Sunday, June 19, 2016

The failing of Abenomics

Abenomics’ failure and the curse of ‘Japanization’

By Jeff Kingston, director of Asian Studies, Temple University Japan and APP member

The word “Japanization” refers to Japan’s prolonged stagnation — a malady that was on everyone’s mind at the recent G-7 summit. Prime Minister Shinzo Abe made the right call in postponing the planned tax hike, but the feeble opposition can be forgiven for pouncing on his abrupt volte-face, which is a tacit admission that Abenomics is a colossal failure in terms of overcoming Japanization. There really is no way to sugarcoat the bad news about the negligible impact of Abe’s eponymous “three arrows” of monetary easing, fiscal spending and will-o’-the wisp structural reforms.

This year’s anemic first-quarter economic results showed that Japan only narrowly averted a technical recession. This might explain Abe’s dubious excuse for why recovery has been chimerical, i.e., “The world economy ate my homework,” as he tries to duck responsibility for not delivering the revival he promised in 2012.

Only Abe-philes insist that the jury is still out on Abenomics. A Kyodo poll in May found that two-thirds of the public is disappointed in the program’s paltry results. It’s a better response than that reported by NHK in its series of polls over the past year that showed 75-80 percent have not benefited from Abenomics. The economy remains moribund, wages and household income are stagnant, deflationary pressures remain strong and structural reforms are thin on the ground. Despite the Bank of Japan’s best efforts to stoke inflation, that too remains unrealized.

Instead of being a virtuous circle of rising corporate profits, wages and domestic consumption, Abenomics is sputtering. Abe’s advisers used to explain that the main reason for low consumption was the deflationary expectations of consumers, causing them to postpone spending, but now it’s clear that the slack demand is not only a psychological problem.

People’s consumption has not risen because household income is stagnant and perceptions of risk have increased. Wages have not risen and job growth is concentrated in nonregular jobs where pay on average is 40 percent lower than it is for full-time jobs.

The rapid growth of the “precariat” (precarious proletariat) working nonregular jobs — now about 40 percent of the entire workforce — is also contributing to deflation. The precariat doesn’t spend much because it doesn’t earn much. Just over 10 million of them are defined as the working poor, who earn less than ¥2 million a year. This structural shift in the labor paradigm is accentuating inequalities and subsidizing the core workforce of full-timers who enjoy job security, seniority wages and bonuses.

Abenomics is known as “welfare for the wealthy” because it boosts the fortunes of the rich and neglects the vulnerable. Japan suffers from growing welfare rolls and increasing single-parent poverty, with about 15 percent of children raised in relative poverty. So there are good reasons to hope Abe hasn’t hornswoggled the public, but sadly that seems to be the case.

Recently I caught up with William Pesek, executive editor of Barron’s Asia and author of Japanization: What the World Can Learn from Japan’s Lost Decades (2015). The book is a timely and astute analysis of why other nations are at risk of stagnating, and what policies they need to adopt to avoid Japanization.

Pesek realized from the outset that Abenomics is a hustle, more about politics than economic revival. He stands out from the many cheerleaders who took all of Abe’s pronouncements about the economy at face value while averting their eyes from all the missed targets and lackluster results.

“I still believe strongly that Japanization is a global risk,” Pesek warns, “and that countries as economically disparate as the U.S., China and India are hurtling down their own lost-decade-like paths.

“Abe’s catchy marketing campaign wowed a media establishment accustomed to predictable methods of reform and half-hearted efforts to achieve them,” says Pesek. “Abe brought the circus to town.”

Problematically, however, “There’s only one arrow to Abenomics: monetary easing. Raising sales taxes sent arrow two into the ground long ago. And if you really believe arrow three exists, I have a bridge in Brooklyn to sell you.”

Pesek’s pessimism is now widely shared. A Reuters poll conducted in May found that 70 percent of firms polled see no easing of deflation, up from 48 percent in January, and 79 percent expect further deflationary pressure this year and next.

Pesek thinks the competitive devaluation of the yen has been counterproductive. It will set Japan back in the long run, he says, “because executives have fewer incentives to innovate, restructure and raise their games.”

And “womenomics”? “To those who say ‘Abe has championed female empowerment,’ I say ‘Nikkei 225.’ Not one of these companies is run by a Japanese woman.” Pesek adds, “Let’s really empower women with quotas for parliamentary seats and corporate boards, and free and plentiful child care options.”

In Pesek’s view, Abe is “a cautionary tale of a leader who has majorities in both houses of parliament, a mandate from a public hungry for change, a specific revival plan with broad support and high-approval ratings, and did nothing with it to raise living standards or Japan’s global clout.”

What should Japan do? Forget the Trans-Pacific Partnership, says Pesek, which is really a “corporate land grab with little hope of raising wages or creating jobs.” Instead, he suggests the implementation of a tax holiday for startup companies that “includes a pass from the labyrinthine red-tape matrix. Forget talk of special-enterprise zones and make the entire economy one.” He believes the government should also “pony up several hundred million dollars to jump-start the venture-capital boom that passed Japan by.” He also sees great potential in renewable energy, suggesting more aggressive tax and regulatory incentives.

“This nation is a proud pioneer in energy innovation and efficiency, and opportunities abound as China, India and Indonesia literally choke on rapid growth. There’s something truly poetic about the only nation devastated by nuclear weapons finding alternatives not just for the reactors Japanese came to fear after 3/11 and Fukushima, but fossil fuels in general.”

Alas, Abe has prioritized “transforming national security, revving up nuclear reactors and silencing the media. Goosing the Nikkei stock average has been to distract attention from his unpopular right-wing agenda.”

Pesek believes Abenomics is “nothing but a sugar high for investors and trading houses,” and one that “failed to boost productivity and competitiveness.

“If Abe spent as much time orchestrating his economic upgrades as Obama’s itinerary, Japan might not be hurtling toward another recession,” Pesek laments. “His mandate is Japan’s economy, not stage-managing the past.”

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