At a June 24 Cabinet meeting, the Abe government decided on its new economic growth strategy, popularly known as the “third arrow” of “Abenomics.”
Salient features include lowering the effective corporate tax rate to between 20 and 30 percent, diverting a larger portion of the Government Pension Investment Fund to equity investment, and reforming regulations in agriculture, employment and medical services.
Also conspicuous in the strategy are measures to cope with the shrinking size of the nation’s workforce due to the population graying and the low birthrate. They include getting more women to join the labor force, extending the period of stay in Japan for vocational trainees from abroad, and further diversifying occupational categories for such trainees.
Japan prided itself on strong, sustained economic growth during the years from its defeat in World War II in 1945 to the bursting of the economic bubble in 1991. During that period, Japan took steps that were unusual among countries with market economies.
One economic plan after another adopted by Japan emphasized economic management that was characteristic of state capitalism rather than a free and competitive market economy.
Since the start of a recession set off by the bubble burst in March 1991, however, the nation’s economic growth rate in real terms has dwindled to less than 1 percent per year. Persistent deflation has caused the nominal growth rate to fall to a mere 0.2 percent.
Thus, during what has come to be known as the “lost two decades” through 2012, the Japanese economy appeared to have lost all of its vigor for growth it had exhibited in the past.
In December 2012, the Liberal Democratic Party won a resounding victory in the general election and returned to power with Abe at the helm, after it had fallen from power three years and three months earlier.
Abe, whose ultimate political goal is to amend the pacifist Constitution, seemed to think that ending the deflation and regaining economic growth were a point of passage necessary for achieving his rightist political reform.
Real economic growth rate for fiscal 2013 (April 2013 through March 2014) exceeded 2 percent for the first time since fiscal 2010, and reached 2.3 percent, thanks to consumers’ rush to buy prior to the consumption tax rate hike in April and the government’s lavish spending in public-works projects.
I would like to review the history of Japan’s postwar economic policies and to identify the true nature of Abenomics.
In 1955, the Japanese economy recovered to its prewar 1937 level, helped by huge sums of reconstruction money poured into the steel and coal industries under the priority production policy. Indeed, the government’s economic white paper for fiscal 1956 declared that Japan was no longer in the postwar period, indicating that it had completed its postwar reconstruction.
But Yonosuke Goto, research division chief of the now defunct Economic Planning Agency and principal author of the document, was not optimistic about the future of the Japanese economy in the post-reconstruction period. A summary of his contention is as follows.
Until fiscal 1955, the Japanese economy was able to expand with postwar reconstruction projects as a springboard. He proposed that innovation and transformation become the new springboard for the next phase of the Japanese economy’s development.
Goto’s ideas were reflected in Prime Minister Hayato Ikeda’s pet program of doubling national income in 10 years from 1961 as well as in expanding and improving science and engineering departments at universities.
The economy grew at a faster pace than envisaged by Ikeda’s 10-year plan, and national income was doubled in seven years’ time helped by rapid development of the heavy and chemical industries and the quick spread of home electric appliances into ordinary households. This represented a major success of economic management with a state capitalist orientation, which was embodied in the industrial policy promoted by the Ministry of International Trade and Industry (currently the Ministry of Economy, Trade and Industry) and the loans connected with economic policy measures provided by government-affiliated financial institutions.
The period of high economic growth came to an end with the “oil shock” of October 1973. It was thought that the quadrupling of the international market price of crude oil would deal a fatal economic blow to Japan, which relied on imports for 99 percent of its oil needs.
But not only did the industrial policy and loan programs connected with economic policy measures rescue the economy from an unprecedented crisis, but the automobile and electric machinery manufacturers were encouraged to develop energy-saving technologies. They accomplished this, enabling the nation to emerge as a major exporter and thus inviting both envy and animosity from other countries.
In the 1980s, however, rapid progress in the information and communications technologies, and a shift by the economy toward the service sector, made it no longer possible to rely on industrial policy and economic policy measures-related financing as the springboard for economic growth. Nevertheless, the economy was able to expand at an average annual rate of 4 to 6 percent as products like automobiles, air conditioners, microwave ovens and video cassette recorders, whose spread still had room for expansion, found their way into previously untapped market segments.
In the 1987-90 bubble period, the rise in stock and land prices shored up the values of these assets. Thanks to this “asset effect,” consumers spent their money on famous brand handbags, clothes and timepieces, traveling abroad and eating at expensive restaurants, enabling a high rate of increase in personal consumption expenditures averaging 6.2 percent a year in real terms.
In short, the Japanese economy was able to grow during the latter half of the 1980s because of the steady expansion of domestic demand, which was supported by the rising value of assets.
In the 1990s, asset values started falling, creating a reverse asset effect of stagnating domestic demand. Meanwhile, car ownership expanded to 80 percent of all households in fiscal 1991; it has since remained at between 80 and 85 percent.
Fast selling products during the 1990s and through 2010 were all digitalized electronic equipment such as digital cameras, cellular phones, personal computers and flat-panel television sets.
The problem was that the ripple effect from these products in inter-industry relations is much smaller than that of automobiles. This fact and auto-market saturation can be regarded as the major cause of the slow economic growth during Japan’s “lost two decades.”
Prime Minister Junichiro Koizumi, who headed the government from April 2001 to September 2006, was a market fundamentalist who was convinced that the economy would grow on its own if the market was changed into a truly free and competitive market. A slogan of his was “There will be no economic growth without a structural reform.” He thus showed complete indifference to the idea of achieving economic growth by manipulating fiscal and monetary policies.
In stark contrast, Abe is turning to a growth strategy of state capitalism, which had been kept in the background for a long time.
According to Economics 101, the economic growth rate is equivalent to (A) the sum of the weighted average of the labor input growth rate and that of the capital equipment growth rate plus (B) the rate of technical progress.
As Abenomics’ third arrow, which is a growth strategy to boost private investments, shows, encouraging private investments leads to expansion of production facilities.
Abenomics is aggressive about reform of university education as a means of elevating the rate of technical progress. To prevent economic growth from being hindered by the shrinking size of the labor force due to the graying of the population and the dwindling population of children, Abenomics aims to have more women join the labor force, enable foreign vocational trainees to stay in Japan longer, and diversify the fields in which trainees are permitted.
As is the case with Apple Inc., the production strategy of leading corporations in the information and communications industries is to leave the assembly of smartphones and tablets to China, and the production of parts and components to Japan and South Korea, while the head office in the United States specializes in product development, planning and marketing, thus creating huge added values with minimal capital investment and a small number of workers. This is the way of production adopted by leading companies in these industries.
The modern-day concept of production brought about by the progress in the information and communications technologies is much different from the concept of production taught by economics textbooks. Likewise, production systems adopted by contemporary businesses in other industries are quite different from those of the previous generation as depicted in economics textbooks, although they may appear similar on the surface.
I hope the government will take these differences into full consideration and work out growth strategy that goes ahead of the times.
Takamitsu Sawa is president of Shiga University.