Almost four years after Japan’s Prime Minister Shinzo Abe launched “Abenomics” to revitalise the country after 20 years of economic stagnation, most have judged it a dismal failure. But to dismiss Abenomics out of hand would be to misread Abe’s true objectives.
Admittedly, first glance shows the policy’s “three arrows” have all fallen far short of their targets. The idea was that by pursuing radical monetary, fiscal and structural reform all at once, Abenomics would succeed where previous attempts at revival failed.
Drastic action certainly looked necessary. After two decades in which entrenched deflation destroyed domestic demand, and only endless supplementary government spending packages kept growth in positive territory, Japan’s gross public debt had reached 210 per cent of gross domestic product. To put that into perspective, it was double the debt level that provoked fiscal panic in the United States, and was approaching a point Japan’s finance ministry believed unsustainable.
The first and most eye-catching of the three arrows was monetary policy. The new Bank of Japan governor Haruhiko Kuroda threw the rule book out of the window and printed lots of money in an all-out effort to hit his inflation target of 2 per cent. By driving down the yen’s value, the central bank would push up the price of imported goods and boost exporters’ profits. Fatter profits, they hoped, would feed through into higher wages, encouraging consumers to spend more, adding to inflationary pressure. That would push interest rates into negative territory in inflation-adjusted terms, which in turn would embolden Japanese companies to invest more. The result: a virtuous circle of rising demand and faster growth which, coupled with higher prices, would shrink the real size of Japan’s public debt relative to GDP.
The second arrow was fiscal policy. At first it would be expansionary to kick-start demand. Once growth got going, the government would raise consumption tax to generate a primary budget surplus – before paying interest on its debt – by 2020.
The third arrow would be removing structural impediments to renewed growth, including cutting red tape, improving governance, boosting productivity and growing the workforce by getting more women into it.
At first it looked as if the first arrow hit its target. The yen tumbled almost 40 per cent against the US dollar, exporters’ profits soared, big companies began to increase wages, inflation returned and growth picked up. But the second arrow flew wide of its mark. The increase in consumption tax from 5 per cent to 8 per cent in April 2014 crushed demand and promptly sparked recession, much as an earlier increase did in 1997. And the third arrow has never convincingly been fired. Despite some notable steps to modernise Japan’s antiquated corporate governance, progress on structural reform has been glacial in the face of deeply entrenched interest groups.
Above all, the looked-for economic feel-good factor proved all too transitory. Even though the central bank doubled down on money printing and pushed interest rates into negative territory, the structural strength of the yen has reasserted itself. Meanwhile, negative interest rates have proved counterproductive, encouraging Japanese to save more to compensate for lower expected returns. So the yen has rebounded 20 per cent over the past year, inflation has evaporated with prices now falling again, retail sales are contracting in volume terms, companies are reluctant to invest in the domestic market, Abe has had to postpone a further consumption tax hike until 2018, and both the government and central bank are looking for new ways to keep growth positive.
In short, Abenomics has missed all its stated targets. But that doesn’t necessarily mean the policy has failed. To judge its success solely by economic criteria would be to miss the point. The declared economic targets – for example generating a primary budget surplus by 2020 – always looked wildly overambitious. But from the start it was first and foremost a political project.
Abe’s premiership has been driven by his conviction that Japan must strengthen politically and militarily to bolster self-reliance in the face of China. As such, Abenomics served a greater political purpose: creating enough of an economic feel-good factor, even if temporary, to allow him a mandate to push the legal changes needed for a more assertive defence strategy.
By that yardstick, Abe has in substantial measure succeeded in what he described as his “lifetime’s work”. The money printing, by putting government debt on the central bank’s balance sheet, has reduced net public debt from 180 per cent of GDP to 130 per cent, dispelling fears that Japan would become dependent on Chinese capital to fund its budget. And by creating the temporary illusion of an economic revival, Abe earned enough political capital to press ahead with his military revitalisation policies. Last year he successfully passed laws allowing Japan to practise “collective self-defence” with allies, effectively tying the country into a mutual defence agreement with the US. He has also put in place the tools needed to change Japan’s constitution. With an approval rating of 60 per cent, it is quite possible that Abe will take advantage of further monetary and fiscal stimulus measures to be launched in the next two months to call an early election. A convincing victory could bolster his position enough for Abe finally to call the referendum needed to ditch the pacifist provisions of Japan’s 1947 constitution. If he wins that, he will no doubt consider Abenomics a resounding success, even if most economists regard it as an abject failure.
Tom Holland is a former SCMP staffer who has been writing about Asian affairs for more than 20 years