In recent Tokyo visits, two Nobel laureates pleaded with Shinzo Abe: Please don’t be crazy enough to raise taxes on your deflation-plagued nation.
What Paul Krugman and Joseph Stiglitz really did was explain why the prime minister’s economics program has flopped so spectacularly, and how Abe’s team is doubling down on failure by clinging to dogma that has no place in Japan’s present or future.
It’s testament to Abe’s salesmanship that some media still speak of Abenomics as a going concern — just one solid stimulus from restoring Japan’s 1980s greatness. But a con is a con. The first real crack in Abe’s ruse came in April 2014, when his government raised the consumption tax to 8 percent from 5 percent. Sure, getting a handle on the nation’s gargantuan public debt is plenty important, but that such a modest step killed growth prospects should’ve been signal enough that Abe needed to think bigger and recalibrate policies.
Amazingly, Krugman and Stiglitz had to spend their time with Abe trying to teach Economics 101. Didn’t Herbert Hoover, America’s Depression-era leader, teach posterity enough about ill-timed fiscal tightening? Insisting on a further 2 percentage points of sales tax next year is just pushing Japan Inc. toward more austerity and fewer wage increases.
This retrograde tax drama exposes Abenomics’ biggest flaw: a lack of imagination. With its three arrows — monetary stimulus, fiscal pump priming and deregulation — Abe’s team aimed to goad cash-rich companies into fattening paychecks. That would boost consumption, triggering a virtuous cycle of economic revival, inflation, greater entrepreneurship and more swagger when Japanese officials walked into a Group of Seven meeting.
But Tokyo’s plan to regain its innovative mojo lacks, well, innovation. To save Japan from another credit downgrade, why not hike taxes in places that won’t deaden growth? Why not triple tobacco levies and turn Japan into less of a puffer’s paradise? How about a carbon tax, something Stiglitz favors? A hike in inheritance taxes, meanwhile, would reduce inequality. A review of white-elephant public works projects is in order, to say nothing of a tighter lid on runaway budgets for the 2020 Tokyo Olympics. And, what, government bureaucrats can’t fly economy class now and again?
Abenomics has long had an intellectual-honesty problem. It sought to treat the symptoms of what ails Japan (deflationary pressures) and not the underlying illness (a complete lack of confidence in the future). That’s why the Bank of Japan’s unprecedented yen-printing program enriched hedge funds, not households. It’s why pledges to create a Japanese Silicon Valley and unleash a startup boom amounted to swamp gas. It’s why, with the exception of Foxconn Technology buying Sharp, foreign buyers aren’t rushing to Japan. And it’s why the upcoming May G-7 meeting in Mie Prefecture will engender more embarrassment than swagger for Japanese officials.
The Trans-Pacific Partnership on which Abe’s team spent so much time and energy is part of the ruse. As Krugman wrote in a New York Times column last May 22: “Whatever you may say about the benefits of free trade, most of those benefits have already been realized.” Besides, he argued that U.S. President Barack Obama’s trade deal isn’t really about trade. Some already low tariffs would come down, but the main thrust of the proposed deal involves strengthening intellectual property rights — things like drug patents and movie copyrights — and changing the way companies and countries settle disputes.”
This corporate land grab would boost profits at Sony and Toyota, but what does it matter if they lack confidence in the future to hike wages? Abe should be cutting trade tariffs across the board, not piling on the corporate welfare.
Abe’s con also cast women in a starring role. Making the underutilized half of a 126 million-person population “shine” made for a great talking point in patriarchal Japan. So was setting a goal of women holding 30 percent of management positions by 2020. Too bad Abe hasn’t led by example. In his Cabinet, women get only the lesser Cabinet posts. What’s more, the government is running at least 15 years behind schedule on that 30 percent pipe dream. Women hold just 6 percent of junior supervisory jobs in the bureaucracy, never mind top ones.
While Japan’s sexism woes predate Abe, his Liberal Democratic Party has held power with only two brief interruptions since 1955. You’d think it would’ve gotten around to empowering women. That failure is partly why the population is shrinking along with the will to have more babies. What Abe’s LDP has never understood is that for many smart and ambitious women, delaying childbirth is a form of protest against an establishment that favors them at home keeping house. In recent days, a blog post gone viral from a mother titled “I couldn’t get day care, die Japan!” pushed Abe on his back foot. His government is finally scrambling to provide women with the basic ingredients to balance family and career.
As Abe pledges “child-rearing support” as one of three new arrows to his quiver, concern over the national debt are returning to the fore. That means pressure to stick to the 2017 tax hike. Abe is also loath to delay it for fear of losing face. As the Mainichi Shimbum wrote in a recent editorial: “If Abe is adamant that the current state of affairs do not allow for a tax hike, then he must first admit that Abenomics has failed.”
The real tragedy is that Abe squandered solid Diet majorities, high public approval ratings and a rare window of opportunity. If his team had spent the last 39 months loosening labor markets, cutting red tape for startups, lowering trade barriers and shaking up an insular corporate culture, growth might be accelerating — giving executives more space to raise wages and convincing credit-rating companies Tokyo can manage its finances.
Instead, the focus is on hiking taxes on households that have barely had a raise in 25 years. Take Toyota, one of the main beneficiaries of Abe’s weak-yen policy. It’s expecting to make about ¥2 trillion in the fiscal year that ended Thursday, and yet Toyota is raising monthly pay a whopping ¥1,500. Economic policymaking must include its own Hippocratic Oath. By hiking taxes in 2014, and threatening to do so again, Japan is doing clear and present danger to confidence. Tokyo shouldn’t need a couple of Nobel winners, just a look in the mirror, to explain why Abenomics bombed.
Based in Tokyo, William Pesek is executive editor of Barron’s Asia and writes on Asian economics. www.barronsasia.com