HIKONE, SHIGA PREF. – Between July and mid-September, the nation’s political discourse heated up over the Abe administration’s bills on national security. A majority of constitutional scholars, regardless of their stands on amending the Constitution, said through various mass media outlets that the legislation is unconstitutional at least under the provisions of the national charter as it now stands. Certain scholars of international politics, meanwhile, emphasized the need for the security-related bills from a realistic point of view.
As has been the case in the past, however, the opinions of those constitutional scholars were dismissed as worthless and the bills easily passed both houses of the Diet.
In contrast, scholars and journalists are oddly quiet on economic matters. Rarely do opinions critical of the Abe administration’s economic policy appear. Generally speaking, the power of liberal economists to propagate their opinions appears to have rapidly become weak. In this column, I will try to explain what I think has given rise to this situation.
In the 2012 general election, the Liberal Democratic Party scored a resounding victory with the promise of ending deflation and by taking advantage of the Democratic Party of Japan’s failure to adopt an effective economic policy while it was in power during the previous three years and three months.
Prime Minister Shinzo Abe of the LDP pledged to end deflation by implementing the “three arrows” of Abenomics — bold monetary policy, flexible fiscal policy and a growth strategy to encourage private-sector investment.
The first arrow took the form of “easy money policy of unconventional dimensions,” which consists of the Bank of Japan purchasing government bonds from private banking institutions. This had immediate effects — stock prices shot up and the value of the yen against the dollar plummeted. As a result, corporate balance sheets improved rapidly and the wealthy rushed to buy high-priced goods.
The scenario of an easy money policy of unconventional dimensions started with the Bank of Japan’s targeting a 2 percent inflation rate within two years.
The government and the central bank envisaged the general public taking the target at its face value and going on a buying spree in expectation of rising prices thanks to inflation. If this were to happen, consumer spending, which accounts for 60 percent of Japan’s gross national product, and private-sector investment in housing would increase.
Increased spending on goods and services would encourage businesses to make more capital investments, which in turn would increase employment and expand production capacity. In turn, this would create a labor shortage, which would result in higher wages and contribute to further enhancing consumer spending. Thus the ideal scenario of a “virtuous circle” would begin.
At this point, it must be emphasized that the Abenomics scenario relies heavily on a psychological factor on the part of consumers — expectations of inflation. The proposition that “bold monetary easing will cause expectations of inflation among consumers” is nothing more than a hypothesis. So is the proposition that “expectations of inflation will stimulate consumption.” Neither of these propositions has any logical basis or has ever been substantiated by past experience.
A grandiose “social experiment” to prove whether these hypotheses are right or wrong is now in progress — at least for the first time in Japan.
Consumers’ expectations of inflation and economic growth will dwindle if economists express through the mass media pessimistic views such as “bold monetary easing would not necessarily give rise to inflation,” “the Bank of Japan’s adoption of an inflation target won’t lead consumers to expect inflation,” “the fact that trade deficits continue despite the lowering of the yen’s value means a serious deterioration of Japanese industries’ competitiveness,” “investment in public works projects now has a much smaller ripple effect on expanding domestic demand than in the past,” and “the proposed growth strategy is not expected to produce immediate results.”
On the contrary, the mass media are actively disseminating views of those economists who support the BOJ’s scenario and statistics pointing to economic recovery in an attempt to fan expectations of inflation and growth.
As long as the success or failure of Abenomics depends on those expectations, it will be a “necessary evil” for the government to “control” opinions coming from pessimistic economists. For various reasons, the mass media have no other choice but to refrain from carrying pessimistic views.
The ruling coalition, which commands majorities in both houses of the Diet, was able to afford to let people and the opposition say anything against the security-related bills. But criticisms of Abenomics would impact adversely on consumer expectations and, through the functioning of markets, ruin the very foundation of the scenario based on an easy money policy of unconventional dimensions.
The success or failure of Abenomics’ first arrow will be determined not by legislative votes but by market forces and consumer expectations, both of which are beyond political control. That is why the government can’t afford to let economists say things that would pour cold water over consumer expectations.
At a news conference on Sept. 24, the prime minister declared that Abenomics would enter into its second phase and announced “three new arrows” to propel economic growth.
The first new arrow is a strong economy that will create hope. More specifically, the nation’s GDP, which stood at ¥490 trillion in fiscal 2014, will be boosted to ¥600 trillion by fiscal 2020. To achieve this, bold steps — expansion of employment opportunities for women, the elderly and the disabled, and enhancement of full-scale regional revitalization — will be taken to accomplish a “productivity revolution.”
The second is support for child-rearing so that families will have bigger dreams. Specifically, the current total fertility rate of 1.4 — the average number of children a woman gives birth to in her lifetime — will be raised to 1.8. To reduce the financial burden related to raising children, education for preschool children will be made free and assistance will be provided for people who want to marry or receive fertility treatment. The third arrow calls for social security measures that would give a greater sense of security to citizens. It includes measures to reduce to zero the number of people who have to quit their job because they have to look after their sick or elderly family members.
Since all three have specific target figures, they should more appropriately be called “targets” rather than “arrows.” And it is doubtful that these targets can be attained.
What is surprising is that the new arrows do away with monetary policy. If they are going to hit the bull’s-eye, Abe has no choice but to rely on flexible fiscal policy, which constituted the second of the three old arrows.
It now appears that the administration has not only realized there are limits to the BOJ monetary policy, which relies on consumer expectations, it has also given up on economic growth driven by the private sector. Instead, the administration appears to have shifted to growth driven by the government sector centering on spending.
Furthermore, the Abe regime is moving closer day by day toward state capitalism as exemplified by its demand that business leaders boost capital investments and raise wages. This is utterly deplorable to this writer, who believes in liberalism and democracy.
Takamitsu Sawa is president of Shiga University.
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