Thursday, November 27, 2014

Is Abenomics Working?

TOKYO – Last April, Japan’s government implemented a long-planned consumption-tax hike, from 5% to 8%, the first in a two-step increase that is expected to bring the rate to 10% by 2015. The hike – a key feature of “Abenomics,” Prime Minister Shinzo Abe’s three-pronged strategy to revive Japan’s economy – signals the government’s long-term commitment to fiscal consolidation. But it has also dealt Japan a heavy macroeconomic blow.

Preliminary GDP data show a 6.8% contraction year-on-year in the second quarter of this year – the largest since the 2011 earthquake and tsunami that devastated the country. Moreover, consumer spending fell by a record amount, contributing to a total real (inflation-adjusted) decline of 5.9% from last July.

But it is not all bad news. Expansionary monetary policy – the second of three so-called “arrows” of Abenomics, after fiscal stimulus – has brought down the unemployment rate to just 3.8%. The ratio of job openings to applicants has exceeded parity, and the GDP deflator narrowed to close to zero.

Such data have given rise to two opposing views. Some economists worry that negative second-quarter data will dampen inflation expectations, thereby undermining Abe’s plan for boosting growth. Meanwhile, the Bank of Japan (BOJ) is emphasizing the positive outcomes of its monetary policy – and is hesitating to continue its expansionary measures.

If the first view proves correct, the BOJ will need to ease monetary policy further to counter falling inflation. If the BOJ is right, it should maintain its current approach, while the government should either postpone the next consumption-tax increase or implement it in two 1% increments, instead of a single 2% hike.

Of course, the second-quarter GDP data show the economy’s immediate response to the hike. But no decision should be made until the third-quarter results are released, providing a clearer picture of what will happen to Japan’s economy after it absorbs the first rate increase. Fortunately, that is precisely what Abe intends to do.

In any case, the success of monetary policy is difficult to deny. As the deflation gap narrows, however, the overall impact of monetary policy will weaken, as it increasingly influences prices more than output.

That is why it is time for Japan’s leaders to shift their focus from the demand-focused first and second arrows to the supply-oriented third arrow: a new growth strategy.

When there is sufficient excess supply in the economy, promoting supply-side productivity is practically useless without efforts to boost demand. That implies that it was not appropriate to focus on growth until the deflation gap narrowed considerably – that is, until now.

The third arrow is not a traditional industrial-policy-based approach. On the contrary, it emphasizes reform of the labor market, deregulation, and a reduction in the corporate-tax rate.

A key component of Abe’s growth strategy is to expand the workforce – a major challenge, given that Japanese society is aging rapidly. One logical solution would be to integrate more foreign labor into the Japanese economy. But efforts to promote immigration face considerable social and cultural barriers.

A simpler solution would be to mobilize working-age women who already – or plan to – stay at home. By removing the barriers to employment that women face – whether practical obstacles, like insufficient childcare services, or social constraints – Japan could substantially increase women’s workforce-participation rate, creating an invaluable buffer against the growing labor shortage.

The second imperative for boosting growth is the removal of excessively cumbersome government regulations. Under the current system, it took 34 years to approve the establishment of a new medical school – the result of collusion between government officials and doctors.

Abe’s plan calls for introducing a series of less strictly regulated special economic zones, each with a specific objective – for example, adopting new medical technologies or attracting foreign businesses. Such a move promises to help prevent damaging obstructionism by the authorities. At the same time, the government should work with the country’s trade unions to boost the flexibility and efficiency of the labor market.

Finally, Abe’s growth strategy demands a corporate-tax reduction – a powerful tool for increasing the tax base in a world in which countries are competing to attract multinational companies. Indeed, lower taxes are vital to increase foreign and domestic investment in Japan.

Some of these initiatives, particularly deregulation, will undoubtedly face resistance from bureaucrats concerned about losing their influence. But, as long as Abe, backed by Chief Cabinet Secretary Yoshihide Suga, remains committed to his stated objectives, Japan’s economic future will remain bright.

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    1. CommentedMargaret Bowker

      That 2.2% growth having now come out assumption was based on expert economic opinion, which it was way out, and Japan went into technical recession. The main thrust of the argument of delaying stands, however, and the election rumour is confusing as no-one would propose a further sales tax rise next year now.

    2. CommentedMargaret Bowker

      Two months ago, Professor Hamada was considering delay, or a 1% rise in autumn 2015 for the sales tax, with another 1% to follow. I was dubious about any rise next year, as seen below, and now, having taken stock, he is rightly proposing any remaining rise should be delayed until April 2017. This seems sensible and will bring certainty to Japanese commerce, particularly retail. The third quarter has now come out as 2.2% annualised growth. Let's build on that.

    3. Commentedraul ramos

      sir koichi hamada, special economic adviser to japanese
      prime minister shinzo abe, is professor of economics at
      yale university and professor emeritus of economics at
      the university of tokyo.
      sir koichi, i just wanted to share, thanks’
      “is abenomics working?”

      21 december 2013 manila, ph


      with all respect to sir shinzo abe, prime minister
      of this beautiful country, japan. we love you sir.
      but this words is quite funny. kindly excuse my
      statements. "abenomics" is purely and precisely
      piles and piles of "debt". there is nothing new.
      with respect to "the three arrows". let us all keep
      this in mind that there is "only one funnel". japan,
      like this greatest and powerful country america,
      put all their resources to this "one funnel". wrong
      idea, exactly a very bad idea. wrong solutions.
      one good question is - what are we waiting for?


      please kindly take good care and God bless . . . . . . . raul

    4. CommentedNathan Weatherdon

      A demand side perspective would reveal that flexible employees are not so easily able to spend money. They make less oney to start with (often, in the particular circumstance presently faced in Japan) and are less able to spend what money they make because they don't know if they'll get fired the next day. This could be OK if a need for lower wages in the economy was matched with a need for higher savings. Japanese already have a high savings rate, which is the reason it's not scary to have debt-to-GDP in excess if 200%. But when an enture class of youth cannot take out a loan to buy a car or house because the job might end tomorrow, this will not be good. There are many reasons to argue in favour of consumption taxes as opposed to other forms of taxation, and I agree with the policy if additional revenues are required (they are). More flexibility in the Japanese labor market is almost certainly needed. But corporate cultures could adapt to the possibility of a 6 month contract, as opposed to strictly flexible conditions for newbies and entrenched, expensive, and impossible (culturally) to fire senior managers.

    5. CommentedMargaret Bowker

      Is Abenomics working asks Koichi Hamada. Generally, yes - an unemployment figure of 3.8% is very encouraging and amazing to some other economies, but a possible GDP contraction of 6.8%, second quarter, points to the need for some adjustment. The 2014 Sales Tax increase of 3% has done in one year what, for me, should have been done in two. Perhaps even a one per cent rise in 2015, as Professor Hamada suggests, should be paused, making a breathing space to encourage demand. This could work in combination with a further BOJ stimulus, subject to third quarter figures, although they would have to be very good not to warrant action. The other measures in PM Shinzo Abe's three arrows policy, including expanding the female workforce using deregulation and deregulating countrywide, will, if fully supported, encourage growth ; as will reducing corporation tax, all of which is aimed at creating a good, modern environment in which to do business.

    6. CommentedJoshua Ioji Konov

      It is obvious that the so called "Third Arrow" offsets the "First and Second Arrows", It could be well considered that the market forces could have prompted the supply side naturally, without any governmental intervention, what about the deregulation and etc. prompting the "Third Arrow" these provide advantage to the big business and big investors, which trickle-down approach of wealth redistribution: such approach greatly underperformed in the EU and elsewhere for the last 10=15 years?