Will Abenomics retain its majority in December’s election?
- By Simon CoxSimon Cox is an Asia-Pacific investment strategist for BNY Mellon Investment Management.
Shinzo Abe, Japan’s adventurous prime minister, won the country’s last election in December 2012 in a landslide. A few months later, his pick as central bank chief completed an equally convincing monetary coup, securing the unanimous support of his eight colleagues for a bold plan to defeat deflation. But as Japan’s GDP falters, both men now face stiffer tests of their economic vision. For Japan to prosper, both must prevail.
Abe has called an early election for Dec. 14, only two years after the last poll gave his Liberal Democratic Party (LDP) and its small coalition partner a two-thirds “super-majority” in Japan’s powerful lower house. His popularity has, however, ebbed since then. His economic strategy, known as Abenomics, has raised wages, but not as fast as it has raised prices. In April, his government lifted the consumption tax, a broad value-added tax on most household purchases, increasing costs and shrinking the economy. Abe was supposed to increase the tax again in October. Instead, he decided to push back the hike for 18 months and pull forward the election.
Despite these troubles, his party stands little chance of losing the election. The decline in its popularity has not increased voters’ enthusiasm for the opposition, according to a Nov. 24 opinion survey by the Nikkei newspaper. Abe’s ruling party is instead running neck and neck with a growing political force: disillusionment and indecision. That coalition of feelings scores highly in the polls (30 percent of voters are undecided, according to the Nikkei survey). But it will not be returning any members of parliament in December.
Abe’s tougher rivals sit not in the opposition but within his own coalition. An underwhelming victory in the upcoming election will embolden opponents of his sprawling economic reform plan, which includes easing firing rules, narrowing the scope of overtime pay, rationalizing corporate taxes, stitching together Japan’s fragmented farmland, and reducing barriers to entry in industries from healthcare to casinos.
His decision to postpone the consumption-tax increase has also upset fiscal hawks within his party. They believe the hike is necessary to preserve faith in Japan’s central government debts, which now amount to over 1 quadrillion yen, according to the Ministry of Finance, a 16-digit figure. In the name of tackling these debts, the hawks may stymie some of Abe’s other fiscal ideas, such as his proposed cut in the corporate-income tax.
Their fiscal flintiness seems commonsensical: the natural response to net government liabilities that will amount to over 140 percent of GDP this year, according to projections released in November by the Organization for Economic Co-operation and Development (OECD). But disinflation is a far bigger danger than fiscal disrepair. The government, after all, finances its debts with remarkable ease. Its net interest payments in 2014 will amount to little more than 1 percent of GDP, the OECD calculates. That is less than Germany pays.
How is this possible? The ultimate reason is that Japan’s public-sector deficits are offset by equally persistent private-sector “surpluses.” Japan’s companies, in particular, consistently spend less than they earn, using the remainder to repay debts or accumulate financial assets, including cash and bank deposits. For Japan’s private sector to spend less than its income, someone else has to do the opposite. That someone ends up being the government. Its bonds are bought by banks, which collect deposits from corporations eager to hoard money, rather than plowing it into extra capacity, extra workers, or higher pay.
The best way to cut Japan’s budget deficits is, therefore, to narrow its corporate surpluses. And the Bank of Japan is trying to do just that. By increasing inflation expectations, it aims to make borrowing money more attractive and amassing cash less so. At a meeting with businessmen in Nagoya on Nov. 25, the Bank of Japan’s governor, Haruhiko Kuroda, warned firms that “hoarding cash and deposits will become costly,” and that corporations should use “their profits in a more productive manner.”
But Kuroda’s strategy no longer enjoys the central bank’s unqualified support. His original April 2013 stimulus may have passed unanimously, but his surprising decision to expand it at the end of October squeaked through with only the slimmest of majorities. According to the minutes of that meeting, one opponent felt the benefits of additional easing would not be worth the “costs and side-effects.” Another argued that Japan needed “structural reform to strengthen [its] growth potential, rather than additional monetary easing.”
A country’s “growth potential” depends on fundamental factors, such as the size and skill of its workforce, the weight of its regulations, the ingenuity of its entrepreneurs, and the intensity of competition between them. There is little a central bank can do about these “supply-side” factors, as the Bank of Japan’s hawks have often pointed out. But the other side of the economy — the demand side — is also important. An economy will only live up to its growth potential if spending is sufficiently strong. Otherwise, workers will remain underemployed, capacity will fall into neglect, and prices will soften. A central bank can hope to do something about that.
The beginning of macroeconomic wisdom is to acknowledge this distinction between the supply-side of the economy — its ability to produce stuff — and the demand-side, its willingness to buy it. But the next step in macroeconomic sophistication is to recognize that demand and supply interact in subtle ways.
Some of Japan’s central bankers seem particularly attentive to these interactions. They have pointed out that stronger hiring in the first phase of Abenomics helped to increase the size of the country’s workforce, tempting more of Japan’s women and older men to look for work. Indeed, last year Japan employed a higher proportion of its working-age women than did France, according to the OECD.
One implication is that if demand remains strong, Japan may discover it has more “growth potential” than it thought. Outright unemployment is admittedly low: just 3.6 percent of the workforce in the July to September period or 2.38 million, according to the Labor Force Survey. But the same survey reveals another 5 million people who do not officially count as unemployed (because they are not actively looking for jobs) but who nonetheless wish to work or are waiting to do so. In addition, millions of “non-regular” workers, many of them part-timers, say they would like an additional job or change in job, if they had the chance.
If Abenomics succeeds, corporate surpluses will shrink, investment and hiring will expand, and some of Japan’s unemployed, underemployed, and discouraged workers will find more productive roles in the economy. As Japan’s growth lives up to its potential, its potential may also live up to its growth. But for that to happen, Abe must preserve his standing within his party and Kuroda must retain his influence within the Bank of Japan. Support for both men has wavered. But they know that Japan’s swing voters, in the electorate and the central bank, have nothing convincing to swing to.
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