Japan: Blunted arrows of Abeconomics

The course Shinzo Abe is following is not unique to Japan. Central bankers, by following Japan, are making the same mistake over stimulus and reforms. Stimulus alone without the most important part, reforms, is simply a recipe for trouble

Has the Japanese prime minister Shinzo Abe found the secret formula? After almost two decades of stagnation, Japan looks like it is recovering. The growth rate has not risen above 2% since 1993, but the first quarter of 2013 the rate was 3.5%. The stock market, even after its recent tumble, has risen almost 70% in yen terms over the last year, an astonishing rise. Even the demand for high-end sexual favours, “highly technical” massages costing 60,000 yen ($600) a session, has gone sky high. What has Abe done to perform this miracle? Actually more of the same.


Abe’s plan, generally known as Abeconomics, is very similar to what Japan has been trying since its stock market collapsed in 1990. They provided monetary stimulus by keeping interest rates near zero. They also provided fiscal stimulus that has increased their debt to the highest in the world, about 240% of GDP (gross domestic product). They even tried quantitative easing, a program they considered a failure.


Abeconomics also involves these elements. It just does so, on a massive scale. Abeconomics requires a 10.3 trillion yen fiscal stimulus. The new governor of the Bank of Japan, Haruhiko Kuroda, appointed by Abe intends to double the monetary base through an unprecedented program of quantitative easing. These are two parts of Abe’s plan, which he calls the three arrows, after a Japanese fable. The third arrow is regulatory reform. The problem is that he has the order of the policies wrong. For the program to work, the hardest part, the regulatory reform has to work. Without the legal reform, the first two arrows will end in disaster.


But the course that Abe is following is not unique to Japan. It is being followed by central bankers all over the world. But they all are making the same mistake. Stimulus alone without the most important part, reforms, is simply a recipe for trouble.


Japan’s prosperity was built by its export prowess, but its local business climate has ossified. It is the home of six of the world’s oldest continuous businesses going back over 1,000 years.  Japan ranks 24th in World Bank’s Doing business rankings behind countries like Georgia and Malaysia. It ranks 127th for paying taxes and 114th for the starting a business.


Like many countries it has outdated labour laws. Its lifetime employment system favours older workers. These laws make firing full-time workers almost impossible, so Japan relies on part-time workers. Part-time workers are not worth the cost of training and less expensive than better educated university graduates. Changing jobs is difficult and productivity per worker is between 60% and 70% of US levels.


Another common complaint is the retail sector. Like India, Japan has a large number of small stores. In the US most of these stores would have been replaced by larger chains. They are not prohibited as they are in India, but a combination of zoning laws, taxes and subsidies keep the retail sector inefficient to the detriment of consumers.


Land use and agriculture are also hampered by restrictive laws, taxes and subsidies which distort the sector. Japanese farmers produce 4.6 trillion yen ($45 billion) a year, but consume 4.6 trillion yen in subsidies. The average age of Japanese farmers is 66 and they farm postage stamp plots of 1.9 hectares. Zoning and tax laws make houses difficult to build and expensive to sell, so almost all Japanese houses are one of a kind constructed by small firms using non-standard materials and methods.


Attempts to reform these and other laws is not something that started with Mr Abe. But any reform in Japan, and almost every other country, is up against powerful vested interests. These vary between jurisdictions. In Japan they include unions, older rural voters, business organizations and especially Mr Abe’s own party—the LDP. The LDP has been in power almost continuously in the post war period. Its dominance was built on this coalition and it will be loath to take it apart. Additional stimulus either fiscal or monetary in such a rigid environment only temporarily masks the problems and blunts the urgency of reform.


The Japanese problems would be very familiar to Europeans. France has a vast regulatory structure and exceptionally restrictive labour practices. France also has closed markets for goods and services in areas such as energy and the professions. Its socialist president, François Hollande, was elected on a platform that rejected changes necessary to cope with globalization and has little interest in remodelling a system that benefits his supporters.


Countries in Europe that are making the largest reforms are the ones that have to, Spain, Portugal and Greece. Spain has made a start in changing its labour system that like Japan favours older workers. Portugal is trying to speed up its courts and licensing system and free smaller employers from collective bargaining obligations more suited to larger businesses. Greece has closed its competitiveness gap for its labour market by 50%.


But these reforms may not result in growth for the countries that need it most, because the Eurozone has not moved on centralizing its banking system. Until it gets a unified regulator and cross-border deposit guarantees, it will, no doubt, experience another financial crisis. Germany has made it very clear that such reforms are not in the foreseeable future.


China’s rapid recovery from the recession has been based on a wall of money. Starting with a tripling of new loans in 2009, Chinese banks have been providing massive stimulus but thanks to a system dominated by entrenched interests, including the most entrenched of all, the Communist Party, the money has become less and less beneficial. China’s rate of growth has been falling steadily since late 2009. It now takes nearly 3Rmb of credit to generate 1Rmb of growth. State owned enterprises (SOEs) in China produced 358.9 billion yuan of dividends. But 330.9 billion yuan was remitted back to these SOEs on top of 173.6 billion yuan in government subsidies. Chinese stimulus not only hides the problems, but stores up massive amounts of bad debt for a future catastrophe.


Central bankers in their heart of hearts truly believe that they are the great and wise, a force for global good. The reverse is true. By sparing the rod of recession they have delayed the efficiency of the creative destruction process at the heart of capitalism. They have allowed governments and politicians with a sufficient illusion of growth to delay unpopular, but necessary reforms. Without reform the additional stimulus is simply allocated to ever more inefficient parts of the economy stifling growth, slowing the economy and bringing the moment of collapse ever closer.


(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages.)

Vinay Joshi
1 decade ago
Hello William,

How r u? I’m fine.

Before I talk on ‘Abenomics’, your thrust subject, I wish to bring to your notice that Corporate Japnese investors are coming back home, stable cash income. YoY domestic investors brought back 8.5 trn Yen, against 2.56 trn they took it overseas. [I have it from REUTERS].

What is the scene in high growth emerging markets? Advanced economies hold $55trn in pension funds. So its working two decades of deflation.

Why should investments come back? Ben Bernanke stimulus v. Q1-3.5%!
So 8.5trn got is ok for bank.

[Apple hoarding $40Bn in cash surplus in Ireland! Apart from other US co’s.]

No deflation. For commodities it’s a ‘super cycle’, Try understand what it is, tho’ the present is at lower end of its range with a decade to go. [read UN economics dept. paper. The trend is from 1920 onwards.]

What does flagging commodities ‘super cycle’ mean for the investors? Answer.

As well tell about pull in growth from resource hungry countries.
[the richest Indian in UK, world’s biggest producer of ‘steel’, is selling his palatial mansion at St.James Square, the MOST prestigious address in London, at a loss of STG Pounds 7mn.]

BoJ achieving 2% consumer price inflation in 18-24 months time horizon.
So about 65trnY will be pumped in to buy assets.

If you’re boiling down to a single question – will this boldest step solve the problem of heavily indebted [234%]? or like Ben Bernanke advising ‘Rooseveltian Resolve’, in his 1999 paper & that it can’t be practiced in US also - ‘SIMPLY UNTESTED’!?

Ben is now practicing it [with results – except for naysayers.]

I’ll not refer to his Chicago address but his Capitol Hill testimony has outlined a chart.
[last time you didn’t answer if Janet will take over?!]

Japan is more complex than US. The power of printing is as much with them as in US & EU.

Only aftermath of 2008, FED comes out with its failures to address it. TALK GROWTH!

On dented ‘Abenomics’, will talk later. There are no asset bubbles, hubristic!

So emerging markets are netting investments but if PRC & S.Korea pounce upon, JAPAN can’t be an unwilling spectator to be unsettled. Phoneix!


Naresh Nayak
1 decade ago
Stimulus has been absolutely wrong. When I was on a contract assignment in Tokyo in 2009, the Government was giving out JPY 12,000 to anybody who had a visa that was not a tourist visa. Unfortunately I was on a short term business visa, so I didn't get it. I asked my Japanese colleagues (all bankers in the Central Business District working with me) what did they think about it, and they said to me, you just take the money and spend it.
Japan had gotten it right with 26 years of zero rates and no economic recovery in sight, but the manner they did it was wrong. They should have cut their sky high tax rates both at the federal and local level instead of doling out 12000 yen to each individual who could be a foreigner who has never paid taxes to Japan.
Bottomline, if you want to stimulate the economy, reduce taxes and Government.
Narendra Modi got it right. While Gujarat's economy is prospering due to low taxation, no octroi and simple laws of doing business, the Gujarat Government's finances have deteriorated in 10 years which have been used as a political weapon against him. This is not because of corruption like here in Maharashtra but because of more cash in hand to businesses and individuals due to less taxation by the Government. Narendra Modi is one politician who gets it right and understands how to stimulate an economy apart from Nigel Farage of Britain and Dr. Ron Paul of the US.

Free Helpline
Legal Credit