ask businesses to go along a certain path, rather than making them to do it. This was recently seen when he asked the private sector to increase wages, which has made many firms to increase their employees’ bonuses for the end of this fiscal year.
Japan’s productivity has already been increasing steadily, but efforts to further encourage it could make the growth arrow truly successful. The service sector could surely use a push here, while various synergies could be explored between industries. Investment into research could also boost the rate.
Labour-force participation remains the only issue here. This is highly needed as Japan labour force continues to decline, and could be addressed if the government introduces policies to change the private sector’s hiring practices and improve women’s labour force participation. A drive to encourage people to learn English could also be beneficial, as the language acts as the lingua franca of global commerce.
Shooting like robin hood
One could be optimistic about Japan’s strategy to get back on the road to recovery, especially since the country has strong institutions, a highly literate labour force, advanced technical skills, and a location near emerging markets. Furthermore, its inequality is lower than many developed nations.
All Abe needs to do now is shoot like robin hood, but that’s much harder than it looks on paper. The weakest link of the Three Arrow Approach lies in its fiscal policy – specifically, its overcommitment to infrastructure spending – which could be partially diverted into other areas. Nevertheless, confidence is high and Abe’s aims even higher – there is every reason to believe that this can be achieved.