Abenomics is dead. Japan’s economy needs a more fundamental solution

Are Japanese Prime Minister Shinzo Abe's Abenomics policies dead? Bigger things (the Trump-Kim summit and threatened trade wars) have overshadowed recent developments in Japan, but these developments could affect the balance of power in East Asia.

Abenomics was designed to finance a growing economic and strategic role for Japan in Asia and beyond. An economically more powerful Japan could then become stronger militarily and strategically, counterbalancing China.

But Abenomics was sold to the world as an innocent and neutral strategy for ending deflation in Japan, allowing it to become a dynamo of global economic growth.

The first two of the “three arrows” Abe unveiled shortly after taking power in 2012 were monetary stimulus and fiscal expansion measures. There were high expectations that monetary policy would give Japan's economy real velocity after years of deflation and stagnation when Haruhiko Kuroda took over at the Bank of Japan in 2013.

A former senior Ministry of Finance official and president of the Asian Development Bank, Kuroda also wanted to restore Japan but could not directly back both the first and second arrows.

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An ingenious strategy was devised whereby the Bank of Japan would drastically ease monetary policy and allow interest rates to fall to zero, or even negative levels. To do that, the central bank would buy vast amounts of government bonds and other financial assets.

This buying of government bonds was justified on the grounds that it would inject funds into Japan's economy and help move investment, consumption and prices up again. The BOJ printed money rapidly, buying government bonds from commercial banks so that (in theory) the banks could then lend to borrowers.

This was like a blank cheque for Abe. However much he stepped up spending, the government was assured that the BOJ would bankroll it by purchasing more bonds. Gross government debt soared to 220 per cent of gross domestic product. 

All very ingenious but, under Abenomics, Japan has neither shed its deflationary mentality nor grown anything like 3 per cent annually, as Abe claimed it would. The government has now put back by five years (to 2025) its declared aim of restoring its fiscal balance.

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The BOJ slipped through (under the cover of major international events) a recent announcement that it would no longer keep to (an already delayed) target of hoisting inflation in Japan to at least 2 per cent a year – double the current level.

Complicating matters further is that, while the BOJ policy keeps the yen at levels where Japan can compete in export markets, global demand is beginning to falter under Donald Trump’s US economic policies and the threat of trade wars. Even a weak currency cannot bolster exports and profits when no one wants to buy.

There is still the “third arrow” of Abenomics – structural economic reform – but, in Japan's case, the “structure” is ageing fast and needs more than a quick fix; it needs new materials and radical changes at the foundations.

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Japan's population is one of the fastest-ageing and declining in the world. The working-age population fell by 4.6 million from 2012-2017, from 80.6 million to 76 million, prompting emergency measures to raise the retirement age and bring more women into the workforce.

This does not augur well for the Abenomics target of raising productivity in Japan to restore competitiveness. Nor do demographic trends attest to the wisdom of allowing a massive government debt burden to grow even larger.

Japan's economic growth is averaging under 1.5 per cent a year and has slowed lately, as has inflation. Something beyond Abenomics is called for if Japan is to keep pace with its neighbours, let alone overtake them. Given the progressive US withdrawal from the region, this can only mean closer trading and investment relations with East Asia, which has not been Abe's strongest suit so far.

Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs