The Liberal Democratic Party scored a big win in the July 10 Upper House election, with it and other forces in favor of constitutional revision grabbing a two-thirds majority in the chamber — enough seats to initiate a revision of the supreme law, which would then be put to a referendum.

For its campaign strategy, the LDP avoided issues like constitutional revision and security-related legislation, having gotten a taste of success in the Lower House election in late 2012, when it regained power from the Democratic Party of Japan by focusing solely on the economic issue of ending deflation.

Just before the start of the latest campaign, the LDP decided to put off the next consumption tax increase and thus eliminated it as an election issue. It has been proven time and again that raising the consumption tax rate seriously hurts the political party in power, as exemplified by the DPJ’s crushing defeat in the 2012 general election.

For this month’s race, the Abe administration busied itself with manipulating public opinion so that constitutional revision also would not be a campaign issue.

Now that proponents of rewriting the Constitution have a two-thirds majority in both Diet chambers, it appears all but certain that Prime Minister Shinzo Abe will hurry to achieve his cherished goal of constitutional amendment before his tenure as head of the ruling LDP ends in September 2018.

Abe’s economic policy package, Abenomics, did not become a campaign issue, either. It is an undeniable fact that the Bank of Japan failed to achieve its target of attaining an annual inflation rate of 2 percent within two years. But the central bank is quite nonchalant about its failure, blaming it all on an “unexpected plummeting of oil prices.”

The decline in the value of the yen not only helped improve the balance sheets of export-oriented corporations but also led to a sharp rise in the number of tourists coming to Japan, which in turn greatly benefited hotel, railway and retail firms.

During the past three years, businesses have been able to increase their profits thanks solely to the cheap yen and the rise of stock prices.

Soon after the official campaign period for the Upper House election kicked off, British voters opted in a referendum to exit the European Union. The unexpected result instantaneously pushed up the yen’s value and caused a plummet in stock prices.

Since export-oriented corporations had been operating on the assumption that the exchange rate would be ¥111 to ¥115 to the dollar, they will likely suffer a considerable decrease in sales and profits for the April-June first quarter of fiscal 2016.

Due to the advance of globalization, unexpected events in other parts of the world, be they a slowdown of the Chinese economy or Brexit, could easily bring to naught Abenomics and other economic policies that take only domestic markets into consideration. In short, global political and economic changes have quickly wiped out the only tangible results of Abenomics, namely the cheap yen and higher stock prices.

The biggest miscalculation in the pursuit of Abenomics was that the BOJ’s qualitative and quantitative easing of monetary policies in unprecedented dimensions — that is, the bank’s unlimited purchase of government bonds from commercial banks to increase the “monetary base” — had little effect on boosting domestic demand, contrary to expectations. The monetary base consists of total currency circulating in the economy and the balance in commercial banks’ cash deposits in the central bank.

As of the end of June, the monetary base had totaled about ¥404 trillion and 34 percent of outstanding government bonds were in the hands of the BOJ — a situation creating the impression that the central bank was directly buying bonds from the government. This is a clear indication of limits of the BOJ’s qualitative and quantitative easy money policies.

In January this year, the BOJ decided on a new easy money step: lowering the interest rate applied to commercial banks’ deposits at the central bank in excess of a certain ceiling to minus 0.1 percent . This means imposing a penalty on money held by private banks in their accounts with the central bank.

This step was meant to serve as an incentive for commercial banks to take money out of their accounts with the central bank and let it stream into the economy. To avoid the penalty payment, private banks would naturally follow that scenario if they could find healthy entities willing to borrow from them.

But the current situation is the same that prevailed in August 2000, when the central bank decided to end the so-called zero interest rate policy. A remark then-BOJ Gov. Masaru Hayami made at that time is well remembered: “What’s the use of taking a horse that doesn’t want to drink water to a waterhole?”

The point is that since demand for money in the private sector is near zero, lowering interest rates on loans will have little or no effect and money that commercial banks have received for selling government bonds to the central bank will remain in their BOJ accounts.

Why is it then that demand for money is so low in the private sector? The root cause is that the capacity to supply goods and services exceeds demand.

In other words, without stimulating domestic demand, it is impossible for the “first arrow” of Abenomics — a bold monetary policy — to produce an effect.

Much hope is placed on the “second arrow” — a flexible fiscal policy — as a means of boosting domestic demand. What is needed now is a program of public works projects based on careful study of what kinds of social infrastructure are needed and how much domestic demand such social infrastructure projects will generate.

The government has long asserted that for a country like Japan, which is not rich in natural resources, people are the most valuable resource. Yet government spending on education, science and technology has been meager. Spending in these fields would undoubtedly contribute greatly to Japan’s economic growth in the long run.

Tax increases are unavoidable if government spending is to grow. While it is definitely desirable to avoid raising the consumption tax, since it will adversely impact household spending, raising “eco-taxes” to prevent global warming would spur purchases of energy-saving electric appliances and fuel-efficient cars as well as investment in energy-conserving industrial equipment and facilities.

Similarly, raising the inheritance tax would encourage senior citizens to spend more. If the fixed property tax is increased, part of the money from sales of unnecessary real estate would be spent on consumption.

During the latest election campaign, both the governing and opposition parties talked a lot about their policies to revitalize the economy and improve social welfare. But they did not give serious attention to the question of how to finance their policies.

The government should finance programs that will stimulate demand by increasing taxes that also boost demand. The true value of the “second arrow” lies in stimulating domestic demand through meaningful fiscal spending while at the same time ensuring restoration of fiscal health.

Takamitsu Sawa is a distinguished professor at Shiga University.

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