OSAKA – When Prime Minister Shinzo Abe announced a massive ¥28 million stimulus package — that’s equivalent to 6 percent of gross domestic product — to boost Japan’s ailing economy he presumably intended to reassure people that he was wheeling out his Abenomics model and putting it back on the road. But it was all rather odd, not least because it was not so much an announcement as a promise of an announcement.
Fickle markets twitched happily at the prospect of new money. The Nikkei rose and the yen fell, but Mr. Market is too easily fooled by empty promises. By last Friday, the yen was up at 103 to the dollar and the Nikkei fell.
If you peer beyond the headline promise you should be worried for Japan. The issue is not merely that the arithmetic of the stimulus does not add up, or the doubts whether the money promised may not be real, or whether it will be spent in the right places to make a proper impact, or how it will be paid for, or who will pay. The real and abiding worry is that it is not just Japan’s economy that is ailing, but that its political governance badly needs fixing.
Japan is — supposedly — a parliamentary democracy, so shouldn’t such a momentous announcement of a stimulus package first be made before the Diet, preferably by the finance minister? Parliamentarians in other democracies would howl with anger about the lack of respect for parliament if they were bypassed in the casual way that Abe promised his package when visiting Fukuoka, and even before his Cabinet approved the deal.
Ideally, the responsible minister should set out the economic scenario and explain why a massive stimulus is necessary; provide the history of previous stimulus packages and the lessons they have taught; offer honest arithmetic about the numbers, the timing, which sectors will get which allocations when, what the expected impact will be, what is the plan B if the economic response proves to be less, or greater, than budgeted for; be honest about how the bill is going to be paid, and how and when. And then be open to questions, that’s government 101.
In the 1990s when the government announced a series of stimulus packages to boost the economy, after the news had been given to the Diet, top Finance Ministry officials explained to the press the details and where they hoped that they would deliver the goods.
The experience of those days should warn politicians and economists alike that stimulus spending that goes largely to infrastructure has limited — and diminishing — impact on the economy as a whole, as opposed to the benefit to construction companies, and back to the funding of powerful politicians. Even in Japan there is a limit to the number of shinkansen trains and bridges and roads to nowhere that can be built.
What has the Abe government has learned from the past? In 2013 it announced a ¥20 trillion stimulus package. In 2014 it launched a stimulus of ¥18 trillion. What happened to those packages that they need a new one today? There must be a suspicion that whoever is behind the stimulus packages is pulling numbers out of the air and just trying to create a sense of shock and awe.
There is certainly a lot of smoke and mirrors involved in the numbers. Abe threw out another number, claiming that a figure of ¥13 trillion would be in “fiscal measures”, whatever that means. Nihon Keizai Shimbun tried to penetrate the fog and claimed that actual new money would be ¥6 trillion, but only ¥2 trillion would be in a supplementary budget to be passed this year.
Other analysts have calculated that there may be ¥6 trillion in new money, but only ¥3 trillion available this year. Of course, there will be other loans available backed by government subsidies, but Japan is awash with money thanks to massive quantitative easing by the Bank of Japan, which has been much more aggressive than either the U.S. Federal Reserve or than European central banks.
Japan’s big non-financial companies, sitting on almost $10 trillion in assets, have been reluctant to invest except abroad and been slow to respond to Abe’s urgings to raise wages.
All these are serious worries that lead to further important question as to who is running Japan economically and do they know what they are doing?
Taro Aso is finance minister and also deputy prime minister, as well as a former prime minister. But he does not seem to be playing a formative part in the discussions. His ministry fought hard for the 2 percentage point increase in the consumption tax for next year, but failed. One reason is that Abe has worked hard to curb the omnipotence of the Finance Ministry and to centralize powers in his own office.
Let’s be fair to Abe in spite of the scorn rightfully heaped on Abenomics: he has made some of the right noises in urging wage rises and greater empowerment of women in the workforce (even without supporting Yuriko Koike for governor of Tokyo).
Abe’s failing is that he sees Abenomics as a magic wand that he can wave and all will be well. Unfortunately, Abenomics has diminishing power with its overuse and abuse, and had limited power from the start. The bigger mistake is to imagine that Japan’s deep-rooted economic and social problems can be solved by slogans or by waving a wand.
There is no magic that can solve the issues of Japan’s increasingly arthritic economy and society. Nor can Abe fix things on his own. It requires a broader discussion and consensus on some very deep and tricky issues, including hiring of more women, changes in labor practices to make them more flexible for companies, yet fairer for workers, re-thinking of retirement ages and an expanded place for immigrants. Even if or when there is consensus, it will take years for the agreed changes to produce positive results.
The other worry is that Abe believes in his magic wand and will think that now he has waved it, he has done his duty and can move on to his other dream — of changing the Constitution. That would be a dangerous bait and switch that would lead to disaster for Japan.
Kevin Rafferty is a veteran journalist and a former World Bank official