The legacies of Abenomics will outlive Shinzo Abe
- The slain Japanese leader was a giant among the likes of Donald Trump, Scott Morrison, Boris Johnson and Justin Trudeau
Nationalistic Chinese greeted news of Shinzo Abe’s death with indifference or, in some cases, even with jeers. Understandably, the Japanese leader was perceived as a right-wing politician intent on reviving his country’s militarism by rewriting its constitution.
But that was only one side of him. Whatever his own personal beliefs, Abe was practical enough to put a lid on right-wing extremism and to have balanced Japan between the United States and China. And he did that much more skilfully than most of his contemporaries in the Asia-Pacific. Whatever happens to the Japanese constitution in the coming years, the country’s military is already one of the world’s most powerful in all but name.
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But to me, Abe’s teaching moment was really his domestic economic programme, launched with much fanfare at the start of his second time as prime minister and only to peter out thereafter. Japan’s decades-long Great Recession should be a warning to any big economy that you cannot defy gravity forever and that sooner or later, we all come crashing down.
I am, of course, thinking of China. What else? Managing the nation’s rise to power is only half the job. It’s when the economy starts to slow or crash that the real test of leadership will come as it must work to keep the country intact and preserve the stability of society.
Abenomics and his ‘three arrows’
When Abe returned to office a second time, he tried to shock the domestic economy out of its deflationary spiral with his so-called three arrows: renewed monetary easing with negative interest rates, and the massive and regular purchases of corporate debt and even stocks (otherwise known as quantitative easing, or QE); heavy fiscal spending – which raised government debt to 240 per cent of gross domestic product, one of the world’s highest; and structural reforms such as tax cuts, shareholder activism and gender equality. The jury is still out on their effectiveness, but there is no doubt that it made a big impact on the thinking of economists and policymakers, and helped legitimise QE around the world.
What is QE? For those of us who lived and suffered through the Asian financial crisis of the late 1990s, it’s basically the very opposite of the policies the International Monetary Fund imposed on East Asian economies that sought its bailout, and the resultant social unrest and suffering IMF conditionalities caused. And we had to put up with “holier than thou” criticisms from the West – you people deserved it for being profligate and loading up on debt you couldn’t afford. Yeah, sure, like that would never happen to a super-sophisticated advanced economy like the United States now, would it? When the shoe was on the other foot, it was QE, not IMF conditionalities.
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QE is nowadays often associated with the policy of the US Federal Reserve in response to the global financial crisis triggered by the real estate market collapse in the US. People sometimes debate whether the Japanese borrowed from the Americans or the other way round.
But as Taiwanese-American economist Richard Koo and others have observed, Japan was practising QE for much of the 2000s before the subprime mortgage crisis hit the US in 2007. As Japan’s companies insisted on paying down debt on their balance sheets and refused to borrow – even when interest rates were zero or negative, the Japanese government stepped in to become the “borrower of last resort”. Banks ended up buying bonds from, and lending mostly to, the government, which then spent the proceeds on such programmes as public works.
That helped maintain normal credit-lending and money supply throughout the 2000s. “Japan’s economy has inhabited a world uncharted by conventional economic theory: a world in which fiscal policy determines the effectiveness of monetary policy,” Koo wrote in his 2009 The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession.
“Disastrous consequences were avoided only because the [Japanese] government took [action] … by administering fiscal stimulus. [The] government succeeded in preventing a catastrophic decline in the nation’s standard of living despite the economic crisis … In this sense, it could be argued that Japan’s fiscal stimulus was one of the most successful economic policies in human history.”
Abe didn’t invent any one of his three arrows; his predecessors were already emphasising or at least sloganising about one or two of the three programmes of monetary policy (including QE), fiscal spending and structural reforms. But Abe put all three into a coherent national social-economic programme and for a time, rallied hope not just domestically but among foreign investors as well. And he and his economic team even managed to make complicated economics understandable to ordinary people.
‘Japanification’ and its discontents
Until recently, people outside Japan worried about “Japanification”, that is, chronic slow growth, low inflation and low interest rates. American economists and policymakers have spent an inordinate amount of time criticising Japan’s supposedly mismanaged economy. But the Japanese leadership and society have different priorities. They are far less interested in making the big lenders, big corporations and Wall Street (highly) profitable again, even at the expense of ordinary people.
The Japanese are willing to tolerate “zombie” companies to keep up employment, and to maintain decent living standards for most citizens. Slow growth has been the price.
America and Japan both succeed in their own way in getting the economy they want and deserve. There is a moral lesson here: there is no one single capitalism, only different versions of it. And success has to be defined more in terms of their societal and cultural values than by any economic science.
Abe was a highly competent leader guided by distinctly Japanese values. He was a giant among the likes of Donald Trump, Scott Morrison, Boris Johnson and Justin Trudeau.
