Shinzo Abe doesn’t wear a wizard’s hat. Nor is the prime minister known to be skilled in sorcery, voodoo or hypnosis. And yet somehow Abenomics entranced millions for nearly three years, none more so than the MBA set in New York and London that should have known better.
Western investment banks beefed up Tokyo staffs, stamped “buy” ratings on Nikkei stocks and raced out reports on Japan triumphing over deflation. Foreign journalists suddenly became Japan experts. Brookings couldn’t plan Abenomics-is-brilliant seminars fast enough. Nobel laureates toasted the Abe effect around the globe. In May 2013, Paul Krugman penned a New York Times column headlined “Japan the Model.”
Such euphoria seems like a long, long time ago as Abenomics fails every key metric. Even exports, the growth engine to which Abe tended the most, have fallen for 10 straight months — the worst streak since the 2008 subprime crisis.
That pledges for 2 percent inflation, higher wages, increased competitiveness, a corporate governance revolution and empowering women fell woefully short shouldn’t be a surprise to longtime readers of this column. My skepticism stemmed from covering Abe’s botched 2006-2007 premiership. Then, too, he pulled a bait and switch, talking big about revival but putting all his energy into amending the Constitution. His unimaginative Abenomics blueprint also ignored key problems like deflationary demographics and rigid labor laws.
My point isn’t to say “I told you so,” but to explore one of modern economics’ most tantalizing riddles: why so many smart analysts, journalists and investors got conned by Abe’s sleight of hand. Was it wishful thinking? Herd mentality? Bias reinforcement? The economic bigotry of low expectations?
Blame it on “hope against experience,” says Robert Dujarric of Temple University’s Tokyo campus. Skillfully, Abe redeployed the bait-and-switch strategy by shaking up asset markets and hiding behind the headlines that followed. With “impressive results in terms of stock prices in the local currency,” Dujarric says, Abe created the illusion of structural reform and then pivoted back to the Constitution.
The press, meanwhile, abdicated its responsibility to cover Abemonics, instead participating as cheerleaders. The disconnect between foreign euphoria and the lack of implementation on the ground came up often when I checked with prominent Tokyo economists who have long frowned on Abe’s prospects.
“I think one of the problems has been that the media has tended to write positively on Abenomics,” says Credit Suisse economist Hiro Shirakawa. Relentlessly bullish coverage belied extreme skepticism among households. “That’s why it has not worked,” Shirakawa says. “If people believed it to be working, it should have worked.”
Naoyuki Yoshino of the Asian Development Bank Institute has a similar critique of the Bank of Japan for thinking it could conjure up inflation by talking ad nauseam about the magic of rate cuts.
Richard Katz, publisher of The Oriental Economist, says this gave analysts a “misguided faith in the power of monetary policy by itself to produce a desired rate of inflation and for that inflation to produce better real growth. Japan was the first real-world experiment in applying that popular academic theory, and it has failed.” Likewise, he says, banks learned the hard way that “the desire to have a good story to sell to customers, plus lots of wishful thinking,” does not a recovery make.
Studying how Japan conned the masses is important because it’s one of 10 giant economies conducting comparable confidence games. Among the biggest lessons, two kept coming up as I did reporting for this post-mortem. One, Abe erred in treating the side-effects of Japan’s malaise — deflation and stagnant wages — not the underlying causes: little confidence in the future, falling productivity and an aging nation not restocking the labor force with immigrants and new babies. Two, a terrible case of the slows as China’s rise alters the economic calculus in Asia.
One of the most intriguing arguments about the latter problem comes from Colin Jones of Doshisha Law School in Kyoto. The divide between foreign optimism and domestic eye-rolling “reflects a basic misconception about what motivates Japanese people, or their leaders at least,” Jones explains. “I think a basic part of that is that they live in a system where failure is punished more severely than success is rewarded. So most policies may be perfectly logical, even successful, if looked at as failure-avoidance strategies rather than efforts to be successful.”
Even with rare supermajorities in both Diet chambers and reasonably high approval ratings, Abe has punted for 1,332 days now on reforms on which he was elected in the first place. His failure to take that mandate out for a ride shows the timidity that stopped governments past from ending Japan’s funk is as prevalent now as on Dec. 25, 2012, the day before Abe took office.
Few economists had Abe’s number all along like Noriko Hama, who in 2013 dubbed the enterprise “Ahonomics” — “aho” meaning “stupid” and “silly.” Abe, Hama argues, is consistently “applying wrong and dangerous tactics to solve this wrong problem.” The problem, she says, is the growing ranks of the working poor and negative interest rates are just exacerbating their troubles. Only by cajoling stingy executives to boost wages can average Japanese get ahead. Producing inflation without structural change is a recipe for increased poverty, not prosperity.
Admitting you were wrong is never easy, of course. As Hama tells me: “As for these ‘wise’ people I rather suspect that having initially given Abenomics such wholehearted endorsement they have been finding it psychologically difficult to ‘unbelieve’ their own judgment. Hope springs eternal that success awaits just around the next corner, so to speak.”
The most prominent economist who saw this failure coming is Masaaki Shirakawa. He’s the BOJ governor Abe sacked in 2013 to make room for his chosen monetary wizard, Haruhiko Kuroda. Shirakawa resisted calls to abandon all monetary sanity and open the yen floodgates, arguing it wouldn’t be enough to end deflation. He’s been vindicated tenfold. As Shirakawa cautioned, there’s no magic wand to revitalize Japan — just a lengthy reform to-do list that Abe never got to.
William Pesek, executive editor of Barron’s Asia, is based in Tokyo and writes on Asian economics, markets and politics. www.barronsasia.com