The Reality of Abenomics

Abenomics catapulted into the global lexicon in early 2013, signaling the comeback of Japan and Prime Minister Shinzo Abe.  He became premier for the second time in December 2012, five years after he was ousted from power and heads the Liberal Democratic Party (LDP) that has dominated Japanese politics since it was established in 1955.

Abenomics has three policy arrows ‒ massive quantitative easing (QE) to the tune of $50-60 billion a month, pump priming fiscal stimulus and structural reforms. Since Abe took office, the Nikkei 225 stock index has spiraled upward by 70% while the yen has dropped about 25%, a devaluation designed to boost exports. Until the past month or so, much of the financial press has been gushing about Abenomics, lauding the bold measures that belie Japan’s image for cautious consensus. Aside from skyrocketing stocks, the GDP growth figures seemed encouraging earlier in 2013 while exports also leaped, providing evidence that Abenomics was jolting the economy onto a growth trajectory after years of listless performance. But Abe has not implemented a single structural reform. Not one. And this explains, according to Bloomberg columnist Willie Pesek, why Abe has suddenly been transformed from a rock star to a question mark. Catchy buzzwords that are not followed by resolute action are not a magic wand for what ails the economy.

Since Japan’s asset bubble burst in the early 1990s, Japan’s “lost decade” seemed endless, a gloomy scenario reinforced by a looming demographic time bomb. Declining fertility and extraordinary longevity leave Japan with about 25% of the population over 65 years of age, meaning the government’s finances are bleeding from rising outlays on pensions and medical insurance. The aging society means a shrinking domestic market for Japanese producers, labor shortages and an increase in the number of retirees per worker, meaning that taxes from today’s shrinking workforce must cover the pensions of the swelling ranks of retirees. This dependency ratio is set to rise from 3.6 workers per retiree in 2000 to 1.9 by 2025.

Japan’s growing fiscal crisis is accentuated by low growth and declining tax revenues. The LDP has relied on fiscal stimulus extensively over recent decades, and as of 2013 the gross government debt to GDP ratio is a staggering 240% of GDP far more than any other advanced industrialised nation. For comparison, India’s debt to GDP ratio is estimated at 67% as of 2012 while the US stands at 106% and the UK is about 90%.

Absence of Structural Reforms

Abenomics represents a bold plan to hit the restart button and recapture the national mojo while addressing the growing fiscal crisis and grim prospects of a greying society. The initial glowing reviews overlook the crucial problem that without significant structural reforms, the monetary easing and fiscal stimulus cannot propel a sustainable recovery.

The absence of structural reforms explains why the honeymoon is over. Markets are figuring out what ordinary citizens have known all along; Abenomics is little more than welfare for the wealthy and big corporations. And the benefits are not trickling down, as they never seem to do.

Prime Minister Abe has done the easy things, but the third arrow remains in his quiver and it does not look like he will be able to achieve even modest structural reforms. There is no organised resistance to QE, indeed the resulting asset bubble makes a lot of money for investors, and who apart from fiscal killjoys and environmental activists opposes a cascade of public works spending? But influential vested interests stand to lose a lot if structural reforms proceed, and these groups are well represented in Abe’s own party. Indeed, in June 2013 Abe was supposed to unveil his package of reforms aimed at deregulation and productivity enhancing measures, but he kicked the can down the road, insisting that he could deliver by the end of 2013.

Time is running out on Abe’s plan to remake Japan, and during this Diet session he has devoted most of his political capital to promoting a secrecy bill that will widen the scope of official documents that can be designated secrets and increase penalties for those who divulge the information while subjecting journalists to imprisonment if they use such information. The public reaction has been resoundingly negative and organisations promoting media freedom and government transparency have sounded the alarm.

Meanwhile Abenomics is losing traction. A modest proposal to allow sales of over-the-counter, non-prescription drugs on the internet has been sidelined by the brick-and-mortar pharmacies that stand to lose customers. A plan to establish special export zones with relaxed labor protections was blocked by the Labor Ministry. There has been no headway on reforming immigration, a rational solution to Japan’s shrinking and aging workforce, because the government does not want more immigrants. Foreign-born residents of Japan constitute about 2% of the nation’s population of 127 million, but the government is more worried about coping with greater diversity than the consequences of demographic decline.

“Womenomics” and the Growing Precariat

Abe has embraced “womenomics”, pointing out that women remain marginalised in the upper echelons of Japan’s corporate sector, but has stopped short of doing anything that might change that situation. He has pledged to provide enough daycare slots for working mothers, but full-time women workers in Japan earn 27% less than male counterparts, almost double the 14% OECD average. Women constitute only 2% of boardroom directors and 11% of managers while 74% of college-educated women voluntarily quit their jobs compared to 31% in the US and 35% in Germany, a massive loss of human capital that reflects how underutilised women feel. Japanese women have low career expectations in a fusty corporate world where glass ceilings remain firmly in place and thus pledges to expand daycare coverage is barely a start.

Essentially, Abe treats “womenomics” as a branding opportunity rather than a wake up call to enact policy reforms that tackle gender discrimination in the workplace. As a result, Japan denies itself the potential of some of its most talented workers whose career aspirations are too often derailed.

Abe has also not done anything to help Japan’s growing precariat of non-regular workers stuck in dead-end, low paid jobs with no job security. Currently, 38% of Japan’s entire workforce, about 20 million workers, are employed on these disadvantageous terms, and Abenomics is promoting measures to make it easier for employers to marginalise more workers. Women and youth are disproportionately represented among the precariat about one half of which is termed the working poor because their earnings are below Japan’s poverty threshold.  Many single mothers are in this category, helping explain why 14.3 % of Japanese children are raised in poverty, the highest in the OECD. Back in 2007 Abe actually reduced government assistance to help such families, underscoring that Abenomics is not about helping the vulnerable. After all, the precariat do not own stocks.

Attempt to Cure  Deflationary Pressures

The hope of Abenomics is to boost consumption and thereby stoke inflation in an effort to cure the deflationary pressures that have lingered for the past two decades. Deflation means prices are stagnant, so producers have low profit margins, and there are few good opportunities for investors.  The fundamental problem is the drag on consumption owing to so many old people living on fixed incomes and such a large precariat barely making ends meet. Pumping up the stock market would not help these consumers while price increases of daily necessities are disastrous to such households’ finances.

Abe’s plan rests on employers raising wages and that has not happened, and a perfect storm is brewing that might capsize Abenomics. In fact, wages have actually declined slightly since he has been in office, suggesting that companies are skeptical about whether Abenomics is for real. The Bank of Japan (BOJ) is engaging in inflation targeting, flooding the market with money to boost consumption, lending and investment, but this has not gone according to plan. Consumer spending accounts for 60% of GDP, but in the third quarter this increased by an anemic 0.1%. Moreover, GDP growth is ebbing from a robust 3.9% in the second quarter to 1.9% in the July-September period. All of that growth is due to a gargantuan fiscal stimulus package representing a 6.5% increase in public investments, but the government is running out of ammo. Given that Japan’s public debt ratio is already stratospheric, there are constraints on further fiscal stimulus. This is worrisome because next April the sales tax will increase from 5 to 8%, and there are widespread expectations that this will stifle growth in consumption thereafter. To avoid this perfect storm, Abe has mixed his pro-market inclinations with old-fashioned command economy directives, calling on businesses to raise wages and boost investment. So far the response has been underwhelming.

The big question hanging over Abenomics is whether he can avoid pushing the economy back into recession as he raises the consumption tax from 5% to 8% in 2014 and 10% in 2015 to promote fiscal consolidation. It is further alarming that, according to the IMF, this doubling of the sales tax will only cover about half of Japan’s structural budget deficit. That means some tough choices on social welfare outlays since the government seems disinclined to boost tax revenues even though 70% of Japanese firms are not paying corporate taxes due to gaping loopholes.

Although the inflation target is a seemingly modest 2%, given that prices have been stable for so long this is seen to be an ambitious target. In fact, Japan has recorded slightly over 1% inflation in 2013, but it is the wrong kind of inflation. Instead of being consumption driven, Japan’s inflation is entirely due to the devalued yen raising import prices, especially for fuel; other prices remain flat. Given that Japan’s fleet of 50 viable nuclear reactors remain shut down due to safety concerns, there has been a considerable jump in fossil fuel imports that have sent the trade account into the red and boosted utility bills and gasoline prices.

There are also signs that Japan’s competitive devaluation is losing steam as an export promotion measure, especially as worries about the US “tapering” of monetary easing is casting a cloud over market prospects in developing economies. Moreover, China is Japan’s leading trading partner, but tensions over disputed territory and history are worrisome; bilateral trade in the first nine months of 2013 dropped 8% overall as compared to 2012.

Can Abe Deliver?

Realising an array of structural reforms may depend on the Trans-Pacific Partnership (TPP), a market opening initiative involving the US, but not China or India, that is designed to lower barriers to the trade in good and services and improve intellectual property rights. It is an ambitious undertaking, and Japan’s late entry into the negotiations with eleven other nations threatens to slow if not derail the process. Japan has declared there are five sacred cows on which it would not make concessions‒rice, wheat, pork, sugar and dairy products‒representing a tiny sliver of Japan’s overall economy, but a powerful political constituency. Like other reforms involving labor, tax and pensions, fiscal consolidation, women, immigration and services, TPP is bogged down in the quagmire of Japanese politics even though Abe controls both houses of the Diet. The TPP should be useful in overcoming domestic resistance, enabling Abe to argue that Japan stands to gain far more from making concessions to realise a deal that will help Japanese industry. But he has not effectively made this case, raising questions about whether he has the political skills and backbone to seal the deal.

And what about all that money flooding the banking system? The BOJ is buying back bonds to keep interest rates low and stimulate lending, but nobody is borrowing. Thus QE is facing the liquidity trap, meaning that adding more liquidity to a system awash in liquidity with few exciting investment opportunities is not having the desired impact and instead creating a stock bubble. A year ago international hedge fund managers were signing off their emails with “All Hail Abe”, illustrating whom he was helping, but now many of these profiteers are having doubts if Abe can deliver.

Crisscrossing Japan over the past year, I have asked hundreds of people ranging from housewives, farmers and fishermen to salaried workers, taxi drivers and hotel managers about the impact of Abenomics. I have met exactly one respondent who thinks that it is improving his life. Outside of Tokyo’s CBD, everyone is skeptical and few believe that they will benefit. An NHK (non-commercial, national television station) poll in October showed that 75% of Japanese have not and do not expect to benefit from Abenomics. It is a program that is accentuating income disparities in Japan and worsening the situation of the most vulnerable. It is another example of neo-liberal reforms touted as a cure-all for the economy that ends up only helping the privileged and well-connected while leaving the nation worse off than before. Abenomics is a chimera, living on borrowed time and money. That is why “tapering” is one of the scariest words in the English language.