Despite all of the seemingly global political shifts towards more protectionism and nationalism, highlighted by the astounding outcome of the Brexit referendum mid-June, Japanese voters have decided themselves to maintain the status quo, as Prime Minister Shinzo Abe, the founder of Abenomics, received its much-needed support by getting 33.5 percent of voters to maintain the country’s ruling Liberal Democratic Party (LDP). The main opposition party was defeated by a significant margin; the ballot revealed that they only received as much as one-third of supporters compared to those of LDP. Economists and financial experts perceived that Abenomics was the determining factor for this election. However, one question remains to be answered: Is reigning Abenomics proving to be successfully implemented in this thriving domestic economy or was it merely an indication of unconvincing policies proposed by their counterparts?
HOW DID JAPAN FALL INTO A SLUMP?
The Japanese economy, since the collapse of the national financial system in the early-1990s, has yet to show any signs of recovery to any desired level. To tell the tale, the optimism of Japanese investors during the 1980s initiated a speculative behavior at the beginning of 1990s. Combined with excessive risk-taking, subpar assessment of credit risk, SMEs were highly vulnerable to market sentiment. Japanese Central Bank (JCB), however, failed to realize the upcoming dangerous consequence of this over-confidence reaction of the market, and thus not recognizing the need of adjustment in interest rates accordingly to market changes. Only when the economy plunged too deeply into overheating, JCB replied with a modest increase in interest rates, but far from what could have anticipated if the adjustments were made earlier. The aftermath of this hike is a bubble burst, stock market chaos, followed by a complete collapse of the banking sector.
In the hope of reinvigorating the economy, seeing that investments started to suffer quite dramatically as some of the domestic banks declared bankruptcy, JCB decided to lower their current interest rates. The downward spiral lengthened until the end of the 1990s where Central Bank set the rate to almost 0 percent. It is theoretically impossible for rates to go lower, which discourages people to place their savings in commercial banks and hence putting less money in circulation. Expansionary policies (e.g. decreasing taxes and funding public infrastructure) were also initiated to encourage investments and consumption, but the effect was relatively modest and hence accumulation of borrowing funds over the years inevitably snowballed into a massive public debt at 144 percent annual GDP in 2000. The Japanese economy started to recover later on as demands for Japanese product increased as the clock turned to the 21st century, but the global economic recession afterward certainly put Japan into another unfavorable situation.
In 2012, after the first unconvincing tenure as Prime Minister in 2006-07, Shinzo Abe was re-elected into the most prestigious position in the House of Councilors. This time though, witnessing the economic downturn, he had enough preparation for his ambitious economic reform policy: Abenomics.
THE EARLY SUCCESS
The vibrant missionary of Abenomics is to re-establish macroeconomic development and dynamism that was experienced during the 1980s, the most prosperous period in Japanese history – obviously with a much more cautious mentality. As it has always been, the massive plan is directed to tackle some of the most identifiable problems within the domestic scene, weak economic demands with evidently dampened economic growth, ever-increasing government debt and sluggish inflationary figures. A structural reform, similar to the transition observed in the United Kingdom during the 1960s, is necessary to shake the stagnating economy; however, in order to recover, maintain and improve domestically in a gradually more medium-term setting, starting within a global economic disappointment, the cabinet believed that quantitative easing and fiscal stimulus are the solutions to answering those pressing concerns. The “three-arrow” plan, in the presumption that the combination of the three is greater than its individualities, was carried out in the hope to lift Japan out of recessionary period.
The government initiated its stimulation plan by spending more than 10 trillion yen at the beginning of 2013, where almost a third of that amount was used to encourage more private investment and local economies. The Bank of Japan also reacted by pulling off qualitative and quantitative easing measures (QQE) by purchasing bonds and exchange-traded funds to directly inject more money supply into the market, with the target of doubling monetary base and outstanding amounts of government bonds.
A 142-page document titled “Japan Revitalization Strategy” published at Kantei (Ministers’ residence) during the summer of 2013 also followed, was designed to tackle the abysmal growth problem, in the hope of producing a 3-percent nominal GDP growth rate/2-percent real growth for the next 10 years. Abe’s strategies to rescue its economic problems cover multiple aspects including attracting more foreign investments whilst abolishing unnecessary legal obstructions, enhancing their domestic technological and physical infrastructure, utilizing human resources capabilities – by involving more women in the workforce – , and encouraging the establishment of SMEs initiatives throughout Japanese regions. Additionally, being faced with societal problems such as population aging (with an estimated 30% of its population over the age of 65 in 2030), Japan also carefully looked into public provisions such as healthcare and environmental programs and looked to ensure standards and quality of living for all demographics of Japanese citizens. One of the more concerning societal issues for Japan is oddly enough, adaptability in catching up with the global market tendency. Therefore, the government is also focusing on how to orientate domestic businesses towards international market by putting more emphasis on the preparation for enterprises for such engagement in trade agreements, most notably TPP or FTAAP.
A comprehensive framework was put in place. During a short span of one year after this major announcement, Japan did experience positivity and optimism throughout the entirety of the market. Some of the key performance measures that were the objectives of the reform, GDP and inflation, definitely showed favorable progress. The commitment of the government had brought more growth to the market, touching at 2 percent real GDP rate for the fiscal year 2013 (which begins in April). NIKKEI 225 index also increased by 60 percent year-on-year. Consumer price index also returned to positive figures (0.35%) after suffering below-zero inflation five consecutive years after the global financial crisis. Although some might argue that there need to be some significant improvements for a rather ambitious long-term goal of 2 percent annual increase on real growth; nonetheless it was a remarkable result that the authority could be happy of.
Although Japanese citizens are enjoying a high standard of living, it is somewhat peculiar to think that Abe’s belief that the economy centering itself on promoting a growth strategy is the way ahead. There are indeed several possible explanations. Market sentiment in Japan for the last decade for Japan had remained low throughout the last decade: GDP registered on average of merely 1 percent growth, in addition to the fact that private investment had halved over the 15 years prior to Abenomics. Furthermore, the economic turmoil will keep escalating as the massive aging population problem is looming larger and continuing to stress government budget, although current healthcare expenses per capita for Japan is the lowest out of the G7 countries and only accounted less than a half compared to figures in the United States, according to OECD. However, the cumulative expenses for healthcare could be devastating if the government fails to react appropriately when the number of elder people is growing at a worrying rate. The violent earthquake that hit Fukushima did not help alleviate the recovery process either.
THE MIGHTY DOWNFALL
Despite having had considerable success on the mission to rescue the economy, Abe’s views towards reviving the economy were heavily contested with loads of skepticism and criticism posed by global economists. They were questioning whether there was any appropriate academic rationale behind the establishment or the sustainability of the plan, as they did not believe the desired results (in particular, 2-percent average real growth) could be obtained by the end of 2022. More incoming criticisms targeted to social and political matters as well. Over time, these weaknesses, both theoretically proven and dealt in practical settings, have become more visible.
The world saw the gigantic collapse of global petroleum price. The explosion that hit the oil market saw its unit price dipping to the low-60s in December 2014 compared to the mid-110s level that was seen only just half a year before. The radical change weakened Chinese appetite for foreign imports and motivated its policy afterward to revolve around consumer goods rather than reliance on being an export hub. Japan, the fourth-largest exporter to China, was particularly damaged by the extraordinary policy shift undertaken by China, and figures showed that aggregate exports only increased by 5 percent in 2015, incomparable to almost double-digit percentage growth with exports in 2013 (statistics). Imports were also significantly affected, especially imports of natural resources for domestic production, which increased to 5.5 percent. The fundamental calculation of current accounts would tell you that there is a negative trading balance – an economic variable that Japan should take more attention to.
The second source of failure, which directly originated from the revised policy but was barely mentioned about, is the adjustment of consumption tax; in more detail, the tax bracket was increased to 8% from 5%. What the government was attempting to do was to decrease corporate tax so as to encourage more private investments and attract foreign funds into the market. Therefore, simply put, it was believed that a decrease in this tax category would be compensated by a rate hike in consumption tax, as the incurred debt by the government had already plunged too deeply. This was believed to create a “chain” effect such that when corporates profits improved, these surpluses would result in higher wages for employees; or would be transferred to other smaller companies and boost SMEs industry performance in general, which attracts more private investment. However, the expected consequence did not happen, and rather by neglecting the fact that weakened demand is actually the underlying reason to the underperforming economy, the reduction in consumers’ consumption was more detrimental than the positive counter-reaction on investment. Therefore, tax revenue collection was negatively affected by such consequence and hence spurred some heightening political debate. While large corporations benefit from retaining a higher proportion of their profits, consumers, on the other hand, have to bear the costs of these privileges. It came to no surprise that many accusations about the flawed policy were directly aimed towards the macroeconomic mismanagement by the “dishonest” and “corrupted” LDP, as some politicians claimed. Learning from this lesson, Abe announced to postpone another consumption tax hike to 10 percent, which was previously announced to come into effect in 2017.
The purchase of assets and government bonds (JGB) following QQE program guidelines was expected to bring about a confidence boost to the stock market, an increase in inflation expectation (illustrated by CPI index) coupled with a slight reduction of interest rate (which had been extremely close to 0 percent at the point). However, the large-scale forceful injection of the money supply will depreciate the domestic currency with respect to other non-fixed international exchange rates, with the intention of having depreciation for rather short-term to encourage more market activities for the long term. Monetary base during first QQE scheme enlarged by 70 trillion yen, with accelerated expansion of monetary base moving forward. However, this yielded literally no economic value: simply printing money does not create wealth; and the commitment to/obsession of defeating deflationary pressures turned out to be ineffective. Real inflation continued to shatter any initial expectations set in Abenomics, with CPI index figures sitting at 0.8 percent for 2015. The Central Bank, with multiple failed attempts to revitalize the economy, pioneered the implementation of the unprecedented negative interest rates. Most economists, including FED chairman Janet Yellen, opposed to the idea – it is merely a trick of currency manipulation, where a country deliberately devalues their own currency to be more competitive with other markets, making their exports sector more attractive towards overseas consumers. In conclusion, continuing currency devaluation measures and imposing negative interest rates are still not doing any better, proving that solving this economic problem by supply-side policies is not the most credible solution to mitigate the adverse effects of` the macroeconomic scenario of Japan.
How well are demand-side policies performing? Multiple fiscal stimulus packages, totaling almost 100 trillion yen since 2012, have been transferred to the market to fuel consumption but no significant effects were felt after the initial success. It was also revealed that the realized amount of money being expended to new constructions was substantially less than what was announced by the government, while the rest of the packages were mostly used for social programs and maintenance of public infrastructure in the aftermaths of natural disasters. Together with the anticipation of a consumption tax hike on goods, not only were customers more reluctant on their spending, but companies also hit back on production as well, which discouraged even more investment. While external demand is hit hard by the Chinese economic vulnerabilities, the more recent happenings of Brexit will almost certainly not help Japan in adding any dynamism into the national investing environment.
Some non-economic factors were also contested about the “Revitalization” strategy of Abenomics. Firstly, there has been criticism towards the government’s commitment to female participation in the workforce. Though the initial plan is to encourage women to successfully be employed and hold managerial positions, so far the job market has been reluctant to behave in such way and the cabinet has shown no signs of responding to the current situation. And ironically enough, the cabinet of Abe is largely dominant by male politicians. Workers are more adaptive into the international competition but progress is slow. Productivity level also deterred and breakthrough innovations only happen few and far between.
SO, WHAT’S NEXT?
The dominance of Japan is sadly long gone; the gigantic household names as we know them: Mitsubishi, Sony, Toshiba, Toyota, and of course (how would we forget) Nintendo are all currently struggling to strengthen their foothold in the international market. Many changes are made to restructure Abenomics but all of them has failed to materialize the dream of making Japan great again. Worldwide economists have suggested on some modifications to the plan, but Japan is only carefully listening and investigating those ideas before executing them. However being too conservative now (as the nature of party itself) is not a sound strategy either when the economy is in desperate need of new energy. Nevertheless, Japan is still very respectable in the entirety of the world, and its economic lessons, past and present, are invaluable to the upcoming generations of economists. Whatever we may say, when the attention of the world focuses on Japan in 2020 for its coverage of the Summer Olympics, we will be more exposed to the more information about its true economic scenario and specifically, how the management apparatus will resolve itself out of its ever-been-so-long recessionary mantra.