Prime Minister Shinzo Abe can learn from Britain’s experience of economic reform in order to ensure Abenomics takes Japan on a course to long-term growth, four journalists from British media organizations said at a recent symposium in Tokyo.
They mainly agreed that Abenomics is heading in the right direction and growth strategy, the third of Abenomics’ so-called three arrows, is the most important one if sustainable growth is to be achieved. The first and second arrows are aggressive quantitative easing and proactive fiscal spending.
Meanwhile, they warned of the potential crash of Japanese government bonds on mushrooming debts exceeding ¥1 quadrillion. They also recommended Japan make more use of immigrants and women to boost the economy.
The four British journalists discussed various issues, ranging from an assessment of Abenomics, the role of central banks, Britain’s position in the European Union and world diplomatic tensions, including the Senkaku Islands dispute between Japan and China, during the symposium organized by the Keizai Koho Center on Oct. 11. The four stayed in Japan from Oct. 7 to 11, and interviewed politicians, business executives, journalists and leaders in other fields.
Kamal Ahmed, business editor of The Sunday Telegraph, expressed his optimism over the Japanese economy.
“My initial overall response (to the stay in Japan) is ‘join the club’ of monetary experimentation. Japan is going through one of those remarkable, defining moments that will indelibly mark your future,” Ahmed said.
Japan can learn from Margaret Thatcher, a former prime minister of his childhood, and Tony Blair, another former premier he came to Japan with in July 2003, he said.
“The first lesson from Margaret Thatcher is: Reform is tougher than you think,” he said. “The U.K. went through significant structural reforms to create a more flexible economy.”
Thatcher, who held Britain’s top office from 1979 to 1990, initiated a growth program, but real growth did not start until the 1990s. During Thatcher’s administration, Britain experienced a lot of strikes, social unrest and high unemployment.
The lesson here is: “There is a phrase we often use in Britain; ‘you cannot make an omelet without breaking eggs,’ ” he said.
During the 1970s, uncollected rubbish was piled up in the streets, hospital staff went on strike, there were power cuts and even the people who dug graves for burials were on strike, he said.
Another British phrase Japan can learn from is a “burning platform.” People will jump for something new only when they realize they are on a burning platform.
It took a decade of reform from 1979 and Thatcher was ultimately forced to resign over the issue of increasing taxes. Britain did not see a real upturn in the economy until the early 1990s, from when it enjoyed 15 years of growth, he said.
A lesson from Tony Blair’s experience is to use your political popularity wisely.
After his first election win, Blair’s approval ratings were in the stratosphere. Public approval touched more than 80 percent, Ahmed said.
However, he did not use that time to push through the necessary reforms, when he had the public on his side, Ahmed said. When he did try to push reform, his popularity was dropping. Blair said he then suffered “the scars on his back” for trying to move the country forward, Ahmed said.
With these lessons from two famous former British prime ministers, Ahmed’s recommendation to Abe is, “Go further than you think you have to: on encouraging more women into the workforce, on free-trade agreements, on labor reform and on regulatory reform,” he said.
He then added that the growth strategy of Abenomics surprisingly lacks the use of immigrants, which he admitted the U.K. had difficulty handling but believes is worthwhile amid Japan’s accelerated declining population.
He brought up an estimate of GDP and population for the U.K. and Germany in the near future, showing the U.K. will surpass Germany in GDP by 2025 because of the population increase in the U.K. on an increase in immigration.
Immigration will help with labor shortages such as construction workers, and bring in new thinking and challenges to the traditional way of doing things. Immigration has many positive sides, “if it’s done carefully,” he said.
Lastly, executives from Japanese companies, such as Hitachi Ltd., Nissan Motor Co. and Eisai Co., would prefer the U.K. to remain in the European Union, Ahmed said. British Prime Minister David Cameron has promised to hold a referendum on whether the U.K. should keep EU membership in 2017, if he is re-elected in 2015.
Ahmed showed a slide with a leopard looking down at a porcupine that has its spines extended to scare away the big cat. Ahmed compared the leopard to the EU and the porcupine to the U.K.
“The leopard thinks the porcupine is odd and doesn’t understand it,” he said.
Central banks’ behavior
The second speaker, Ralph Atkins, capital markets editor for the Financial Times, discussed the role of central banks in stabilizing economies.
“What’s happening in monetary policy in Japan is fascinating,” Atkins said, referring to Abenomics’ first arrow, drastic quantitative easing, which Haruhiko Kuroda, appointed Bank of Japan governor in March, began.
He discussed the activities of central banks in the world and how the BOJ is doing in comparison.
Overall, the world’s central banks took prompt action to avert a catastrophe after the collapse of Lehman Brothers in September 2008, he said.
And on subsequent sovereign crises in European countries, the ECB, or European Central Bank, prevented the breakup of the eurozone by providing financial support to Greece and other countries in trouble. The ECB has earned enormous credibility for that, he said.
It is unclear if the BOJ will do better. The problem Japan has may not be as grave as the problem the eurozone had, but Japan faces a “huge balancing act” as government debts are enormous, he said.
“The risk is that JGB (Japanese government bonds) may crash or the BOJ becomes unable to control the long-term interest rate,” he said.
Then Atkins tried to answer the question: How stable is the world?
He showed a graph of the FTSE All World stock index and global GDP growth, which indicates a mild positive correlation of the two. The graph shows the stock index had a sharp increase and GDP growth a modest increase in 2013, implying the real economy may have room to grow more.
One of the risks is that Democrats and Republicans in the U.S. may not be able to agree on budget and debt ceiling legislation in a timely manner, which may deal a blow to the U.S. and world economies, he said.
He concluded that the credibility of central banks has now been put at risk and while it is possible to have smooth adjustment in sustainable economic growth, he expects a few years of market volatility.
For investors, he offered a piece of advice: “Please keep your seatbelt fastened.”
Lesson from Abenomics
The third speaker, Andrew Clark, deputy business editor for The Times, said Europe can learn from Abenomics.
“Since Prime Minister Abe was elected in December 2012, the world has been watching with a mixture of anxiety, fear and admiration as a big, unprecedented, economic experiment has begun in this country,” Clark said.
He praised Abenomics for its boldness in increasing liquidity.
“The fascination, from the European point of view, is that you’re doing the opposite to us. While British Finance Minister George Osborne and German Chancellor Angela Merkel insist that you can’t borrow your way out of recession, Prime Minister Abe believes you can,” he said. “He is the antiausterity figure that many critics of European austerity are watching in admiration.”
French President Francois Hollande came to Tokyo in June and described Abenomics as “good news” for an austerity-weary Europe, Clark said, quoting the top French politician as saying, “If we have one lesson to learn (from Japan,) it is that we need to inject liquidity.”
However, Clark echoed Ahmed in that the third arrow of Abenomics, growth strategy, is the most important and difficult, and “is a work in progress.”
Referring to the fist two arrows, quantitative easing and fiscal spending, he said, “It would perhaps be fair to say Japan has so far done the easy bit.”
The effect of the first two arrows is clear. The stock market is up by 42 percent this year. GDP growth is running at the highest in the Group of Seven industrialized nations. The Tankan business sentiment index has risen and there are early signs that prices are rising, after 15 years of deflation, he said.
“But it’s the third arrow, growth strategy, or reforming and liberalizing the economy, that will be the most difficult. And if the third arrow misses its target, all the good news will disappear as soon as the BOJ stops pumping money into the economy,” he said.
Deregulation in employment is one of the key factors for a successful growth strategy. After interviewing Panasonic, Hitachi, Nissan, Hitachi, Eisai, ANA and other major Japanese companies, Clark realized that all those companies want flexible employment, but they said it is hard to achieve in Japan.
Abenomics’ growth strategy contains deregulation on firing restrictions. But the question is how far the proposal in the growth strategy goes. It is not news to say it is more difficult to cut employees in Japan than in America and Europe.
“It seems that much needs to be done: more temporary workers, more assessments of employees’ performance and perhaps more involvement from the government in training staff, so that they can find another job if they need to,” he said.
He also mentioned greater diversity in workplaces will help as well. Namely, more women and immigrants.
Increasing the number of women and immigrants in the workforce will solve the problem of the lack of a working-age population while he admitted immigration is “a sensitive issue.”
He praised Japan’s universities for making efforts to attract more foreign students.
The fourth speaker, Gideon Rachman, chief foreign affairs commentator of the Financial Times, discussed diplomatic tension facing Japan and the world.
He first stressed the importance of East Asia to the world as the region involves the U.S., China and Japan, the world’s top three economies.
“East Asia is what matters. The future of the whole world hangs on East Asia,” Rachman said.
“The dispute over the Senkaku Islands, (which China calls the Diaoyu Islands,) has existed for a long time, so why has it become an issue now? The big picture is the rise of China,” he said. China surpassed Japan as the world’s second-largest economy in 2011 and is estimated to be No. 1, surpassing the U.S., sometime between 2016 and 2020, he added.
Global powers are generally cautious of conflicts because the result of any military action could be catastrophic, but tension rises around China because the country is “not a status quo power, both in terms of border disputes and a sense of historic grievance, particularly toward Japan,” he said.
Thus, the security treaty with the U.S. is crucial to Japan. It is also in the best interests of the U.S. for Japan to be strong in the Asia-Pacific region, he said. “A strong Japan offsetting China sounds good to the U.S.,” he said.
Still, the U.S. has, basically, no position on the Senkaku dispute, although it has stated that the islands are part of the Japan-U.S. security treaty, he said.
Rachman said tension will not stop because “accidents will happen.”
“The overexcitement of one ship’s captain could be all it takes to start a conflict,” he said.
Rachman suggested it may be the correct move for Japan to increase its independence from the U.S. in national security matters because America has become tired of going to war after Afghanistan and Iraq.
One thing he is worried about, though, is that he never heard Japanese saying, “Maybe China has a point.”
“This is potentially a problem,” he said, adding that Japan and China should try to understand each other.
Syria, eurozone unification
After each presentation, Naoaki Okabe, a columnist for the Nihon Keizai Shimbun newspaper, moderated a Q&A session.
Okabe asked if the U.S. decision not to intervene militarily in Syria signifies the U.S. focus has shifted to Asia.
Rachman “agreed with some of that,” he said, adding U.S. President Barack Obama has pivoted the U.S. diplomatic focus to Asia.
Still, Rachman added, 80 percent of discussion on foreign policy in the U.S. is about the Middle East, he said, citing some U.S. politicians.
On the question if the eurozone is moving in the direction of larger-scale integration, Atkins said, “The short answer is yes, but I am not sure how much.”
At least, he believes the zone will survive because member countries are fully committed to its survival. He said he has talked to German politicians and they “have the firm conviction that Europe comes first,” he said.
Clark pointed out that the anti-EU movement inside the U.K. is evidence that Prime Minister Cameron has mishandled the issue and he is “a weak leader.”
Asked what is expected of Japan, Ahmed said he wants Japan to drive the world economy by succeeding in Abenomics.
He reiterated that the third arrow, growth strategy, is the most important economic measure.
“It will be painful for those who feel comfortable and do not want to change things. But by learning what we did wrong, you will do well,” he said.
Clark said he likes the idea that Abenomics is about spending and stimulating the economy, as opposed to the U.K.’s “cut, cut, cut” approach.
He also stressed that hosting the Olympics will provide a huge boost to the economy. There was lots of concern about London hosting the games in 2012, but they were a great success, he said.
“That will happen in Tokyo this time,” he said.
Rachman said Cool Japan is something Japan can play up because the country has a good reputation in design and product reliability.
“It’s not so hard to create a positive image of Japan,” he said.