New York – Japan has steadily churned through its share of prime ministers in the decades since World War II — one stint was little more than two months. Yet just as Prime Minister Shinzo Abe notched a record for the most consecutive days in office, it appears that fatigue has set in. Polls show support for his Cabinet has been sagging for a while. After spending hours at a hospital Monday — his second visit in about a week — Tokyo is rife with speculation that Abe is seriously ill and might step aside in coming months.
With Japan facing its deepest downturn since the 1950s, it would be tempting to conclude that the twilight of Abenomics has arrived. Even before the new coronavirus hit, the “three arrows” of the prime minister’s signature economic program had been losing altitude. Muscular fiscal policy, massive monetary easing and efforts to unshackle business from regulatory burdens were failing to adequately reflate the economy.
It’s true that Abenomics has had its setbacks, but to overlook its successes would be a mistake. If anything, the legacy of this program could outlive Abe’s tenure, offering lessons to future Japanese leaders and global policy makers alike.
In the current landscape, there’s little choice but for the key component of Abenomics — monetary largesse — to continue. This arrow, personified by Bank of Japan Gov. Haruhiko Kuroda, is often characterized as a failure because inflation hasn’t managed to reach its target. But this assessment verges on schadenfreude (remember that Japan was once thought to be on the path to global economic supremacy). The defining feature of central banking in the years before the pandemic was a universal failure to reach 2 percent for any meaningful period of time. Neither the U.S. Federal Reserve nor the European Central Bank succeeded, either.
The intent of Kurodanomics, as it’s sometimes called, was laudable and its implementation breathtaking at first. At his inaugural BOJ Policy Board meeting, Kuroda dramatically expanded quantitative easing and declared an intent to reach the hallowed 2 percent in two years. While Japan was the first major central bank to cut rates to zero, and undertook a form of QE a decade earlier, it wasn’t until Kuroda came along that the exercise was turbocharged.
Inflation did make significant progress. That climb began to stall after 2014 when — despite pledges of fiscal expansion — Abe signed off on an increase in the consumption tax. A deep slowdown ensued. Unfortunately, this happened around the time oil prices began sliding. The push toward inflation continued, but momentum was lost.
Mandarins at the Finance Ministry — long the epicenter of bureaucratic power in Japan, and a stronghold of budgetary conservatism — won that round. The political class seemed to realize its error and planned increases in the consumption tax were postponed several times, before finally getting the go-ahead last October. That was another case of poor timing, coming just as the economy was slackening because of the U.S.-China trade war. It meant Japan was behind the eight ball when the virus erupted.
The pandemic has given expansionary fiscal policy a new lease of life, too. With a V-shaped recovery now looking far-fetched, it’s full steam ahead on stimulus around the globe.
Abe did have some success in overhauling the way companies do business. The prime minister was a strong advocate of getting more women into the shrinking labor market; with Japan’s population dwindling, this was a matter of arithmetic as much as equality. Despite good efforts, participation still remains lower than in many other large industrial economies. Abe’s team was also a driving force behind keeping a semblance of the Trans-Pacific Partnership alive after the United States walked away. Given Japan’s reputation as a fortress of protectionism, this was groundbreaking stuff, as I wrote at the time.
There are signs that some components of Abenomics will live on outside Japan. For one, the Federal Reserve Board has signaled it’s willing to overshoot 2 percent inflation as part of a long-running policy review, a prospect Kuroda said he would tolerate as early as 2016. It attracted little attention at the time because inflation was so far from that level. Fed Chairman Jerome Powell is expected to outline new approaches this week. Another policy measure now circulating among major central banks is yield-curve control, where authorities aim to hold bond yields around zero. Japan introduced this in 2016. When the Reserve Bank of Australia rummaged through the tool box to shore up markets this year, it settled on a similar approach.
The peak of Abenomics arguably lasted just a few years before it was neutered by policy errors and the drag of global factors. That doesn’t mean it was the wrong design from the outset, and indeed the idea of an economically revitalized Japan held great appeal to voters. After Abe’s first stint at the government’s helm between 2006 and 2007, China supplanted Japan as world’s No. 2 economy and Asia’s main commercial power. There was a strong element of national security in the idea of radical medicine to get the economy going.
Even if Abenomics is entering a sunset, its substance will remain influential — whether Abe leaves next week or next year. That may be less because of his inherent genius than the fact that post-pandemic economic scarring will require it.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.
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