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Rejuvenating Japan’s Economy and Industries: Abenomics in the Long Run

Overview

Leader Professor. Takashi Hikino
Researcher Dr. Glen Fukushima, Professor Yoshinori Hara, Professor. Junichi Mori
Term Oct 2015 – March 2016
Research Outline

It is not an easy task to overcome the deflationary mentality deeply rooted in the Japanese economy, which was fermented during “the lost two decades”. The Abe Cabinet, which started in December 2012, came up with the new Abenomics policy. Abenomics consists of monetary policy, fiscal policy, and economic growth strategies to encourage private investment. For the First Arrow BOJ promoted to generate a 2 percent target inflation rate through “monetary easing of a different dimension”. The Second Arrow was stimulus fiscal policy. The ultimate outcome of Abenomics critically depends on the Third Arrow or the microeconomic and structure reforms through which corporations conduct their businesses in the more effective manner. In the latter half of 2015, many people have started doubt on the success of Abenomics while the global economy seems to be affected very much by slowing China’s growth and the rapid fall of oil prices.
This research team seeks for evaluating the accomplishment of Abenomics and its long term prospect. Glen.Fukushima will discuss about the political and economic impact on US-Japan relationship. Junichi Mori reviews Abenomics from the macro-economic perspective, including the monetary policy and its long term perspective. Yoshinori Hara discusses Abenomics from micro-economic perspective with reference to technology and service. Takashi Hikino summarizes the result of these researches.

Report

Leader Professor. Takashi Hikino
Researcher Dr. Glen Fukushima, Professor Yoshinori Hara, Professor. Junichi Mori
Term Oct 2015 – March 2016
Achievements Outline

The purpose of this research project was to evaluate the current results of the “Abenomics” economic policies, which were announced and initiated by the Abe Cabinet in 2012, and to consider the long-term prospects of these policies and their potential impact on US-Japan relations. Takashi Hikino, as the project leader, established the questions that we sought to answer. Junichi Mori reported on the macroeconomic aspects of Abenomics, with a particular focus on the evaluation and future prospects of non-traditional easing of the BOJ monetary policy, as promoted by Governor Haruhiko Kuroda. Yoshinori Hara reported on the future prospects of Abenomics from a microeconomic perspective, with particular reference to technology and service industries. Glen Fukushima commented, from an American viewpoint, on the research findings of two Japanese economists, and also discussed the political implications for Japan’s future.

Mori pointed out the importance of understanding Abenomics and the BOJ’s monetary policy not as isolated phenomena, but in terms of the policies’ international context. Many developed countries are suffering from decreasing real interest rates, and the central banks are struggling with monetary policies in an environment of “near zero interest rates.” He then provided a positive evaluation of Abenomics and discussed the necessity of the Japanese government’s reform efforts to improve the salary level of workers and deal with the aging society.

Hara evaluated the policies of Abenomics from the three different perspectives: 1) the promotion of export through devaluation of the yen; 2) the increase of inbound foreign tourists; and 3) the increase of domestic consumption. Other than with regards to the second point, Hara provided a negative evaluation of the results of Abenomics, and he proposed long-term policies in five major areas: 1) increase supply-side innovations; 2) invest in industries that make good use of Japan’s strengths through effectively accessing real data about manufacturing industries to meet the needs of the coming 4th industrial revolution; 3) invest in service industries; 4) invest in the media and contents industries, where Japan has strength; 5) invest in the tourism industry.
Fukushima analyzed the reasons for the prevailing skepticism regarding Abenomics. The first reason is that the definition of Abenomics is very vague; the second is that the target of two percent inflation has not been achieved and the new target of 600 trillion yen GDP seems to be difficult to attain; and the third is that the stock market value is no longer rising and the negative impacts of that are now being recognized. He pointed out that the implementation of Abenomics is just one of the four major focal areas of the Abe cabinet. The cabinet’s four areas of focus are: economic policies; defense strategies; diplomacy with countries such as China, Korea, Russia, and India; and domestic politics such as the amendment of the Constitution. All four of these areas must be considered when seeking to evaluate the achievements of the Abe cabinet. Fukushima also mentioned Japan’s labor market tradition of long working hours, which discourages the participation of women in the economy. He also suggested that topics requiring further discussion are the difficulties caused by Japan’s aging society, its immigration policies, and the far lower level of inward direct investment in Japan as compared to foreign direct investment.

During the workshop, the participating researchers and audience members raised many questions about the evaluation of Abenomics’ results over the past three years and its future prospects. The workshop included discussions on 1) immigration policy; 2) the “Cool Japan” concept; 3) the cultural barriers that hinder incoming FDI to Japan; 4) Japanese labor market customs, particularly the discrepancies between regular employees and contract employees; and 5) the huge government deficit which has accumulated. This workshop provided a valuable opportunity to consider the future of the Japanese economy and politics.

Activity Contents

In September 2015, during a visit to Japan by Mr. Glen Fukushima, he and Prof. Takashi Hikino discussed the basic concept for this USJI workshop. Prof. Yoshinori Hara and Prof. Junichi Mori also participated in the project as collaborating researchers. On February 25, 2016, the workshop, organized by the USJI, was held at the Washington Office of the Japan Society for the Promotion of Science (JSPS). A policy paper based on the research results is currently being drafted.

Relative URL(s)

http://www.us-jpri.org/en/week/feb2016#event6

Policy Paper

Leader Professor. Takashi Hikino
Researcher Dr. Glen Fukushima, Professor Yoshinori Hara, Professor. Junichi Mori
Term Oct 2015 – March 2016
Title Rejuvenating Japan’s Economy and Industries—Abenomics in the Long Run

It is not an easy task to overcome the deflationary mentality deeply rooted in the Japanese economy, which was fermented during “the lost two decades.” The Abe cabinet, which was formed in December 2012, formulated the innovative “Abenomics” policy. Abenomics consists of a monetary policy, fiscal policy, and economic growth strategies to encourage private investment. These three components are referred to as the policy’s “three arrows.” For the first arrow, the Bank of Japan promoted the generation of a two percent target inflation rate through “monetary easing of a different dimension.” The second arrow is a stimulation-oriented fiscal policy. However, the ultimate outcome of Abenomics critically depends on the third arrow—microeconomic and structural reforms through which corporations can conduct their business in a more effective manner. Since March 2013, the Bank of Japan has strengthened a non-traditional easing of its monetary policy, as promoted by its newly appointed governor, Haruhiko Kuroda. The Abe cabinet continued its stimulation-oriented fiscal policy and postponed the increase of consumption tax for one year until April 2014. The increase of the consumption tax in April 2014, however, is having prolonged negative impacts on the economy. In the latter half of 2015, many people began to doubt the success of Abenomics, while the global economy seemed to be greatly affected by China’s slowing growth and the rapid fall of oil prices.

In 2015 the Abe cabinet issued “The New Three Arrows Policy.” The three new arrows are: 1) The promotion of economic growth, 2) Child-rearing assistance to bring up the low birth rate and 3) Social security measures to increase the availability of nursing facilities for the elderly. There is, however, considerable skepticism about the feasibility of the three new arrows.

In this paper we will consider the ways in which Abenomics has been evaluated to date and also its future perspectives. We will discuss the macro-economic aspect, focusing on its monetary policy, the micro-economic aspect, focusing on Japan’s investment in the future, and the political aspect in combination with Japan’s future outlook.

 

  1. Abenomics and Macro-Economic Evaluation

The target of Abenomics is to pull Japan out of deflation and to strengthen its power for economic growth. By weakening the yen, Abenomics enabled Japanese companies to recover their ability to be competitive and improved the profitability of Japanese corporations. With regards to the policy’s effectiveness for overcoming deflation, Japan’s Consumer Price Index (CPI) rose by 3.1% p.a. in August 2014. This represents a 1.1% rise after adjusting for the consumption tax hike. However, due to the rapid decline of energy prices around the world and stagnant domestic consumption, the CPI increase rate fell to 0% in February 2015, which is very low in comparison with the Bank of Japan’s target of 2%. Unfortunately, the GDP growth rate fell to a minus growth figure in five of the twelve quarter periods from the beginning of 2013 until the end of 2015.

There are many criticisms of Abenomics. Especially of the BOJ’s non-traditional relaxed monetary policy and the negative interest rate policy. But it is important to understand that the negative interest rate policy is not unique to Japan—it is a common approach shared by several developed countries. Many developed countries are experiencing declining real interest rates, and their central banks are now struggling with monetary policies that set interests rates close to zero. The developed countries in the world are suffering from “secular stagnation.” The declining real interest rates in the secular stagnation environment can be explained by many factors, such as stagnating technological development, changing demographic situations, and increasing inequality of income. The central banks are now trying to find ways to manage monetary policies with near zero interest rates. The European Central Bank and the central banks of Sweden and Switzerland are now adopting negative interest rate policies.

Given that negative interest rate policies are now being applied in many developed countries and that this is due to secular stagnation, which is common in developed countries, we can conclude that it would also be impossible for Japan to adopt any policy other than a negative interest rate policy. If the Bank of Japan does not apply aggressive monetary easing or a negative interest rate policy, we may see a sudden appreciation of the Japanese yen and a heavy fall in stock prices.

From a macro-economic viewpoint, the major problem that Abenomics must tackle is to implement the structural reforms needed to cope with Japan’s rapidly aging society. There are two areas in which problems must be solved. The first is the area of pension and social security reforms. The largest item in Japan’s fiscal expenditure is its pension and social expenditure, and reforms to lessen the burden on the young generation are essential. The other area is the participation of women in the economy. The Abe cabinet proposed a policy to facilitate women playing more active roles in society, and set an objective to reduce the number of children on nursery school waiting lists to zero by the year 2017. However, these problems have proven to be far more serious than previously thought, and they are becoming major issues in the coming upper house election.

 

  1. Abenomics from the Micro-Economic Viewpoint

The policies of Abenomics consist of : 1) The promotion of exports through devaluation of the yen, 2) The increase of inbound tourists, and 3) The increase of domestic consumption. Unlike the second policy, to increase of the number of inbound tourists, the first and third policies have produced no clear results. The first policy, to promote exports, has not been effective because many corporations have manufacturing facilities outside of Japan, and therefore the cheap yen does not accelerate exports. The third policy, to increase domestic consumption, has not produced results because Abenomics does not lead to an increase of workers’ salaries, but actually causes a decrease of their real wage, resulting in consumers taking a very conservative attitude towards spending.

In 2015, Prime Minister Abe set the goal of strengthening Japan’s economy by adopting the “Three New Arrows” policies and aiming to increase the national GDP to 600 trillion yen. This would mean a GDP increase of 20%. He has not, however, specified a target year for this goal. In order to realize this goal, Japan needs investment in new industries. The long term policy could involve investment in such industries as: 1) Industries in which Japan’s strong ability to grasp real data can be effectively utilized, 2) Innovative service industries, such as media or contents industries, 3) The tourism industry.

We are currently experiencing a fourth industrial revolution, and Japan should make the most of its strength in manufacturing. For example, gathering real time data at the site of manufacturing by applying IoT (Internet of Things) or big data is one area in which Japan can utilize its comparative advantage.

It is also important to invest in the service industry, which occupies the largest portion of the Japanese economy, and it is necessary to introduce Japanese traditions internationally via the media and contents industries. Many Japanese corporations place an extremely high degree of importance on their relationships with clients, and some such companies can operate for several hundred years. The Japanese government has established the Nihon Service Award to honor corporations which offer excellent services. In addition, the Cool Japan initiative aims to create more overseas business opportunities for Japanese corporations and increase the number of inbound tourists.

The number of inbound tourists visiting Japan has recently increased remarkably. In 2015, the number of foreign tourists in Japan reached 19,730 thousand, and it is eventually expected to exceed 20,000 thousand. Last March, the Abe cabinet established a new goal of having 40 million tourists visit Japan in 2020, when the Tokyo Olympic Games will be held. However, there is currently not sufficient hotel accommodation for such a large number of tourists. It is necessary to improve the tourism environment for foreign visitors, including loosening the conditions for tourist visas. It is also important to deregulate homestay regulations.

Such efforts to fully utilize Japan’s traditions in the fields of manufacturing and service will contribute to revitalizing the nation’s economy.

 

  1. Abenomics and Political Hurdles

One rather cynical view of Abenomics maintains that the most important benefit of the policy is that Japan finally got a stable administration. It is certainly true that Japan had several prime ministers in rapid succession before the Abe cabinet, to the extent that many would find it difficult list off their names. The Abe cabinet has held on to power for four years, and it will continue until 2018, when Prime Minister Abe’s term as leader of the LDP will end. The success of Abenomics during this term is of great importance for the future of Japan and it could be the nation’s last chance for a thriving economy.

Prime Minister Abe has strong ambitions in government management, and to fulfill those ambitions he must allocate more of his political resources to economic policies. The Abe cabinet has divided their political targets into four areas: 1) Economic policies, 2) Defense, 3) Diplomacy with East Asia and Russia, and 4) Revision of the Constitution. The problem is that the economic policy is just one of four areas, and the political resources of the Abe cabinet are being also being spent in the other areas. The economic reforms require tremendous effort and the cabinet needs to strongly focus its energies to realize them.

Japan’s aging society problem requires more effort than in it did the past. Japan’s long-standing tradition of long working hours, which hinders the active participation of women in the workforce, is just one example of an area which needs to be changed. Japan also needs a revision of its immigration policy—a measure which has been regarded as taboo, and we need a clear policy to increase the number of immigrants.

The reforms must not be mere “cheap tricks.” Japan needs a profound reform of its business culture. Foreign direct investment to Japan is still very limited. The business culture is still insular, and this causes Japan to lose opportunities for more investment.

Finally Japan needs to consider its huge budget deficit very seriously. Of course, a reckless increase of consumption tax could jeopardize the economy and careful judgment is required. We must bear in mind, however, that these reforms will be of great importance for Japan’s future.

 

  1. Conclusions

The Abe cabinet has successfully won the bid to host the Olympic Games in Tokyo in 2020, which could be the cabinet’s final year. After the Olympics, the aging society in Japan will rapidly worsen, causing the nation serious difficulties. How the international environment surrounding Japan will change is difficult to predict. How long can the US lead the global economy? Can China sustain its 6% growth rate? There are many global uncertainties. Abenomics and the stable government of Prime Minister Abe have given hope to Japanese society. The high approval rating since the formation of the cabinet reflects this fact. For Japan to prosper in the long term, it is vital that the policies described in this paper are implemented. The nation also needs to build a wide consensus of political determination among its citizens in order to rise to the challenges it will face.

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