Abe needs a fourth arrow
Critics whose dislike of Abe gets the better of them are often gleeful about the apparent failure of what's called Abenomics.
Japan Prime Minister Shinzo Abe’s leadership has earned him public support ratings near 60%. However, he hasn’t managed to pull the economy out of its multi-decade slump.
Critics attack the prime minister about the apparent failure of what’s called Abenomics, but it should be noted that none of his predecessors were any more successful on the economic front over the last 25 years.
Non-economists rightly hesitate to weigh in on topics in that field, but since even the professionals appear to dabble in sorcery rather than science, is it worth a try?
Since a couple of decades of the same medicine to revive Japan’s economy hasn’t worked and having experienced that economy first-hand for 20 years, I’ll take the plunge.
Best and brightest?
Abe might be forgiven for relying on Ministry of Finance and Bank of Japan officials for advice since finance is said to be their specialty. But he might reconsider.
When working at the US Embassy in the 1990’s I regularly met a senior financial official. Asked how Japan was going to fix its banking problems, he replied, “Wait until the economy improves.”
I figured he simply didn’t want to tell the Americans the real plan since elite bureaucrats no doubt had something clever in the works. It turned out that was the plan.
Since then, other inspired MOF and BOJ schemes to fix the economy include introducing the 2,000 yen note (the retooling of Japan’s millions of vending of machines would kick-start growth).
This was followed by an increase in the consumption tax , taking money from people being a surefire way to get people to spend more. More recently we have negative interest rates, which will go into the “splendid idea bin” along with the 2,000 yen note.
Financial officials routinely chastise the Japanese citizenry for its moral failing known as a “deflationary mind set” or not spending freely enough.
But I’m yet to meet a Japanese who postpones going to the supermarket, buying underwear, or delaying any number of other purchase decisions expecting the items will cost less next week.
The financial mandarins are at least correct about one thing. There is a psychological element to an economy. And how people think about an economy tends to determine how the economy performs.
However, as psychology is harder to demonstrate in a glossy power point than money supply, inflation, interests rates, and the like, it gets less attention.
Asking whether psychology drives an economy or an economy drives psychology may be a chicken and egg question, but let’s explore the former.
It’s job security, stupid
In Japan’s economy, this psychology has little to do with expectations prices will decline and everything to do with individual financial circumstances.
The main thing is a relatively secure job that pays enough to support oneself (and a current or prospective family) and leaves enough to have some fun and save for the future.
When enough people have relatively safe jobs and some disposable income they tend to spend more, which not surprisingly bucks up the entire economy.
Unfortunately, too many Japanese haven’t had secure jobs and enough money for a long time, and many Japanese under 35 years old have no first hand experience of such things at all.
Japan as Greece
Despite periodic stimulus packages, Japan’s financial officials have implemented what amounts to an austerity policy akin to what the Greeks got from the European Central Bank and the German finance ministry.
Japan might be awash in money, but it accumulates in all the wrong places — Japanese companies are said to be sitting on a couple of trillion dollars — and not enough finds its way into citizens’ pockets.
Japanese professionals and other workers are underpaid to start with and then the taxman goes to work through national and local taxes, along with health, welfare and pension levies.
A visit to the local ward office to ask how one’s residence tax is calculated can be compared to a sit down with the local Yakuza and being told, “we charge what we think you should pay.”
And the fleecing continues with hefty highway tolls, extortionate vehicle licensing and car inspection fees, and bullet-train tickets prices resembling the cost of an overseas vacation.
Even without an economics degree, it seems that if the Japanese government wants people to spend more, it would help if the government left them some money to spend.
Severe Fiscal Condition
The MOF and Bank of Japan have a default response to all matters to do with the economy and hence the need to squeeze the public dry: Japan’s national debt has created “severe fiscal conditions” and bureaucrats are in fact nobly fending off national disaster.
Apparently, when the economy improves then these officials on the front line will ease up.
However, that’s got it back to front. Until the bureaucrats drop the severe fiscal condition excuse and start generating some oxygen then the psychology of Japan’s starved-of-air consumers will never improve and that means the economy.
Yes, Japan has a lot of debt, but owes most of it to itself — unlike the United States. PhD theses are written on such topics, but the casual observer might reasonably think that borrowing from one’s family members is preferable to borrowing from an international Mafia.
The foreign economic chattering class has said for years that Japan needs to “restructure” its economy. It’s unclear exactly what this means, but being able to fire lots of people seems to be a big part of it.
The restructuring that has taken place has resulted in almost 40% of Japanese employees being labelled as temporary workers, which as the title suggests does not provide for the job security and attendant psychological underpinning of a strong economy.
And the part-timers are usually paid poorly. Japanese raking in the equivalent of $9 an hour aren’t likely to get married, have four children and spend lots of cash on building a domestic bliss.
Is it any wonder after a couple decades of this, that Japan’s citizens aren’t brimming with confidence about their economic prospects, which of course are Japan’s economic prospects. For a graph of that confidence, take a look at the country’s birthrate.
Pointing at the failures is easy, but here is a suggestion for what to do. Abenomics is said to have three arrows: monetary policy, fiscal policy and restructuring. Add a fourth arrow and call it psychology.
Forget about inflation targets, negative interest rates, and going home early on so-called Premium Fridays. Make job security and putting more money into people’s pockets the main and only objective.
Reverse the grotesquely high level of insecure, low-paid temporary employment. Next, reduce taxes (not exactly a new idea), tolls, shaken fees, and other burdens. Cut social welfare spending. Daunting perhaps, but not impossible, and there isn’t a social welfare budget on the planet that can’t afford some pruning.
Taking a hatchet to social welfare spending won’t shut up the bureaucrats with the severe-fiscal-condition mantra, but it will take some of the wind out of their sails.
Abe’s popularity is an advantage he should use. He had the nerve and clout to pass collective self defense bills and even take on the powerful farmers union over TPP, both thought impossible.
Abe needs to show the same boldness and enthusiasm for fixing the economy that he has for revising the Constitution – which is far less important for Japan.
Another way of putting this prescription is Abe needs to listen closely to his advisors in the Ministry of Finance and the Bank of Japan and then do the opposite, because their approach hasn’t worked for 20 years and counting.
Grant Newsham is a Senior Research Fellow at the Japan Forum for Strategic Studies.