Abenomics : is the Japanese economy really bouncing back ?

Right after his election in 2012, prime minister Shinzo Abe visited Barack Obama at the White House and explained to him his upcoming project to boost the Japanese economy. ‘‘Japan is back and so am I’’ he declared in front of a Washington audience in an ambitious way. As investors, stock markets and entrepreneurs were starting to believe in the future economy, the ‘‘lost decades’’ of recession and stagnation seemed to be over. While Japanese firms are now hoping to see the light at the end of the tunnel, results are rather mitigated. With a 0,5 % inflation rate in May 2015, the lowest rate in two years, we could ask ourselves if the Japanese economy is really bouncing back (regardless of some external factors that contributed to the decrease of the inflation rate, such as the falling oil price.)

Looking back through history, Japan faced numerous economic issues during the post war period. While the country was ravaged by defeat, the demilitarisation process implemented by the American indirect rule put 7 million Japanese out of work. Approximatively 13 million people in total were unemployed right after the war. In addition, because of the compensation salaries given to jobless soldiers, a large amount of money was put into circulation in the economy with hardly any increase in national production, causing a problematic rise in the inflation rate. Prices went up and considerably affected consumers’ purchasing power. Finally, the dominance of ‘‘Zaibatsu’’ companies in the market was an obstacle for the economy’s reconstruction. These business conglomerates used to benefit from government assistance and concentrated the majority of market share, which hindered progress and innovation.

Taking all these issues into consideration, the possibility of an economic recovery was, at the time, quite challenging, not to say nearly impossible. However, a series of aggressive policies and reforms brought the country back on its feet. First of all, the Dodge Plan‘s monetary policies in 1948 helped reduce inflation and stimulate the economy on a short term basis. After this monetary easing, the Supreme Command of Allied Powers (SCAP) implemented a series of structural changes to assure a peaceful political and economic transition period, in order to dispel the risk of a new war. The Zaibatsu were dissolved, a new democratic constitution was introduced, property was restituted to farmers to promote entrepreneurship and manufacturing was modernised. The government policies went far beyond the simple monetary easing or fiscal stimulus strategy ; the whole country was restructured, which led to a new economic model driven by exports, innovations and industrialisation. The results were extraordinary, as Japan entered a ‘‘miraculous growth’’ period, with 9% annual growth in GDP between 1950 and 1975, which was almost 3 times the American annual GDP growth rate at that time.

Source : data from data.worldbank.org

Source : data from data.worldbank.org

Today is another story. Since the 1990s bubble burst, Japan has been suffering from a concerning lack of productivity, a fall in exports and a deflationary spiral over the past 25 years. When Shinzo Abe became prime minister in 2012, he promised to boost the economy with his famous ‘‘Abenomics’’ project, based on short term stimulus and long term reforms. The Bank of Japan governor Haruhiko Kuroda decided to purchase Japanese government bonds from financial institutions (quantitative easing policy) to increase inflation and devalue the Yen to promote exports. The government intensified fiscal stimulus with public spending to support economic growth over the short term. Finally, Shinzo Abe plans on voting major reforms in the future to apply structural changes within the country to assure long term growth.

These policies seem ambitious and appealing. Unfortunately, the results are rather disappointing. The inflation rate is still at a historical low rate of 0,5%. Even though 1 million jobs have been created since 2012, the GDP growth rate has not improved. These aggressive interventions did not spark up inflation and economic growth, which left some economists quite sceptical about Japan’s future. Abenomics will indeed have to be pushed further. It takes more than just simple mo netary easing to start an old engine. Solid sources of growth have to be found, not just short term stimulus.

If you look at the ‘‘Kondratieff’’ economic cycles during history (40 to 60 years cycles), long term periods of growth were driven by innovations, a theory which was developed as well by famous economist Joseph Schumpeter is his ‘‘Theory of Economic Development’’. This is why the upcoming digital revolution could be an opportunity for Japan. As the Japanese labor force is decreasing each year because of serious demographic issues, increasing capital productivity is essential for Japan. Public spending should be oriented towards specific innovative sectors to promote these opportunities. With hardly any resources, Japan should be the leader in innovation like it used to be, in order to restore its previous economic model based on exports.

Shinzo Abe does not have many cards left in his deck ; he will have to be aggressive on the reforms, even the painful ones. Just like the Japanese government did in the post war period, Abe will have to restructure the economy completely to guarantee sustainable growth. A new economic model should be implemented. Only this time, Japan is on its own. Furthermore, with a concerning demographic issue coming up in future years, the clock is ticking and Japan will have to act fast.

Nicolas TRAUSCH, Tle ES

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