But in recent weeks, those who saluted the courage of Mr Abe and his “big bang” economic now are lashing out his policy. The return to Japan recession in the third quarter has cast doubt on the minds. What if Abenomics was a mirage?
Two years after his victory in the elections of December 16, 2012, Abe called for early elections on 14 December in an attempt to regain control. Because one thing is certain. “If Japan is not yet out of the woods, it is too early to condemn the government’s initiatives,” said Evelyne Dourille-Feer, a specialist in the country at the Centre for Future Studies and International Information (CEPII). Again, how Abe rectifies – or not – the shot will serve as a great test for Europe. After the Archipelago, it could indeed be the next to have to battle against deflation.
Why so much economic debate around this policy?
This may be so because Abenomics might prefigure the solution to the ills that plague today the euro area. To understand this, we must go back to 1990. That year, a stock market bubble burst in Japan, followed by a real estate crisis and banking. House prices and the value of financial assets collapsed. In their wake, all prices went up. A bit like what we observe today in the monetary union in the wake of the crisis of 2010. “There are many similarities,” says Van Thuy Pham, Asia specialist at the Institute of Economic studies Coe-Rexecode.
Japan gently in the dark even deflationary spiral: after flirting with zero for ten years, inflation fell to – 0.3% per year on average between 1998 and 2012. Since 1998, growth has hardly exceeded 1% per year, while wages and investment stagnated.
What did the Japanese at the time to reverse the trend? “Of course expansionary monetary policies, but too late, small and irregular to clearly restore economic confidence,” says Alicia Garcia Herrero, Asia economist at BBVA. Today, many economists, including the International Monetary Fund (IMF), wonder if the European Central Bank (ECB) are not going to make the same mistake in hesitating to launch a massive stimulus.
After his election in December 2012, the Prime Minister of the center-right, Shinzo Abe, realized that to break the deflationary trap he had to create a confidence shock. He launched his “Abenomics”, a stimulus policy on an unprecedented scale, with three arrows. The first is a fiscal stimulus package of 10,300 billion yen (€80 billion), adopted in early 2013.
The second is a wave of structural reforms to boost productivity gains and potential growth. The third arrow, monetary, consists of massive purchases of government bonds by the Bank of Japan (BoJ), up to 70,000 billion yen per year. On October 31, they even increased it to 80,000 billion yen.
An ambitious program, combining Keynesian stimulus – though Abe was truly inspired by Takahashi Korekiyo, the Minister of Finance who helped Japan out of the Great Depression of 1929 – and liberal reforms inspirations, which does not fail to amaze many economists, particularly in the United States. What if Japan finally took the magic recipe against deflation?
Why the “three arrows” of Abe were disappointing?
“Initially, the Abenomics worked well,” analyzes Mrs Van Pham. In fact, between early 2013 and mid-2014, inflation was clearly back into positive territory, the Nikkei had surged more than 50% in a few months, households had started to consume, unemployment fell to its all-time low (3.5%). And gross domestic product (GDP) rebounded, swelling of 1.5% in 2013. Abe and his supporters were not far from declaring victory.
Except that in the third quarter of this year, boom! Archipelago fell into recession. Taking short government forecasts, GDP fell by 1.9% year-on-year. What was the reason? “The increase in VAT from 5% to 8% in April broke the mechanics of Abenomics” said Kohei Iwahara, economist at Natixis in Tokyo.
This measure, decided upon by the previous government, was intended to finance the increase in social security spending to stabilize the colossal national debt (230% of GDP). “The trouble is that it intervened before companies began to really increase fixed wages,” says Raymond Van Der Putten, country specialist at BNP Paribas. Penalized, consumption spinned like a bellows.
But that’s not all. The first salvo of structural reforms announced in June to release growth seems, for now, too timid. The government began to take action to increase the employment of women. But it stopped short of opening the country to immigration, one track that really offset the melting of the labor force (- 0.5% per year).
Finally, if the depreciation of the yen (- 30% against the dollar in two years) created by the expansionary monetary policy to just supported exports, it mostly inflated the price of imported energy and encumbering household consumption.
A serious setback for Abe. Proponents of the monetary and fiscal orthodoxy were quick to see proof that the “Keynesian” component of its policy was a failure. Were they right? It is still too early to tell.
What do the Japanese think?
The issue is critical because one of the key issues of Abenomics is precisely to gain the confidence of households, to encourage them to consume. And as for entrepreneurs, to convince them to invest and raise wages. Because of “wa”, this form of social consensus cherished by the Archipelago, the Japanese are reluctant to openly criticize their government.
When questioned, many are doubtful. “These measures have not changed much in my daily life” and finds Takashi Tamura, 50, a doctor in the city of Yamaguchi (west). “I’m afraid I do not have a real retreat because of the aging of the population, I would like that the government reassured us,” commented Mamiko Yoshizaki, who owns a clothing store. A concern widely shared by the Japanese.
As for entrepreneurs, the bell sound is more positive. “This year, my company recorded the best result since its creation, I was able to quickly increase the salaries of my employees by 15%,” says Hisao Kudo, 64, owner of a logging company in the prefecture Aomori (north). “Our order books increased, whereby we hit bonus,” says Toshio Shibuya, 57, manager in a construction company in Tokyo.
Can Abe still make a difference?
Probably, if he wins the confidence of the Japanese. The postponement of the second increase in VAT in early 2015, very unpopular measure, should help score points.
But Abe primarily continues and completes the initiated structural reforms: signature of a Trans-Pacific Partnership with America, agriculture deregulation and electricity, measures to develop the use of robots and innovation. “If we look closely, he launched ambitious projects that can succeed, but they need time: in Japan, there is much discussion before establishing consensus and act,” says Dourille-Feer, convinced that it is too early to bury the Abenomics.
In this matter, the next test will be the 2015 wage negotiations in companies. If they greatly increase base salaries, like Mr Abe’s has had them growing for months, the first round will be won. “The virtuous circle, which saw the rise of pay engage that of consumption and activity, could then engage in earnest,” hopes Kazuhiko Ogata, an economist at Credit Agricole CIB in Tokyo.
What are the lessons for the euro area?
The first is that after a crisis it is necessary to clean up bank balance sheets quickly. Without this done, the latter cannot start properly financing the economy. “If Japan of 1990s was waiting for too long, the euro area has done a good thing this year with the examination of bank balance sheets of the ECB,” says Van Der Putten.
The second is that for a country to take deflation, monetary half-measure, such as that conducted by the BOJ in the 2000s, does not work. “In these circumstances, it is questionable whether the ECB intervention is sufficient, and if it does not take too long to act,” asks Ms. Garcia Herrero.
The third lesson from the Japanese case is that even the most ambitious central bank is powerless to solve the structural problems of a country. It is not just its jurisdiction. Low productivity and aging population are braking the activity: the number of countries in the euro zone have now to face the same challenges as Japan. As Mario Draghi, the ECB president, stresses during his every speech, only governments are able to operate in these areas.
The fourth lesson, finally, is that in economic policy, timing is crucial. By raising VAT too soon, Abe lost precious months. In struggling to coordinate their fiscal policies, by delaying to implement European investment expected to support the recovery, the countries of the euro zone may be falling into the same trap.