‘Abenomics’ meets curse of the second 100 days — will the mirage last?

by William Pesek

Bloomberg

The accomplishments of the first 100 days in office are a favorite benchmark for democratic leaders. It’s thought to offer a preview of his or her worldview, ambition and political fortune.

So, viewed through this lens, just how is Prime Minister Shinzo Abe doing?

Abe’s 100-day mark came and went on April 4, the same day his new Bank of Japan governor shocked markets with one of the most aggressive monetary jolts in history. Suddenly, Japan was in the international news for the right reasons, not for natural disasters, radiation leaks or corporate scandals.

And in the month since, Abe has little to show for his promises of laying out a program to bring about radical structural reforms. If Japan is going to produce steady growth that raises incomes, it needs sweeping measures to deregulate the economy. Easy money can help “Abenomics” along, but it is even more important that Abe start making good on his rhetoric.

Fake arrows

For starters, the media should stop doing Abe’s work. His public-relations machine convinced the press that Abenomics consists of “three arrows,” when really it’s more like 1½.

The first so-called arrow is spending, but since Japan has been doling out corporate welfare to construction companies for decades, let’s dispense with the fiction that this matters.

The second arrow — monetary policy — is real. Tapping Haruhiko Kuroda to head the BOJ was a wise move, and he hasn’t disappointed. The central bank plans to double the monetary base, weaken the currency, end deflation and impose shock therapy on a fossilized financial system.

As for the third and most important arrow — cutting regulation to increase investment and hiring — it is nowhere in sight.

To understand the disconnect between perception and reality about Abenomics, look no further than Isao Iijima, a political operative sometimes referred to as Japan’s Karl Rove, the man often credited with turning George W. Bush into a two-term U.S. president.

Iijima was former Prime Minister Junichiro Koizumi’s chief secretary and the image-maker behind the myth of Koizumi as Japan’s answer to Margaret Thatcher or Ronald Reagan. When Koizumi stepped down in 2006, he erred in entrusting his reform agenda to Abe, who instead focused on stoking nationalism when he wasn’t committing amateurish blunders.

The main reason Abe’s second turn as prime minister looks more impressive than the first is that Iijima has kept him disciplined and on-message. This is being buttressed by splashy policy pronouncements, public appearances, a flurry of overseas trips and copious musings on Twitter and Facebook. The payoff is an approval rating of more than 70 percent.

Things haven’t always gone smoothly. Recent visits to a Yasukuni Shrine by Deputy Prime Minister Taro Aso and 168 lawmakers enraged China and South Korea, who view it as a symbol of the Shinto-driven atrocities committed during Japan’s conquest of East Asia. It raised the question: What good is a weaker yen if two of your main customers boycott your goods?

With the first 100 days come and gone, it’s time to wonder what really lies beneath the Abenomics marketing blitz. International Monetary Fund Managing Director Christine Lagarde is among those anxious to find out.

“In Japan, the recently announced framework of ambitious monetary easing is a positive step,” Lagarde said in Washington on April 18. “But Japan needs more ambitious plans to bring down debt, plus structural reforms to shift the economy into higher gear.”

Abe now needs to display less Rovian spin and offer more details on plans to make Japan more productive, innovative and competitive. News releases and vague pronouncements about opening markets, empowering women, importing foreign talent and encouraging small businesses won’t do. If the hype over Abenomics is to meet expectations, he must present clear strategies with specific timetables and goals.

Crushing debt

Japan’s crushing debt explains why Abe has so far relied on the central bank. It’s bad enough to develop the world’s biggest public-debt load, but it’s also a rapidly aging society. People 65 or older account for about 22 percent of the population, the highest ratio in the world.

Many economists say demographics have more to do with Japan’s deflation and economic inertia than a lack of central bank liquidity. So does scant income growth for workers at the younger end of the age spectrum. Suppose the BOJ succeeds in generating a 2 percent inflation rate in two years. Without income growth in excess of that goal, stagflation will replace deflation.

McDonald’s Corp. shows how. Its Japan operation is raising some prices by as much as 25 percent, the restaurant chain’s first increase on burgers in the country since 2008. Missing, so far, is a parallel wage increase for Japanese workers churning out Big Macs and fries.

Let’s hope it won’t take Abe the next 100 days to figure out that inflation and stalled incomes are no better than deflation. Good luck spinning that.

William Pesek is a Bloomberg View columnist. The opinions expressed are his own.

  • chomskyite

    “As for the third and most important arrow — cutting regulation to increase investment and hiring — it is nowhere in sight.”

    Would like to hear more on what regulations but that is another matter.

    As for “nowhere in sight” I believe huge tax increases are on the horizon, are you ready readers?

  • Ray

    Mr.William Pesek: thank you for your mind opening analysis.