Abenomics: The Hope and the Hazard

While Japanese prime minister was selling Abenomics to the G-8 in Ireland last week, I was listening in Tokyo to those experiencing Abenomics at the annual Japan Roundtable, a gathering of the Japanese leadership elite. The danger is that the Abenomics may well turn out to be necessary and good and yet too little too late.

As has been widely reported, the Abe plan has three parts or arrows to use the prime minister’s term. These are aggressive quantitative easing (QE) linked aimed at creating inflation (or at least at halting deflation) and devaluing the yen; increased stimulus through infra-structure and other government spending; and broad structural reform aimed at removing major roadblocks to growth.

The first two of the arrows have essentially been shot. The results are as yet unclear. Initially, the QE did, indeed, result in a fall of the yen, a rise in exports, a rise in the stock market, and some hint of a possible change in consumer expectations. But then the impact of rising interest rates on the Japanese government’s already high debt service obligations (about 25 percent of the total government budget) and U.S. Federal Reserve Chairman Ben Bernanke’s hint of possible less future U.S. QE gave rise to second thoughts and the markets tanked. How this will eventually play out is difficult to predict. There is bound to be volatility associated with any program this far reaching. But it is absolutely crystal clear that it cannot possibly turn out well in the long run unless the third arrow – structural reform – hits the bull’s eye.

What are the chances of that? The good news is that the Japanese are now talking more openly and comprehensively about their structural problems than anyone else with the possible exception of the Chinese. For instance, I actually heard some Japanese say there would be nothing wrong with a bit of immigration into Japan so long as it was carefully controlled. While that may sound unexceptional to many global ears, it is almost unheard of in Japan until now. Or take the Japanese decision to join the Trans Pacific Partnership talks for a free trade area. That represents a heretofore unheard of willingness on the part of Japanese political leaders to confront the agriculture lobby which has long succeeded in keeping Japanese tariffs at astronomical levels. There are also hints of changes in corporate governance, regulatory practices, and labor arrangements. This is all more than I had ever imagined I would see, and even though I have not been a fan of Abe’s, I admire him for taking these steps.  

But the bad news is that for Japan to achieve a renaissance of sorts it must take much more dramatically bold action across a broad front almost immediately, and nothing I heard in Tokyo suggests that that is about to happen. Now mind you, it’s still early days. Abe is looking at an election for the upper house of the Diet in July. If he wins, which is likely, he’ll essentially be in control of Japan for the next three years. So he may be keeping some powder dry for after the election when he will almost surely be at maximum strength. But what’s of most concern is that even among all but a few of those in the avant garde, there is not the sense of urgency one might expect about the biggest single problem facing the country.

I mean, the issue of the aging and shrinking of Japan’s population and what to do about it was raised more often by foreign analysts than by the Japanese themselves.

Here is a country with a present population of about 125 million souls going to anywhere from 95 million to as low as 88 million souls by 2050 depending on how you forecast. Moreover, the proportion of those who will be over the age of sixty five is about 40 percent. In economic terms this means that Japan is losing about  1 percent of its population annually.  In other words, at the beginning of each year before anything else happens, Japan automatically has deflation of 1 percent. Thus, for Abe to achieve his target of 2 percent inflation, he actually has to generate 3 percent just to overcome the drag of the population decrease. If these trends continue, it is very difficult to imagine that Japan will be able to pay for the health care, pensions, and other costs of its aging people even if everything else that Abe is proposing actually happens, obviously a heroic assumption.

It is not impossible to imagine turning the trends around or at least flattening them. For instance, greatly increasing child care facilities and making them less costly would make it easier for couples to have the children they want. Copying France and its payments to mothers for children could be tried. Creating sperm and particularly egg banks would lengthen the time of possible child bearing by women. And, of course, finding ways to accept and promote immigration could be quite effective.

Take just one example. If you are a foreigner living in Japan today and you would like to have say a Filipina as a live-in maid in your home, you may readily obtain a visa for her from the Japanese government. But if you are a Japanese in the same circumstance, you can’t get the visa for the maid.

Things like this could obviously be changed. But at the moment there is little discussion of them. The problem with this tardiness is that because population trends work themselves out over such long periods of time, if Japan does not start with these measures right now there will soon be no chance of recovery.

Here’s a motto I suggest for Abe: Carpe Diem. (Seize the day).