Japan Gives Abenomics a Second Chance

5 MINS READDec 13, 2014 | 21:58 GMT
Japan Gives Abenomics a Second Chance
A man walks past posters of Japanese Prime Minister and ruling Liberal Democratic Party leader Shinzo Abe in Tokyo on Dec. 4.

Japanese voters are expected to overwhelmingly support Prime Minister Shinzo Abe and his plan to revive the country's economy, known colloquially as Abenomics, when they head to the polls for nationwide snap elections Dec. 14. While Abenomics is only one part of a broader initiative to improve Japan's international standing, it is, for now at least, the focus of Japan's political establishment and its electorate. The vote could give Abe's Liberal Democratic Party its biggest parliamentary majority in almost two decades, equipping the prime minister with his strongest mandate yet to push through monetary easing, fiscal stimulus and structural reform measures designed to put Japan on the path to sustained economic growth. Even so, a confluence of factors, including political opposition from Japan's key economic decision-making bodies and politically powerful lobbies in addition to the deflationary effects of demographic decline, will limit the reach of Abenomics in 2015.

Abe's move to hold snap general elections Dec. 14 originated in his decision to raise the national sales tax from 5 to 8 percent in April. The hike was meant to appease skeptics of Abenomics in the Ministry of Finance and the Bank of Japan by reaffirming the administration's commitment to tackling Japan's budget deficit and reducing the national debt. However, it sent consumer spending plummeting in the second half of the year and plunged Japan's economy into recession. This outcome ultimately forced Abe to abandon plans for a second sales tax hike, which would have raised rates from 8 percent to 10 percent. Essentially, the fallout from the April sales tax hike exposed the fragile nature of gains made under the first attempt of Abenomics in 2013 and early 2014.

Abenomics and Beyond

Abenomics 1.0 made notable headway in temporarily combating Japan's deflation. The country's inflation rate reached 0.4 percent in 2013, up from 0 percent in 2012, and deficits of 0.3 percent in 2011 and 0.7 percent in 2010. Abenomics also stimulated economic activity through increased government spending on infrastructure development and various social services. But it largely ignored the so-called "third arrow" of Abe's agenda: structural social and economic reforms intended to raise productivity and competitiveness across Japan's declining workforce. These reforms represent the most significant component of Abenomics and are key to translating the temporary tailwinds of monetary easing and fiscal stimulus into sustainable, long-term economic growth.

To be sure, implementing structural reforms is a long-term process. Even if Abe had passed productivity-enhancing reforms in 2013 and early 2014, it is unlikely they would have prevented the fallout from April's sales tax hike. Nonetheless, as the tax hike and subsequent economic slowdown made clear, unless Abe can push through reforms to improve worker productivity, expand the workforce and expose domestic markets for things like cars and agriculture to greater external competition, the effects of further easing and fiscal stimulus are likely to be short-lived.

Victory in the Dec. 14 elections will give Abe more room to increase government spending and cut the corporate tax rate, and it may even pave the way for further monetary easing in 2015, especially if oil prices continue to fall. The true test of Abe’s mandate, however, will be his ability to fire the third arrow.

So far, pursuing structural reforms has not been politically viable for Abe. In June 2014, he made pledges to revise the worker dispatch law to make it easer for businesses to hire and fire workers and to open the agriculture sector to greater outside competition, a move that would go hand-in-hand with Japan joining the U.S.-led Trans-Pacific Partnership. He also promised to increase female participation in the workforce, especially among women over the age 45, and to bring in more foreign workers to the health and elderly care sectors. Finally, he said he would implement a raft of other labor and economic reforms that would inject greater competition into Japan's economy and expand gross output. All of these initiatives will be high on the prime minister's agenda in 2015, even as he struggles against Japan's industrial lobbies to increase wages, works to bring some of Japan's dormant nuclear power capacity back online and presses the Bank of Japan and Ministry of Finance for further help in sustaining inflation. 

Opposition to Abenomics

That help is not likely to be given lightly, especially in light of the internal political blowback from the Ministry of Finance and the Bank of Japan following the bank's surprise decision to ramp up government bond purchases in October. This decision, combined with the delay of the second sales tax hike, has stoked concerns in powerful corners of Japan's policy establishment over the government's deteriorating fiscal condition. Nor can Abe expect to easily raise wages and open the agriculture sector to foreign competition. Both moves position him against not only powerful lobbies, but also key Liberal Democratic Party constituencies.

Regardless, while a strong win in the snap elections could still influence Japanese policy, even with a stronger parliamentary majority, Abenomics faces constraints that will not simply dissolve after Sunday. The next year will test the Abe administration's ability and resolve to move forward with measures that will upset the status quo according to which Japan's economy has operated for decades. The reforms will disrupt a system that for a long time provided an extraordinarily high quality of life for most of the country's population but which is becoming progressively less socially and financially tenable for many reasons, mainly Japan's demographic decline. Put another way, the reforms will test whether Japan has reached a point of crisis sufficient to make these reforms politically viable. 

Ultimately, even if Abe and the his party win 300 or more of the 480 seats in House of Representatives — and recent polls suggest they well might — the prime minister will continue to operate in a profoundly constrained political and economic environment. These constraints are not new, but rather are hardwired into Japan's post-World War II social contract and, more recently, in the structural effects of a rapidly aging population and declining workforce. After Dec. 14, Abe will be better positioned to combat these constraints — but that alone will not guarantee success.  

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