It has been almost three and a half years since the administration of Prime Minister Shinzo Abe launched its economic policy known as Abenomics. What I would like to suggest here is that Abenomics is moving in the right direction and that real successes have been achieved.
Ever since 2009 when the Democratic Party of Japan came to power, the question of whether government policy should focus on economic growth or redistribution of income has been debated repeatedly. But the reality is that during its entire three years in office, the DPJ never managed to get Japan’s economy back on track with its income redistribution policy. This is because they were putting the cart before the horse.
The order in which economic policies are implemented is extremely important. When corporations are forced to carry out an income redistribution program without an appropriate growth strategy in place, their financial conditions can only worsen, and the result is ultimately a decline in household income.
The problem was that Japan’s corporations suffered from the effects of a strong yen, lagging in free trade practices, tough environmental regulations, labor regulations and a high corporate tax rate, leading production operations to relocate overseas. The result was the hollowing out of Japan’s industry. In addition, there was the problem of insufficient electric power and rising energy costs, as well as a deteriorating relationship with China. In short, Japan’s economy suffered.
Abenomics has taken the right approach to the above-mentioned problems. First of all, it represents an about-face from the former anti-business policy. The current pro-business economic policy focuses on the creation of wealth, providing for redistribution of income.
Japan’s economy continues to move steadily toward recovery with a strong labor market, even as foreign affairs, such as relations with China, may bring a note of uncertainty. Thanks to Abenomics, corporate earnings have achieved record-high levels, and employment has grown by over two million jobs. Meanwhile, the active job openings-to-application ratio, which indicates the extent to which the employment market is strong, has risen to the highest level seen in the past twenty-four years. Moreover, growth in employment is centered on women. The number of women employed has grown by over 1.6 million since Abe took office. And to top it off, the stock market has recorded major growth during the same time.
The next challenge for Abenomics is to move beyond the classic growth versus income redistribution argument; both of which need to be pursued, but in the right order.
One problem is that in focusing on growth, the original “three arrows” of Abenomics (monetary policy, fiscal policy and growth strategy) overemphasized monetary policy.
Rather than boldness in monetary policy, what is needed is a flexible fiscal policy. This is the second arrow. There’s nothing wrong with implementing aggressive fiscal policy, but ultimately, what is important is to maintain fiscal discipline in the long-term through the implementation of drastic reform of the social security system.
As for the third arrow, growth strategy, the Abe administration has made steady progress in deregulation of areas that have long been considered taboo in Japan. For instance, reforms have taken place for the first time in over 60 years in agriculture and energy. The Abe administration has also laid the foundations for growth by implementing reforms in the areas of corporate governance, measures for dealing with the decreasing birthrate and aging population, encouraging a more active role in society for women and labor market reforms.
However, further reforms are still needed in the areas of agriculture, medicine and nursing care and labor. These are all areas with entrenched interests having what are known as bedrock regulations, requiring even more drastic reforms. The biggest challenge for the Abe administration is finding a means of resolving the polarization of the labor market caused by Japan’s lifetime employment system that divides the labor market into privileged regular employment and insecure non-regular employment.
The second challenge for Abenomics is strengthening policy oriented toward redistribution of income.
The sectors that have gained the most benefit under the original three arrows are major manufacturers, high-income urban dwellers and the elderly. The Daiwa Institute of Research estimates that the weak yen brought on by Abenomics resulted in growth of recurring profits for Japanese corporations overall totaling ¥4.3 trillion. However, looking at the breakdown of this figure by industry we see that growth in manufacturing was ¥3.1 trillion, while for non-manufacturing it was only ¥1.2 trillion. Meanwhile, when we look at the breakdown of this figure by the scale of the business, we see that major corporations have gained ¥3.5 trillion, while small business has improved only by ¥0.8 trillion.
Just under three and a half years have passed since the start of Abenomics, and the time has now come to move from the original focus on growth and place more attention on redistribution of income. The challenge is to strengthen the redistribution of income to non-manufacturing, small business and low-income populations in the regional areas of Japan, including young people and families with young children.
The reorientation of the Abe administration’s focus is reflected in the new “three arrows,” which provide a foundation for the correct understanding of current problems: strengthening the economy, supporting child rearing and social security.
As Japan hosts the G7 Ise-Shima Summit, I would like to emphasize the importance of international policy coordination in this context. The key to halting the decline in the global economy and financial markets is proactive, coordinated fiscal policy on the part of the advanced nations and China. With the economies of the emerging nations and the resource-rich nations in decline, the world economy can no longer depend on the emerging nations to act as engines for growth. The advanced nations must become the driving force in improving the world economy. But since the advanced nations have limited margin left for implementing monetary policy, it is essential that they implement major fiscal policy. As the host country of this year’s G7 summit, Japan must take the lead in promoting such policy.
In addition to developing countermeasures to world economic decline, international coordination is also needed to fight terrorism. Meanwhile, the emergence of the Panama Papers underlines the need for a method of preventing tax evasion on an international scale. The international community faces a host of difficult problems, and under Abe’s leadership, the G7 Ise-Shima Summit should be a meaningful one.
Mitsumaru Kumagai is the chief economist at the Daiwa Institute of Research.