Japanese Prime Minister Shinzo Abe’s program for his country’s economic recovery has led to a surge in domestic confidence. However, to what extent can “Abenomics” claim credit?
Interestingly, a closer look at Japan’s performance over the past decade suggests little reason for persistent bearish sentiment. Indeed, in terms of growth of output per employed worker, Japan has done quite well since the turn of the century. With a shrinking labor force, the standard estimate for Japan last year — that is, before Abenomics — had output per employed worker growing by 3.08 percent year-on-year. That is considerably more robust than in the US, where output per worker grew by just 0.37 percent last year, and much stronger than in Germany, where it shrank by 0.25 percent.
Nonetheless, as many Japanese rightly sense, Abenomics can only help the country’s recovery. Abe is doing what many economists (including me) have been calling for in the US and Europe: a comprehensive program entailing monetary, fiscal and structural policies. Abe likens this approach to holding three arrows — taken alone, each can be bent; taken together, none can.
New Bank of Japan Governor Haruhiko Kuroda comes with a wealth of experience gained in the Japanese Ministry of Finance and as a former President of the Asian Development Bank.
During the East Asia financial crisis of the late 1990s, he saw firsthand the failure of the conventional wisdom pushed by the US Department of the Treasury and the IMF. Not wedded to central bankers’ obsolete doctrines, he has made a commitment to reverse Japan’s chronic deflation, setting an inflation target of 2 percent.
Deflation increases the real (inflation-adjusted) debt burden, as well as the real interest rate. Though there is little evidence of the importance of small changes in real interest rates, the effect of even mild deflation on real debt, year after year, can be significant.
Kuroda’s stance has already weakened the yen’s exchange rate, making Japanese goods more competitive. This simply reflects the reality of monetary policy interdependence: If the US Federal Reserve’s policy of so-called quantitative easing weakens the dollar, others have to respond to prevent undue appreciation of their currencies. Someday, we might achieve closer global monetary-policy coordination; however, for now it made sense for Japan to respond, albeit belatedly, to developments elsewhere.
Monetary policy would have been more effective in the US had more attention been devoted to credit blockages — for example, many homeowners’ refinancing problems, even at lower interest rates, or small and medium-size enterprises’ lack of access to financing. Japan’s monetary policy, one hopes, will focus on such critical issues.
However, Abe has two more arrows in his policy quiver. Critics who argue that fiscal stimulus in Japan failed in the past — leading only to squandered investment in useless infrastructure — make two mistakes. First, there is the counterfactual case: How would Japan’s economy have performed in the absence of fiscal stimulus? Given the magnitude of the contraction in credit supply following the financial crisis of the late 1990s, it is no surprise that government spending failed to restore growth. Matters would have been much worse without the spending; as it was, unemployment never surpassed 5.8 percent, and, in throes of the global financial crisis, it peaked at 5.5 percent. Second, anyone visiting Japan recognizes the benefits of its infrastructure investments (the US could learn a valuable lesson here).
The real challenge will be in designing the third arrow, what Abe refers to as “growth.” This includes policies aimed at restructuring the economy, improving productivity and increasing labor-force participation, especially by women.
Some talk about “deregulation” — a word that has rightly fallen into disrepute following the global financial crisis. In fact, it would be a mistake for Japan to roll back its environmental regulations, or its health and safety regulations.
What is needed is the right regulation. In some areas, more active government involvement will be needed to ensure more effective competition.
However, many areas in which reform is needed, such as hiring practices, require change in private-sector conventions, not government regulations.
Abe can only set the tone, not dictate outcomes. For example, he has asked firms to increase their workers’ wages, and many firms were planning to provide a larger bonus than usual at the end of the fiscal year last month.
Government efforts to increase productivity in the service sector probably will be particularly important.
For example, Japan is in a good position to exploit synergies between an improved healthcare sector and its world-class manufacturing capabilities, in the development of medical instrumentation.
Family policies, together with changes in corporate labor practices, can reinforce changing mores, leading to greater (and more effective) female labor-force participation.
While Japanese students rank high in international comparisons, a widespread lack of command of English, the lingua franca of international commerce and science, puts Japan at a disadvantage in the global marketplace. Further investments in research and education are likely to pay high dividends.
There is every reason to believe that Japan’s strategy for rejuvenating its economy will succeed: The country benefits from strong institutions, has a well-educated labor force with superb technical skills and design sensibilities, and is located in the world’s most (only?) dynamic region.
It suffers from less inequality than many advanced industrial countries (though more than Canada and the northern European countries), and it has had a longer-standing commitment to environment preservation.
If the comprehensive agenda that Abe has laid out is executed well, today’s growing confidence will be vindicated. Indeed, Japan could become one of the few rays of light in an otherwise gloomy advanced-country landscape.
Joseph Stiglitz, a Nobel laureate in economics, is University Professor at Columbia University.
Copyright: Project Syndicate
Saudi Arabian largesse is flooding Egypt’s cultural scene, but the reception is mixed. Some welcome new “cooperation” between two regional powerhouses, while others fear a hostile takeover by Riyadh. In Cairo, historically the cultural capital of the Arab world, Egyptian Minister of Culture Nevine al-Kilany recently hosted Saudi Arabian General Entertainment Authority chairman Turki al-Sheikh. The deep-pocketed al-Sheikh has emerged as a Medici-like patron for Egypt’s cultural elite, courted by Cairo’s top talent to produce a slew of forthcoming films. A new three-way agreement between al-Sheikh, Kilany and United Media Services — a multi-media conglomerate linked to state intelligence that owns much of
The US and other countries should take concrete steps to confront the threats from Beijing to avoid war, US Representative Mario Diaz-Balart said in an interview with Voice of America on March 13. The US should use “every diplomatic economic tool at our disposal to treat China as what it is... to avoid war,” Diaz-Balart said. Giving an example of what the US could do, he said that it has to be more aggressive in its military sales to Taiwan. Actions by cross-party US lawmakers in the past few years such as meeting with Taiwanese officials in Washington and Taipei, and
The Republic of China (ROC) on Taiwan has no official diplomatic allies in the EU. With the exception of the Vatican, it has no official allies in Europe at all. This does not prevent the ROC — Taiwan — from having close relations with EU member states and other European countries. The exact nature of the relationship does bear revisiting, if only to clarify what is a very complicated and sensitive idea, the details of which leave considerable room for misunderstanding, misrepresentation and disagreement. Only this week, President Tsai Ing-wen (蔡英文) received members of the European Parliament’s Delegation for Relations
Denmark’s “one China” policy more and more resembles Beijing’s “one China” principle. At least, this is how things appear. In recent interactions with the Danish state, such as applying for residency permits, a Taiwanese’s nationality would be listed as “China.” That designation occurs for a Taiwanese student coming to Denmark or a Danish citizen arriving in Denmark with, for example, their Taiwanese partner. Details of this were published on Sunday in an article in the Danish daily Berlingske written by Alexander Sjoberg and Tobias Reinwald. The pretext for this new practice is that Denmark does not recognize Taiwan as a state under