BLOOMBERG – Can Ronald Reagan save Japan from a debt crisis? We’re about to find out as Prime Minister Shinzo Abe bets the remaining years of his mandate on the former U.S. president’s economic philosophy.
Abe’s new plan to curb Japan’s debt burden, the world’s heaviest at almost 250 percent of GDP, doesn’t mention Reagan. But it’s impossible not to notice the influence of his widely touted theory that healthy government finances require, above all, a thriving corporate sector. That should worry investors, credit rating companies and the Japanese people alike.
Abe did announce some vague intentions to cap spending and reach a budget surplus in fiscal 2020. But the heart of his strategy for dealing with government debt is stoking broader economic growth. It’s a questionable strategy, one that’s even more dubious because of where Abe expects this debt-erasing output to come from: giant companies profiting from a weaker yen and a “productivity revolution.”
Unfortunately, Abe’s plan is based on the discredited notion that more money for companies and the wealthy will mean more money for government coffers. Japanese companies have been earning more money since at least 2012, when the yen began dropping to the benefit of exports. But instead of sharing the wealth by fattening paychecks, executives hoarded it. The amount of cash and deposits corporate Japan has on hand jumped 3.6 percent in March to a record $1.96 trillion. In 26 of the 30 months Abe has been in office, CEOs have chosen to save extra cash rather than deploy it.
Abe shouldn’t expect much growth to trickle down from productivity gains either. Japan’s insular and outdated business practices have long made it a laggard among developed nations. That was less problematic before China’s ascendance in the region. Japan is now an aging, inefficient and wildly expensive property in a cheap neighborhood. In order to sustain its living standards, Japan needs to innovate and develop new job-creating industries (think renewable energy, not cars and televisions). But as Georges Desvaux of McKinsey argues in a recent report, Abe has done very little since taking office to invest in Japan’s vast human capital.
Abe’s vague hopes to cut corporate taxes, strengthen government and private-sector cooperation on technological innovation, and use the 2020 Tokyo Olympics to accelerate reform don’t add up to a serious economic plan.
“Many of these proposals are fragmentary and it could be several years before bureaucrats and advisory councils are able to draft more concrete policies,” says Tobias Harris of Teneo Intelligence. “It may also take longer for the proposals to be translated into law.” And Abe doesn’t even mention the biggest contributor to Japan’s debt problem — its shrinking population.
Even worse, Abe suggests he has already initiated his boldest step to improve Japanese productivity: the corporate governance code that went into effect on June 1. The idea is that the new rules will put CEOs under pressure to invest in technology, equipment and training that will boost national growth. And that might be true — if much of the code weren’t voluntary.
The bottom line is that there’s little “new” about a plan that relies on growth to pay down debt. Reagan never managed to pull it off in the 1980s — U.S. debt actually rose, belying the theory that tax cuts pay for themselves.
If Abe doesn’t rethink his approach, and develop a plan to cut wasteful spending and find new revenue sources, things are sure to get worse for Japan. “If the Abe Cabinet, which continues to wield significant, albeit diminishing, political capital, can’t make politically difficult fiscal decisions now,” Harris says, “it’s far from guaranteed that this government or its successors will have an easier time.”
Japan has been trying to grow its way back to a credit rating of AAA for decades now. As Abe gives it yet another try by relying on trickle-down economics, it’s fair to wonder why history’s lessons haven’t yet trickled down to him.
William Pesek is a Bloomberg View columnist based in Tokyo and writes on Asian economics, markets and politics.
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