Not a household name in Japan, but Carmen Reinhart may explain better than anyone why wages fell the most in 25 months and bonuses got slashed in July.
The Harvard professor and his co-author, Kenneth Rogoff, ruffled many a feather in 2009 with “This Time Is Different.” Those four words, the most dangerous in economics, breed hubris and manias that invariably end badly, lethal delusions like the tech-stock boom of the late 1990s, the idea home prices couldn’t fall in 2007 and today’s faith that China’s crushing debt and runaway pollution really don’t matter.
Thirty years ago, Japan, too, was thought to be confounding centuries of theory as living standards and assets went up, up — and up. By the early 1990s, the narrative had swung to Japan as yet another cautionary tale of hysteria run amok. Yet Reinhard’s take on Japan’s stagnant-wage present is unearthing fresh lessons both for Prime Minister Shinzo Abe’s government and developed-economy peers struggling to hasten growth.
The bottom line, she argues, is that “recovery isn’t the same as resolution.” An obvious thought, perhaps. But nearly five years into Abenomics, there’s a clear pattern of the prime minister’s team and investors agreeing that faster gross domestic product is enough. Time and time again since December 2012, any jump in GDP, the slightest uptick in wages and new multi-year highs for the Nikkei were reason to declare victory. But now that the sugar high from the Bank of Japan’s epic easing has worn off, underlying momentum is waning.
The 0.8 percent drop in real wages in July, the sharpest since June 2015, is no aberration. It reflects the extent with which cash-and-profit rich corporate giants like Toyota lack confidence to fatten paychecks. That’s because the most important phase of Abenomics — a deregulatory big bang — has been a series of modest pops. Steps to tighten corporate governance are welcome, but they’re benefitting shareholders, not the masses.
Sliding approval ratings have Abe trying to divert attention away from scandals to economic retooling. “Structural reform is the lifeline of Abenomics,” Abe said Monday. “I want the engine of reform to run at full blast.” He urged a government council to “challenge head-on” any restrictive regulations stymieing competitiveness. But Abe negated that supposed determination by focusing on forestry issues, wireless communications and day care, as if these specifically are the reasons Abenomics isn’t getting more traction.
If we’re really going to “challenge head-on” why more women don’t enter the labor market, how about proposing free day care? Why not offer tax incentives to companies that make child care a benefit of employment? If Abe were true to his words, he’d eliminate hurdles standing in the way of more meritocratic economy, more women in executive positions, far more immigration, increased innovation, lower trade barriers, making bureaucrats more accountable. He’d make public places smoke free, prod companies sitting on trillions of dollars of cash to boost wages, tweak tax policies to favor startups over corporate giants and craft a pro-growth energy policy that favors renewables over nuclear.
Sadly, the latest Abenomics reboot is as milquetoast as previous ones. Tokyo is still treating the symptoms of weak wage growth, shying away from the causes.
It’s become a global tendency, Reinhart argues. The International Monetary Fund’s recent upgrade of growth projections for developed economics, including Japan, masks the problem. The Federal Reserve’s ongoing exit from ultra-easy post-2008-crisis monetary policy, she writes in a recent Project Syndicate op-ed, is “adding to the growing sense that normal times are returning. But are they? Good news notwithstanding, declaring victory at this stage (even a decade later) appears premature.”
Yale University’s Stephen Roach worries about the West’s failure to heed Japan’s lessons, namely that “monetary policy provides no answer for a chronic deficiency of aggregate demand.” Reinhart thinks the problem is the nature of demand over the last decade.
The growth the United States, Europe and Japan are enjoying is driven largely by stimulus alone, making it more cosmetic than organic or sustainable. In all cases, we’ve seen more monetary and fiscal steroids than structural change to make economies vibrant and productive enough to drive healthy wage increases. Japan might be in a very different place today, for example, if Abenomics had targeted 2 percent wage gains, not 2 percent inflation. Because the government is still preoccupied with symptoms, incomes are stagnant even as labor markets tighten.
There is at least one reason this time really may be different for Japan: It’s disproving the doctrine of the non-accelerating inflation rate of unemployment, or NAIRU. The concept, which emerged from the works of Milton Friedman, is that a sliding jobless rate eventually results in overheating. Japan, not so much. In July, the same month wages fell the most in more than two years, the rate hit a 23-year low of 2.8 percent.
Based in Tokyo, journalist William Pesek is the author of “Japanization: What the World Can Learn from Japan’s Lost Decades.” Follow him on Twitter: @williampesek