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Abenomics: state capitalism

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There are two schools of thought in economics. One preaches that if everything is left to the forces of free and competitive markets, resources will be distributed efficiently and that, therefore, it is more harmful than beneficial for the government to intervene in the markets through fiscal and monetary policies and through various regulations. Those who advocate this way of thinking are known as neoclassicists or conservatives.

While they admit that taxation cannot be done away with altogether because the government needs money to fund public services — such as defense, police, firefighting and elementary and secondary education — conservatives insist that income tax rates on individuals and corporations should be kept as low as possible, that an emphasis should be placed on indirect taxes like the consumption tax and that social welfare should be reduced to a bare minimum in order to encourage self-help.

Followers of the other school believe that it is an armchair theory to expect a free and competitive market economy to be efficient, and that in the real world imbalances such as unemployment and instability such as an economic cycle are unavoidable. Therefore they go on to say that the government’s market intervention through fiscal and monetary policies is indispensable to rectify imbalances and avoid instability.

This school is usually referred to as Keynesian or liberal. Concrete means of implementing the liberals’ fiscal policy consist of raising or reducing taxes, increasing or decreasing investment in public works projects, enacting progressive income taxes in order to transfer a portion of income from the wealthy to the poor, making public education free of charge and getting the government to pay part of expensive medical bills. As for monetary policy, the liberals try to cool an overheated economy or to buoy the economy through manipulation of interest rates by the central bank.

The ultimate goal of the liberals is to attain a “fair and equitable” society under the slogan of full employment, eradication of poverty, relief for the socially weak and environmental protection.

In the United States, the Republicans push the economic policies of the conservative school and the Democrats favor those of the liberals. In Britain, the Conservatives follow the former and the Labour Party the latter.

In Japan, Prime Ministers Yasuhiro Nakasone and Junichiro Koizumi followed the policies of the conservative school. Under his favorite theme of carrying out “administrative reform,” Nakasone turned the nation toward “small government” and succeeded in privatizing the Japanese National Railways, Nippon Telegraph and Telephone Public Corp., and Japan Tobacco and Salt Public Corp. Koizumi pushed the slogan of “structural reform” and enforced various deregulatory measures and privatized the three branches of the nation’s postal service operations — mail, savings and insurance.

Both Nakasone and Koizumi were genuine conservatives. Although they followed free market ideologies in their economic policies, on the political front they were second to none in honoring tradition and order. Indeed, they never gave up the idea of paying homage to the Japanese war dead at Yasukuni Shrine.

During its reign of power for three years and three months from September 2009 to December 2012, the Democratic Party of Japan did not make clear its liberal posture. On the contrary, the DPJ made the blunder of betting its political life on the most nonliberal legislative bill to raise the consumption tax rate.

What the DPJ had been expected to do was run a government devoted to sustainable economic growth, elimination of income inequality through tax reform and fiscal spending, eradication of regional disparities, free education and environmental protection. The failure to live up to these expectations shortened the life of the DPJ administration and lowered the party’s approval rating, which is now below 10 percent.

The preface to this column may be too long and I now turn to the main theme of characterizing the policy stance of the present administration under Prime Minister Shinzo Abe. It is clear that his Abenomics economic policies, which are aimed foremost at ending the deflationary trend, are incompatible with conservative economics, which attaches importance to a free and competitive market economy.

“Bold monetary policy” constitutes the “first arrow” of Abenomics. This policy consists in the Bank of Japan setting a target of achieving an annual inflation rate of 2 percent within two years and making unlimited purchases of government bonds from banking institutions. An increase in the monetary base attained through this step would firmly embed inflationary expectations in the minds of the public, thus stimulating household spending on consumer items and investment in housing, and business spending on capital investment.

In fiscal 2013, consumer prices rose by 0.4 percent and in the ensuing fiscal year went up 2.7 percent, which was still less than the 3 percentage point increase in the consumption tax rate. For fiscal 2015, consumer prices are projected to rise by less than 0.5 percent.

At the end of 2015, national bonds in the hands of the BOJ ballooned to nearly 30 percent of the nation’s outstanding government bonds. Moreover, the central bank has started purchasing investment securities issued by J-REIT (the Japan Real Estate Investment Trust) in an attempt to put the brakes on falling land prices. The central bank has also begun buying exchange traded funds (ETFs) to shore up the stock market. Needless to say, both are high risk assets.

The easy money policy of “unconventional dimensions,” as BOJ Gov. Haruhiko Kuroda calls it, has had the immediate impact of raising stock market prices and lowering the value of the yen against the dollar. High stock prices have prompted the wealthy to spend money on high-price items while the cheap yen has served to boost both sales and profits of export-oriented corporations.

The cheap yen also has led to a sharp increase in the number of foreign visitors to Japan. Their annual inbound consumption, estimated to reach between ¥2 trillion and ¥3 trillion, has served to make up for sluggish consumption by Japanese households.

All told, however, the prevailing economic situation in Japan is undoubtedly far from the virtuous circle envisaged by the government and the BOJ — that the easy money policy of unconventional dimensions would create inflationary expectations among the public, stimulating domestic demand and eventually leading to inflation and economic growth.

“Flexible fiscal policy,” which constitutes the second arrow of Abenomics, has not lived up to expectations either. Nor has anything remarkable emerged from the “growth strategy to encourage private-sector investment,” which constitutes the third arrow, in the three years since Abenomics made its debut.

From the outset, American Keynesian economists like Paul Krugman and Joseph Stiglitz have highly praised Abenomics. In contrast, Martin Feldstein and other genuine neoclassical economists labeled it bad policy. After all, Abenomics is truly Keynesian in that it is based on the assumption that fiscal policy and monetary policy are effective. But it does not necessarily attach importance to helping the weak or rectifying disparities between rich and poor.

Also conspicuous is its strong tendency to make light of market forces and to control the economy as exemplified by Abe’s personal call on the private sector to raise wages and increase investment.

In addition the prime minister has been pursuing genuine conservatism, as evidenced by his steamrolling through the Diet the state secrets bill and the security bills that include the Self-Defense Forces’ participation in collective self-defense, and by his intention of revising the Constitution.

Abe’s policies, aimed at imposing more control in both the political and economic arenas, cannot be called either conservative or liberal. They can perhaps be most appropriately called “state capitalism” as exercised in countries like China, Russia and Singapore.

Takamitsu Sawa is president of Shiga University.

  • solodoctor

    The leaders of ‘state capitalism’ do more than ‘call on’ corporations to raise wages or to invest more in equipment and other growth oriented activities. These leaders are readily willing to use fiscal policies to incentivize corporations to change their practices. Eg, they would offer corporations lower taxes if they raised wages substantially or purchased more equipment. Or they’d lower taxes for those corporations which hire/promote more women or hire more permanent, full time employees as opposed to temporary part time workers.

    Abe has never really unleashed his so called second and third arrows. He has talked a good game but not backed it up with action. So, the corporations have largely ignored him.

    With such a substantial majority in the Diet Abe could get these things done. Is he worried about offending the CEO’s of the Toyotas, Sonys, etc of his world?

    • soudeska

      I think he just has no clue about economics and doesn’t care. “Abenomics” was just talk to get elected.

  • A.J. Sutter

    While I agree with Sawa-sensei that Abe’s economics policies are a misbegotten mishmash, there are a couple of things in here that are mistranslations or misconceptions.

    For one, the Nakasone and especially Koizumi visits to Yasukuni were radically reactionary, not “conservative” in the sense of tradition or order. No Emperor has visited Yasukuni in the past 40 years.

    For another, state capitalism involves the state ownership of businesses, which, unlike China, Russia and Singapore, is not something Abe has pursued.

    I think what Sawa-sensei might be alluding to is that Abe believes that the central government can intervene in the market. Pretty much all governments attempt this – what’s distinctive about Abe is that he’s falling flat in his face in the attempt, aside from having a cooperative BOJ governor. The one example cited in the article, asking corporate leaders to increase wages, is a far cry from being able to force them to do it.

    What Japan does have in common with China and Singapore (and the late Soviet Union) is that one political party has dominated the country for a half-century or more.

    • Shinjo

      As that old saying goes, it ain’t liberal, it ain’t democratic and it certainly ain’t a party.

    • Shinjo

      As that old saying goes, it ain’t liberal, it ain’t democratic and it certainly ain’t a party.