While critics of “Abenomics” begrudgingly agree Prime Minister Shinzo Abe’s policy package has been a success so far, they are equally quick to highlight its looming headwinds.
They concede that the first two “arrows” of Abe’s economic program, monetary easing and fiscal stimulus, have achieved their goals, but argue that the third arrow, structural reform, will never materialize. The more pessimistic economic commentators even expect the upcoming consumption tax hike to mark the beginning of the end of the Abenomics success story.
But like so often in politics and economics, the reality is a bit more complicated than that. Most people realize that the future of Japan’s economy rests on the implementation of structural reform. This in itself is a fact. However, the economy’s future does not depend exclusively on structural reform. Why is this?
Both the economy and domestic companies are benefitting from four fundamental, long-term economic trends. All of these trends started in the late ’80s and recently reached a level that is providing substantial tailwind for both the economy and for companies. Let’s deal with these in turn:
The exchange rate: For 30 years Japanese exporters were repeatedly hurt by a strengthening yen. Starting from ¥250 to the U.S. dollar in 1985, the value of the yen regularly increased to less than ¥80 in late 2011. Since then, the yen has found a plateau, even weakened again. And most observers agree that the yen is unlikely to strengthen again beyond the ¥80 line.
Labor costs: If 1991 employment costs are used to form a baseline of 100, Japan is the only industrial country with unit labor costs clearly below 100 since 2001. In 2013, Germany stood at 120 and the United States at 150, while Japan only equated 82. These first two economic trends (exchange rate, labor costs) will not go away overnight. Instead, they should boost domestic manufacturers’ global competitiveness in general and increase their exports in particular.
Asia: Japan has been benefitting from Asia’s growth and will continue to do so. Back in 1985, Asia only accounted for 33 percent of total Japanese exports. In 2012, Asia’s share had increased to 55 percent out of a total value of $800 billion. Regardless of tensions with China, we can expect this to grow further, especially with the center of economic gravity shifting toward Southeast Asia, a traditional stronghold of Japanese firms.
Capital investment: Since the bubble economy burst in 1991, most Japanese investment went into restructuring and replacement investments. After 20 years, the industrial base of the economy is now tailor-made for demand in Japan and — as pointed out by Martin Schulz of the Fujitsu Research Institute — more and more new investments are being channeled into new sectors and technologies. What’s more, there is a huge wave to come. Consider that Japanese nonfinancial firms held $2.3 trillion in cash and liquid assets at the end of 2012, 25 percent more than their peers from the much larger United States.
Put these four trends together and there is sufficient reason to expect a strong showing of the Japanese economy and its firms over the next five to 10 years.
Of course, structural reform is essential if Abe hopes to channel this perfect position into an effective outcome. This is especially true as other countries will not rest on their laurels, but instead continue to improve their global competitiveness.
It is also clear, however, that Abe’s timing is fortunate. If he does not fail over foreign policy or other noneconomic matters, he will likely reap strong economic results to come. Add possible — although unlikely — fundamental structural reform into the mix and Japan could even become a top performer among industrialized countries in the next few years.
In other words: Japan can “do” without structural reform, but it is still advised to implement it.
Dr. Jochen Legewie is managing director of German communications consultancy CNC Japan. Follow his blog at www.cncblogs.jp.