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Richard Katz on the failures of ‘Voodoo Abenomics’

by Jeff Kingston

Special To The Japan Times

Richard Katz, editor-in-chief at The Oriental Economist, is the author of “Voodoo Abenomics: Japan’s Failed Comeback Plan,” an article published in the July/August issue of Foreign Affairs magazine. Katz went into more detail about Prime Minister Shinzo Abe’s “Abenomics” policy in a recent email interview with The Japan Times.

In your article you open by focusing on key changes in the labor market. What happened and what are the implications?

Irregular workers have risen from about 15 percent of the labor force in the 1980s to 38 percent today. These are part-timers and temporaries who often get paid a third less per hour, work fewer hours per month and don’t get bonuses and other benefits. Because even a firm in trouble finds it legally very hard to lay off permanent workers, they prefer to hire irregulars. The result is a continued drop in consumer spending power. Moreover, it worsens Japan’s demographic crunch. Whereas 70 percent of Japanese men in their 30s with regular jobs are married, among irregular workers in their 30s, that percentage plunges to just 25 percent. Abe has done nothing to address this problem. In fact, so far, all of the job growth under Abe has been in irregular employment.

Does the tight labor market suggest things are improving?

The market is not as tight as it looks. People point to the figure of 1.1 job offers for every applicant. However, in April, the opening-to-applicant ratio for part-time workers was 1.4, while the ratio for full-time regular workers was just 0.95. With real wages continuing to fall, there is not enough consumer purchasing power either to drive growth or reach the 2 percent inflation target.

You argue that Abenomics is a con game. How so?

Abe argues that the root cause of Japan’s malaise is lack of confidence. If Japanese had more faith in their country’s prospects, then consumers would spend more and companies would do more investing and hiring. That is wrong. The malaise stems from problems in reality, not in psychology.

And it is a con game, in the sense that most of the so-called third arrow of structural reform is just nice-sounding targets with no strategies to realize them.

What about Abe’s recent structural-reform proposals?

We have seen serious reforms in Japan before: the change in the Large-Scale Retail Store Law, the “Big Bang” financial reforms, the cleanup of nonperforming loans, the telecom reforms — so, we know Japan can reform. But nothing Abe has done looks anything like those.

He could pass a law to equalize the wages of regular and irregular workers. He could act against the malfeasance of the nuclear utilities so as to reverse the well-deserved distrust of these companies’ handling of nuclear power. Japan cannot grow well without enough energy. He could remove Japan Agriculture’s exemption from the Anti-Monopoly Act, which enables it not only to maintain high prices on food, but to act as a nucleus for the anti-reform forces in Japan. He could enforce the act when firms use their bargaining clout with distributors and retailers to keep competitors from gaining access to the market and challenging them. Growth in any economy depends on the exit of inferior firms and entry of new, better firms, but Japan has the lowest rate of firm turnover among major rich countries.

Why is Abenomics sputtering?

If Abe were indeed executing all three arrows — monetary stimulus, fiscal stimulus and genuine structural reform — then Abenomics would work. But Abe has, in fact, just one arrow: monetary stimulus. The problem is that none of the three work without the other two. For example, instead of pursuing fiscal stimulus until Japan reaches recovery, and then working on the deficit, Abe is enforcing austerity via tax hikes. That renders monetary stimulus impotent.

Has Abe missed his chance to advance significant structural reforms?

Because of the failures of Abenomics, Abe’s approval ratings keep falling. That, in turn, is steadily depriving him of the clout necessary to overcome vested interests, even if he wanted to.

Abe’s recent rural-revitalization proposals have been panned as rehashed, old-style pork-barrel projects from the Liberal Democratic Party that are aimed at local elections next year. What’s your read?

I agree. His previous moves on agricultural reform were supported by Japan Agriculture, precisely because it had little content. While Abe’s own Council on Regulatory Reform recommended abolishing Japan Agriculture, Abe refused.

You wrote: “Trying to cure Japan’s malaise by generating inflation is like trying to cure a fever by putting ice on the thermometer.” What did you mean by this?

Deflation is not the cause of Japan’s problems; it is just a symptom. It’s primarily a symptom of weak domestic private demand. That, in turn, is the result of anemic consumer income. Without commensurate wage hikes, inflation can make things worse. In June, due to hikes in prices and the consumption tax, real price-adjusted income for worker-headed households was down 6 percent from 2013.

So what should be done?

The first step is to combine (Bank of Japan Gov. Haruhiko) Kuroda’s monetary stimulus with fiscal stimulus. That means postponing the consumption-tax hike. It also means increasing spending on the kind of public works that actually help the economy long-term while providing short-term stimulus. This fiscal-monetary combo would help restore the economy to full employment and full capacity and provide a cushion for the parts of the third arrow that will cause a loss of jobs in some backward sectors. The social safety net has to be improved to protect workers as they move from job to job. Japan should truly reform its electoral districts so that rural and urban voters have an equal say. That would strengthen pro-reform voices. Working on the chronic budget deficit should follow, not precede, economic recovery.

Does Abenomics bolster the prime minister’s “womenomics” policy?

No. Another violation of the truth-in-advertising laws by Abe. One of the biggest problems for women is pressure to leave the career track once they get married or become pregnant. Japan needs a situation in which women can have both careers and children. Abe has not even addressed this issue beyond tokenism.

What are the prospects for the Trans-Pacific Partnership free trade initiative?

I fear that the TPP could go the route of the Doha trade round, in which talks go on forever but nothing is resolved. Abe had spent his energy on protecting the 100,000 households involved in beef, dairy and pork instead of aiding the economic needs of the 46 million other households. If there is no agreement by early 2015, it will be very hard to pass the U.S. Congress or the Japanese Diet, where there are elections for each in 2016.

Jeff Kingston is the director of Asian Studies, Temple University Japan.

  • Steve Jackman

    I agree with Richard Katz on everything he’s said, except for his characterization of the so-called “Big-Bang” financial reforms in Japan as a success. In fact, these reforms were anything but, and they certainly were not big-bang, since they were more like a whimper.

    The Financial Times just published an excellent article by Henny Sender on Aug. 27, with the heading, “Abenomics’ arrows fail to hit their mark”, which also makes the same case about the failure of Abe and Abenomics as Katz.

    The FT article emphasizes that in reality, Abenomics never had three arrows and that it was always based on a single arrow of depreciation of the Yen. It concludes that Abenomics is a failure because Abe has never been a reformer and he is not interested in looking forward. Instead, he is the type of politician who is more interested in looking back at Japan’s militarism and nationalism.

    • Stephen Kent

      Thanks for the title of the FT article, it was a pretty interesting read.

    • zer0_0zor0

      The problem is, is that the yen actually was super-inflated, as the points raised in this article make clear. Accordingly, the only real political capital Abe has is precisely his reversal of the disastrous policy pursued by Noda, a formed “Minster of Finance”.

      Abe has invested that capital wisely, but the fact is that he has served the interests only of his cronies, not the people. Hopefully, the people will depose him in the same manner that the deposed Noda.

  • zer0_0zor0

    A point-on analysis that covers everything in the visible light spectrum.

    The malaise stems from problems in reality, not in psychology.

    One can only hope that the electorate will be quicker to wake up to te charade being laid out in front of them at their soon-to-be casino gaming tables. A start would be translating some of this material into Japanese…but I suppose that the points will eventually be filtered through to the Japanese public that do not read English-language news media.

    I like to reference to the criticism of Reaganomics, as “voodoo” certainly applies to Abe, too, and they are obviously cut of the same cloth.