‘Abenomics’ missing the mark

by Hugh Cortazzi

The Liberal Democratic Party’s promise of new economic policies to revive the Japanese economy was a major factor in the party’s success in the December elections in Japan. Will they succeed?

As seen from abroad, what has been termed “Abenomics” is a version of the policies advocated by economist Maynard Keynes in different circumstances. It appears to have three main elements.

The first is to force the Bank of Japan to aim for 2 percent inflation and expand “quantitative easing,” which is another way of saying create more liquidity or print more money. The second is to attempt to reflate the economy by a renewed program of public spending. The third is a vague promise of structural reform.

Prime Minister Shinzo Abe and Finance Minister Taro Aso have been highly critical of the policies pursued by Masaaki Shirakawa, the governor of the BOJ, who has been accused of pusillanimity in face of Japan’s economic woes. Threats have been made that the government are prepared to enact legislation that would end the hard won independence of the BOJ.

The Japanese government would be unwise to act precipitately over independence of the bank. The independence of central banks is designed to ensure that monetary policy is not subject to the vagaries of political maneuvering and is decided by experts on the basis of economic factors.

If Japan undermined the independence of the BOJ this would put Japan out of line with other central banks in developed economies.

Governments do have a role in relation to monetary policy by setting targets for central banks. The Bank of England has had an inflationary target of 2 percent and the governor is required to send a letter to the chancellor of the exchequer whenever the target is exceeded or undershot by a significant margin in any one quarter explaining why the target has been missed.

There has been discussion recently in the media about the possibility that the Bank of England should be given a different target such as for GDP growth or for employment. The next governor of the Bank of England, Mark Carney, now governor of the Bank of Canada has already hinted that he would like to see a different set of bank targets.

The BOJ, which has already agreed to aim for 2 percent inflation instead of 1 percent said hitherto, argues that the bank has already done a great deal of “quantitative easing” and holds huge quantities of government bonds.

Japan’s public debt ratio is the highest in the developed world. Japan is able to sustain such a ratio because the Japanese government does not have to borrow abroad. Japanese citizens have hitherto had an insatiable appetite for Japanese government bonds regarding them as a safe place for their savings. This is unsustainable in the long run, but what is the long run? Ten, 20 or 50 years?

The basic problem is not the quantity of money but the lack of appetite to borrow. Japanese banks are reputed to be awash with resources, but companies are reluctant to invest and prefer to hoard their cash waiting for demand to rise at home and abroad. Older Japanese consumers (the Japanese population is an aging one) are worried about their future and prefer to hoard their resources against a rainy day.

The problem in Britain is rather different. There are plenty of medium and smaller enterprises that would like to borrow, but banks anxious to shore up their balance sheets under regulatory pressures are reluctant to lend to any but the safest companies. The British government are doing their best to overcome these obstacles, but it is clear that quantitative easing is far from being a sure way to revive a developed economy.

If the first strand of “Abenomics,” namely working through the BOJ, seems likely to have only a limited effect, the second strand of public works will have to fill most of the gap. But even in Japan there are limits to what the government can borrow and limits to what it can spend.

In the wake of the earthquake and tsunami, the Tohoku region certainly needs massive reconstruction and Japan must find a way of meeting its energy needs without continuing to rely so heavily on imported gas and petroleum. No doubt some tunnels and bridges that were constructed before stringent construction standards were enforced need repairs.

The main beneficiaries of this planned spending spree seem likely to be the construction companies who for so many decades have helped to fund members of the LDP. There is surely a danger that public works will lead to the further concreting of the Japanese countryside and feathering politicians’ nests.

Structural reform, the third strand, is vague. It should involve putting more resources into education and into funding Japanese young people to go abroad to study and work.

Another priority should be to increase competition by further deregulation and liberalization. In this context Japanese hesitancy over joining the Trans-Pacific Partnership seems not only inward-looking and protectionist, but also contrary to Japan’s long term interests.

Foreign observers also believe that Japan’s corporate governance should be reformed in ways that will lead more Japanese companies back into leading world positions in manufacturing and service industries. Japanese attempts to cover up scandals whether in the nuclear industry or in the Olympus Corp. case have damaged Japan’s reputation in the world.

The economic policies so far enunciated by the Abe government may have some beneficial effects, but seem inadequate in themselves to revive the Japanese economy in the long run and could do positive harm unless great care is exercised.

Hugh Cortazzi served as Britain’s ambassador to Japan from 1980-84.