Australia & Japan in the Region
Volume 5, No 9, September 2017
It looks as if Prime Minister Shinzo Abe is fighting for his political endgame, but his pet policy Abenomics is coming under increasing pressure on a number of fronts.
First, history is against Abe. Japan’s current business cycle began in November 2012, coinciding with Abe’s appointment as prime minister on 26 December that year. But although the economy is reasonably robust for now, after 45 months, the current cycle could end at any time (Japanese business cycles since World War II have typically lasted between 40 and 60 months). This is bad news for Abe because no prime ministers except Shigeru Yoshida and Eisaku Sato survived in office for more than one business cycle.
According to the Bank of Japan’s Outlook for Economic Activity and Prices in July 2017, the Japanese economy will continue growing in 2017–18. After this, growth is expected to drop in 2019 due to anticipated decline in infrastructure investment for the 2020 Tokyo Olympics. History shows that the pattern of business cycles continues regardless of government attempts to smooth out fluctuations through a mix of monetary and fiscal policy.
History shows that the pattern of business cycles continues regardless of government attempts to smooth out fluctuations.
Second, Japan is facing pressure to drop its monetary easing policies. The monetary policy stances of the US Federal Reserve, the Bank of England, and the European Central Bank indicate a move away from excessive monetary easing, but under the leadership of Governor Haruhiko Kuroda, it seems likely that the Bank of Japan will continue to implement quantitative and qualitative monetary easing (QQE) until the 2 per cent inflation target is achieved.
The first of Abenomics’ ‘three arrows’, QQE is the only unique economic policy—the other two arrows, fiscal policy and growth strategy, are fairly orthodox. If the other major economies start implementing normal monetary policies, it will be difficult for the Bank of Japan to maintain its QQE policy. Financial institutions and other investors will inevitably shift their portfolios towards foreign assets with higher interest rates. The Ministry of Finance will face increased demand from domestic and international investors for an interest rate hike for Japanese government bonds. Sooner or later, the time for cheap finance for government expenditure will be over. That will mean the end of Abenomics.
Third, except for the reaction of financial and currency markets, immediately before and after Abe took office, economic indicators have been weak under his administration. Abe often cites the steady rise in the job openings-to-applicants ratio from 0.4 in 2009 to above 1.49 in May 2017, pointing out that this is the highest point reached after the historical record of 1.53 in February 1974, above the peak figure of the bubble period of 1.46 in July 1990.
Sooner or later, the time for cheap finance for government expenditure will be over.
But this ignores the very different labour market conditions Japan faces in 2017 compared with 1974 and the bubble period of the late 1980s. Current job openings are mostly for part-time workers or non-permanent workers, whereas job openings in the 1970s and 1980s were for full-time work for new job market entrants.
Another puzzling statement from the Prime Minister was that weak consumption demand was due to the 3 per cent consumption tax hike in April 2014, the first stage of a two-stage increase in the tax rate from 5 per cent to 10 per cent. In response, Abe postponed until October 2019 the second stage of the consumption tax hike (from 8 per cent to 10 per cent) that was initially scheduled for October 2015.
But his interpretation of weak consumption demand was wrong. The consumption slump was a result of ‘rush’ shopping for durables such as cars, housing and expensive electronic goods before the scheduled tax hike. In contrast, normal nondurable consumption has remained more or less constant over time, despite the April 2014 tax hike.
Increased consumption tax revenue was designed to finance expanding social security expenditure, including pensions, medical care, and old age nursing care. Abe did not explain how he would manage the social security program without additional revenue from the consumption tax rise. This ambiguity about financing the social security program created uncertainty over the future course of pension benefits. This is the main reason for sluggish consumption among the elderly.
Lastly, Abe has lost significant popular support. Since last year, the Japanese media has reported on a series of scandals involving Abe and his wife’s favours for friends and political supporters. The response of Abe and his aides to these controversies in Diet sessions has left voters unimpressed with the administration’s apparent arrogance and insincerity. The fall in his public support below 30 per cent prompted the prime minister to reshuffle his cabinet to prevent a further slide opinion polls. But the reshuffle may not prove effective this time since the drop is not a reaction to the mismanagement of any specific policy, but a response to Abe’s personal attitudes.
Abe has also taken actions that have gone against the weight of Japanese popular opinion.
Abe has also taken actions that have gone against the weight of Japanese popular opinion. For example, at a time when Western countries were imposing international sanctions against Russia over Moscow’s military intervention in Ukraine, Abe approached Russian President Vladimir Putin to discuss the resolution of the Northern Territories issue. Likewise, on 3 May 2017 Abe again courted controversy and raised the spectre of a possible violation of the constitutional amendment process by abruptly announcing his plans to revise the constitution without consent of members of his ruling Liberal Democratic Party and its coalition partner, Komeito.
In a similar vein, despite 122 countries voting in favour of the Treaty on the Prohibition of Nuclear Weapons on 7 July 2017, and despite being the only nation to have suffered atomic bombing, Japan was one of 69 countries that did not vote to pass the accord. Most Japanese had hoped Japan would take the leading role in supporting the treaty. Prime Minister Abe did not agree.
With tenuous popularity and the sluggish economic recovery, Prime Minister Abe will have a hard time prevailing in the endgame.
About the author
Yukinobu Kitamura is Professor of Economics at the Institute of Economic Research, Hitotsubashi University, Tokyo.