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USJI Voice Vol.9

The Third Arrow of Abenomics
―Sustainable growth or retreat to the past―

July 15,2015
Ritsumeikan University

Targets of Abenomics and sustainability of growth

Since its start in December 2012, Prime Minster Shinzo Abe has advocated Abenomics, the combined economic strategy of expansive monetary and fiscal policy and structural reform called the growth strategy.

The short-run strategies of the “quantitative and qualitative monetary expansion” and fiscal stimulus have so far succeeded. In particular, even before the start of the Abe Cabinet, change in market expectation led to the “correction” of “historical high” yen exchange rate. The yen depreciation caused the expansion of profitability among export companies, pushed up Nikkei average share price, and raised the economic activity. However, people are not yet confident in the sustainability of the economic recovery.

Even during the slow growth of the recent quarter century, the Japanese economy experienced several phases of economic expansion, but due to lack of sustainable basis for growth, the recovery was easily reversed by external shocks. In this process people have lost confidence in the future course and the effect of economic policy. Any economic recovery would be trivial without sustainability.

Businesses seem to be skeptical of the maintenence of the low yen rate. Though yen rate has declined by one-third, export industries are reluctant to try to increase the export volume. They just raise yen-denominated export price, thus not to lower price in the exported markets. Therefore export volume has not increased. My view is that export industries do not anticipate the continuation of the low yen rate, so that, instead of trying to increasing export volume and adding fixed investment and employing additional regular workers, they try to accumulate internal reserves to prepare the “winter time” of yen rate surge. The real effective exchange rate of yen, announced by the Bank of Japan, is now far lower than the low yen time before the Plaza Accord. That is, current yen is “historical low,” which is not sustainable.

The other side of the coin is that yen depreciation pushes up import price and lowers consumers’ purchasing power. Domestic oriented industries suffer loss of demand. To offset the negative effect, export industries enjoying high profit ought to raise the wage base (across-the-board wage hike) of regular employees, but as far as companies think the low yen would not sustain, they would avoid it as it would persistently raise the wage cost. So the Abe Cabinet is trying hard to campaign the raise in wage base.

As far as the current economic recovery is of a temporary nature, the economic policy must aim at raising potential growth in a long run. The growth strategy in the Abenomics is thus a race against time.

The potential growth rate of Japan has gradually lowered in the recent decades, and now it is around a half percent. To raise the trend growth, the growth strategy is highly hoped for. But it is impossible here to examine the feasibility and effectiveness of hundreds of items included in the proposed strategy.

Evaluation criteria of the growth strategy

Therefore, I would assess the strategy along the following three criteria, related each other, whether the strategy is likely to attain necessary structural change.
・The transformation from a “catch-up” type growth regime;
・The change from an overpopulation paradigm to a depopulation one; and
・The change from a single country model to a model as a member of the global society

(1) Transformation from a “catch-up” type growth regime

The post-World War II Japanese economic development of catching up to industrialized economies was characterized by leadership of the government. Prof. Yukio Noguchi named the system “the 1940 regime” because it utilized various schemes originally formed just before WWII as a national mobilization policy to prepare for the all-out war. As the model of North America and West Europe existed as a goal, the question was how to effectively achieve the goal. Clever bureaucrats planned the strategy, sought cooperative behavior of business, labor and consumers to attain the common goal. Economic and financial regulation, traditional business and labor market practices, and consensus formation processes fully worked for the purpose. In the late 1960s the catch-up process finished and Japan joined the top group. There was no more common goal. A new era came, in which businesses and individuals have to settle their own goals, attain development with their own strategy and risk-take, competing each other. Then there occurred the first oil crisis, and Japan returned to a collective, government led actions to overcome inflation and energy shortage, as Prof. Masahiro Okuno called “the 1975 regime.” This collectivism in cooperation with the government eventually led to the bubble economy of the late 1980s and its collapse. The post-bubble economic stagnation has been called “the lost decade(s)” but if so, the bubble period would have been a normal one. A correct name should be “the lost at least four decades.”

From this viewpoint, PM Abe’s outright pressure on big businesses to raise the wage base for regular employees in 2014 and 2015 spring wage rounds can be seen as a return to a government-led collectivism. Japanese white-collar workers are notoriously unproductive and inefficient. To raise their labor productivity, their wage level should be determined more individually reflecting their respective productivity. Imposing the across-the-board wage rise is to go against this reform trend.

In addition to labor market, the growth strategy contains some interventionist policies on respective industries such as doubling of agricultural export, and promotion of tourist industries, as déjà vu of the post-WWII “industrial policy,”

In the future, these may be called “the 2015 regime.”

(2) Paradigm change from over-population to scarce population

In the early 2000s some critics (Yutaka Harada, Takahiko Furuta, etc.) tried to interpret the depopulation positively. They argued that in most part of the world including Japan, the humankind had always faced over-population, and for the society to prevent struggles, it was essential to form a scheme to share scarce resources and job opportunity in a peaceful and orderly manner. To do so, societies established social norms and regulatory mechanisms strictly, to give priority to the interest of community rather than that of individuals, and forced those rules to the members. Productivity was often sacrificed. Japan’s traditional public regulation and the life-term employment practice can be interpreted from these viewpoints. Now the Japanese society among others is experiencing depopulation. In a society of scarce population, the constraint in the overpopulated society no more exists. Individuals are respected as individuals, and the society would develop driven by their personality, ability, ideas, risk take and free competition. However, regulations and business practices formed in the overpopulation paradigm persist, protecting vested interest and preventing new entry of individuals and businesses with new ideas.

Labor market regulations are formed to protect workers from exploitation by employers taking advantage of labor supply pressure. Therefore, in Japan, at least in practice it is difficult to dismiss regular employees. The Abe Cabinet once advocated a mechanism of pecuniary settlement of dismissal-related labor disputes, but the decision was postponed facing strong resistance by the labor union. Participation of women in labor force is much cited by PM Abe but labor market practices to have limited it to prevent excessive competition among workers is still persistent. Relaxation of labor hour regulation called the white-collar exemption is also one of the flagship policies in the growth strategy, but it has faced strong resistance by the labor union who concerned deterioration of working conditions of disadvantaged workers, and as a result, it was limited to very special skilled workers. Regulatory reform initiatives on dispatched workers can be appreciated, but this initiative is also facing opposition despite diversification of the form of work.

In other areas of the so-called “bedrock regulation” such as in agriculture, health care and pharmaceutical, education and other public service sectors, vested interest has prevented the reform. In agriculture, the Agricultural Coop has blocked agri-business development conducted by large-size farmers by the name of protection of small size part-time ones. The Abe Cabinet is focusing on weakening of the power of JA-Zenchu, the nationwide organization of agricultural coops, which is worth appreciation, but strong market power of regional coops in distribution of farm products, materials and tools, and finance is left untouched.

To “drill the bedrock regulations,” one tool is the determination of special zones named National Strategic Economic Zones, inside which regulatory reform and promotion of new industries are conducted as a trial attempt. It is potentially a good idea but a similar initiative has been conducted as structural reform zones in 2002 under the Koizumi Cabinet, which has been far from successful with rather trivial regulatory reforms as a result of resistance by government organizations. The Abe Cabinet does not seem to learn from the failure.

(3) Change into more participation in the global economy and society

For Japan where depopulation will go on, globalization should be a rescue boat. Japan can be a member of the world where population and the economy continue to grow. However, Japan has not got rid of the success story of attaining the catch-up without financial and human power help from abroad, and the conventional wisdom that scarce job opportunity must be shared only by Japanese, and has failed to take advantage of the globalization.

Regarding acceptance of foreign work force, the growth strategy advocates participation of foreigners, but a major focus is highly educated, high skill human power. As for semi-skilled workers, expansion is limited to skill training programs, a rather short-run invitation program by the name of training but often used as supply of cheap labor. However, in reality industrial and emerging countries are competing to attract the high skilled labor and Japan has already been laps behind in the race. Even in unskilled labor, Japan is not seen attractive to them. The only way Japan can introduce foreign labor force would be to offer lifetime visas to unskilled workers and their family. Even if their net contribution to economic development is limited, as far as the country can provide education to their children, the next generation would more fully participate in the economy. Unfortunately, so far no such political momentum exists.

Japan is also characterized of very low presence of foreign firms. To attract foreign direct investment in Japan is emphasized in the growth strategy. However, the government has long tried to promote internal FDI. A government committee headed by the prime minister has continued for 20 years, without significant outcome. This time, one difference is the reduction of corporate income tax rate, but again this is a delayed response to tax competition of the world. The government correctly pointed to labor market rigidity as a barrier to FDI, but as mentioned above it is unlikely to be much corrected. Thorough systemic change into an open economy is necessary.

Arguably the most significant initiative regarding globalization would be the participation in the negotiation on the Trans-Pacific Partnership Agreement. TPP will be a crucial platform for the development of the global supply chain, as the agreement in principle tries to remove all the trade barriers so that global movement of goods, services, money and human being would ultimately be facilitated just like inside one country. It will be a prototype of the future system of WTO. It is appreciable that the Abe Cabinet is tackling the negotiation vigorously, though the participation was originally decided by the former Democratic Party Cabinets.


The above criteria for the growth strategy are partial but it provides a viewpoint to examine feasibility and effectiveness of policy measures to overcome chronic slow growth by raising potential growth rate. Unfortunately, in any criterion, the proposed strategy items seem to be still insufficient or are facing deep-rooted resistance. Nevertheless, during the recent quarter of the century, now is a precious time with high expectation among people and businesses for the future and high political momentum for reform, arguably following the Hashimoto reform and Koizumi reform. This uplift can be used to the long-run reform. Conversely, if Japan should lose this opportunity, people’s expectation would turn to disappointment, and the economy would continue to stagnate, together with depopulation and ageing. To impose tough political choice to PM Abe, as has long been an effective measure to move forward the Japanese policy, gaiatsu, foreign pressure, may be necessary.


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