“Buy my Abenomics!” urged Japanese prime minister Shinzo Abe in 2013. And we did. In an all-time triumph of Something-nomics branding, Mr Abe convinced the world that his so-called three arrows of “bold monetary policy, flexible fiscal policy and a growth strategy” would transform Japan’s economy. Now Mr Abe is stepping down after more than eight years in power, it is time to judge: did Abenomics succeed?
The simple answer is: no. The central goal of Abenomics was an inflation target of 2 per cent. Yet even before Covid-19, Japan never got closer than about 1 per cent. This is failure.
But like a football team that fails to win the league, defeat does not necessarily mean you were bad, just not good enough. Abenomics had its moments. For a world struggling with “Japanification” — a slide towards stagnation, deflation and ultra-low interest rates — it holds powerful lessons.
Lesson one is that monetary policy works. The initial “bazooka” of massive asset purchases by the Bank of Japan in 2013 was highly effective. Bond yields fell; stock markets boomed; and most important, the yen fell below ¥100 to the dollar, a boon to Japanese industry. Lending grew and the country enjoyed record employment during the Abe years. It is almost impossible to argue that Japan would have been better off with higher interest rates and a stronger yen.
Lesson two is that weak economies cannot handle tax hikes. The day Abenomics failed was the day Japan’s consumption tax rose from 5 to 8 per cent in the spring of 2014. The tax rise was planned by a previous administration, but both Mr Abe and BoJ governor Haruhiko Kuroda are culpable for the decision to go ahead, plunging the country into recession. A further tax increase to 10 per cent last year had the same results. If you promise stimulus, and deliver restraint, you get failure. That is the story of Abenomics in brief.
Lesson three, following closely on the above, is that credibility is everything. In the early days of Abenomics, Mr Kuroda promised 2 per cent inflation within two years. Inevitably, that pledge was not kept. After the consumption tax led to recession, Mr Kuroda’s second bazooka in 2014 — upping the pace of asset purchases to ¥80tn a year — had less effect. By now, the spell was broken.
Nor was this the only way Abenomics undermined its own credibility. For example, the government never raised public sector wages in line with the 2 per cent inflation target. Why, then, should the private sector have heeded Mr Abe’s demand for wage increases?
Lesson four is that you cannot rely on expectations alone. Mr Kuroda repeatedly explained how his policy would work by raising public expectations of future inflation. In fact, there are signs this did initially happen, before the 2014 recession killed hopes that inflation actually would rise. A tool reliant on expectations will never match one that changes interest rates directly.
This is particularly relevant given the US Federal Reserve’s decision last week to adopt an average inflation target, which will compensate for low inflation today by allowing higher future inflation. Fed officials should note the BoJ has had an “inflation-overshooting commitment” since 2016. It has not done much good.
Abenomics lesson five is that stimulus does not cause problems with public debt, it solves them. Since 1990, Japan’s public debt as a percentage of gross domestic product has risen relentlessly, except for two periods: 2005-07, when the economy was strong enough for the BoJ unwisely to raise interest rates, and 2013-19, when Abenomics provided enough of a boost to allow the consumption tax rises. The public sector can only save more if the private sector saves less. Economic strength is a precondition for fiscal tightening.
Lesson six is the limits of a growth strategy. Perhaps the most common criticism of Mr Abe in Japan is that he never delivered on promises of structural reform. It is true he never did the most radical things, such as tearing up protections for salaried staff. But he did liberalise Japan’s electricity market, open the country to Chinese tourists, cripple the agriculture lobby and sign two huge trade deals.
But most economic growth ultimately comes from more people, better education, accumulating capital, and most crucially of all, new technology. With Japan’s declining population, the only “reform” sure to expand the economy is large-scale immigration, and Mr Abe rightly felt that choice goes beyond economics. Perhaps he is at fault just for claiming to have had a strategy to revive growth. But since no such strategy exists, delivery was not the issue.
Where does that leave Japan today? Its challenges are greater than ever. After the failure of a supposedly all-out stimulus programme, the public may not buy another. But the status quo, with inflation well below target, is symptomatic of a chronic demand gap, imperfectly filled by ever-rising public debt.
One option is to wait, continue central bank asset purchases and hope for the best — the basic BoJ stance since 2016. The alternative is to co-ordinate those asset purchases even more closely with government spending.
That would be another step towards the uncharted and potentially perilous policy of helicopter money. But to sustain the hope that Mr Abe once sold so well, Japan may have little alternative.