Is Abenomics really Japan’s solution?

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Abenomics’s three-pronged strategy rests on a combination of heavy public spending, massive monetary easing, and sweeping reforms of a post-war industrial structure.   Despite these lofty goals, the results had been poor.  The latest economic data showed that Japan’s economy shrank 0.4 per cent in the fourth quarter of 2015 (or an annualized 1.4 per cent drop), and a trade deficit in January attributed to a 17.5 per cent export slide to China.  These disappointing figures now fan speculation that the Bank of Japan will launch fresh easing measures.

Abe hopes that unemployment rate will be brought down, there will be an increase in permanent as opposed to temporary employment, wage rates will rise again (currently stagnant at 1992 level), consumption will go up, investment and trade will go up, and finally Japan’s GDP growth rate will start to go up again as it had done in four decades of meteoric post-war economic rise.  Lofty goals, but Abenomics is increasingly proven not to be the answer.

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Here are several factors to consider.

TRADE.  Many praises are still heaped on Japan’s former Prime Minister Junichiro Koizumi for bringing back some growth to the Japanese economy in the early 2000s, and indeed in real terms Japan in fact experienced an annualized average of 2.4 per cent GDP growth for five consecutive years.  However, this growth is not due to Koizumi’s policies but rather to the combined efforts of Japan’s private sector and China’s growing market for high quality niche industrial products such as high-grade steel.  In fact because of this, Koizumi had failed to promote real change in Japan’s private sector mentality.  Left to fend for itself, the private sector took the usual and easy way out.  Japanese corporations only did exactly what they had always excelled at, and that was to trade their way out of trouble.

POLICY.  Japanese governments traditionally aimed for the certainty of market domination, rather than to explore new frontiers.  They left this to the Americans.  For Japan was more (and is still) interested in knowing, rather than merely hoping, that it can dominate global markets in the manufacturing sector, primarily as the surest and quickest way to attain a high-income economy.  Japanese corporations successful execution of this investment and trade strategy for four post war decades is still not lost in the mentality of Japan’s economic bureaucracy spearheaded by MITI itself.  These past successes unfortunately only help to reinforce a strong belief in the old and tested strategy of investment and trade as the primary way to economic growth.  Therein lies Japan’s modern-day handicap.

INNOVATION.  Japan needs to become more competitive once more by regaining its productivity, not simply by trying to match those emerging economies below it which had taken away its manufacturing competitive edge in the first place, but more realistically for the long term by moving away from the very industries that had brought global prominence to Japan and since 1985 taken away from it.  If it can undertake this transformation in a double quick time, then Japan will regain its competitiveness very fast, it will increase its economic productivity, and eventually attract the right types of investment that will resuscitate its presently ailing economy.

EDUCATION.  Partly to be blamed for the lack of genuine innovation is the country’s education system.  Post-war era economic recovery in Japan was driven by investment and trade, with the large pre-war conglomerates given the mandate by the government to lead the nation’s charge.  The pre-war and wartime military culture was thus transferred to the nation’s post-war corporate culture.  As in the military, post-war corporate Japan demand uniformity from their employees.  As a result, the education system really prepares the youth for competitive exams that are actually filters for big corporations and banks, with little room for training them to be independent.  Japan’s otherwise intelligent workforce does extremely well in churning the next world beating versions of existing products that have originated from the U.S. or Europe, but will almost certainly will not be able to do as well when the corporations they work for need to come up with completely new inventions, something that the world had never seen before.  The world is still waiting for a Japanese Bill Gates or Steve Jobs.  Failing in this respect, Japan had better encourage a community of foreign-born inventors to live and work there, as the U.S. has cleverly done all the time.

The lesson is that when confronted with a recurring bad outcome, there is a need to change strategy.  For Japan, the playing field had already changed since the Japanese yen was forced to strengthen against the U.S. dollar from Y240 to Y120 per dollar within two years from Sept 1985, thus began the hallowing out of its core manufacturing sector and three decades of economic decline.  Until now, all that successive Japanese prime ministers had done were actually to apply counter-cyclical Keynesian policies to an advanced economy that has serious structural problems.  The U.S. and Europe had experienced a similar trend earlier, and interestingly it is also happening in China even as we speak.

Comments welcomed.