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Economic Development of Japan
Aggressive
monetary policy
Flexible fiscal
policy
New growth
strategy
No.14 Abenomics
Second Government of Shinzo Abe
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First Abe Cabinet (Sep.2006-Sep.2007) was unsuccessful.
Second Abe Cabinet (Dec.2012-) has the following features:
 Active, quick, and vigorous (compared with past PMs).
 Politically conservative (critiques say “right wing”):
business interests, active defense.
 Broadening the interpretation of Constitution (Article 9)—
instilling nationalism, more military possibilities.
 Diplomatically active (foreign visits, top sales, coping with
China, etc.)—but promises are not properly followed up.
 Abenomics for ending deflation and reviving growth.
High popularity + weak oppositions = LDP’s free hand
 Economic recovery is welcomed by businesses
 With gained popularity, Abe now shifts to his “right wing”
agenda—but they are not so popular among people.
Dominance of LDP-Komei Coalition
Ruling party coalition has majority in both Houses due to weak &
fragmented opposition; it can force any law after debating it
formally & superficially in the parliament.
The term of The House of Representatives
is four years; last election took place in
Dec. 2014.
The term of The House of Councillors is six
years with half elected every three years;
last election took place in July 2013.
Three Arrows of
Abenomics
To revive the economy, three “arrows” are mobilized.
1. Aggressive monetary policy (“New Dimension”)
- PM Abe appoints BOJ Governor Haruhiko Kuroda (Mar. 2013)
- Dispel deflation mindset: inflation target of 2% within 2 years
- Monetary expansion with new asset purchases (REIT etc.);
doubling monetary base & gov’t bond holding in 2 years
- Correction of high yen (done, or overdone)
2. Flexible (=active) fiscal policy
- Revive economy first, consolidate budget later
- Increase infrastructure investment
3. New growth strategy (cabinet approval in June 2013; another
cabinet decision in June 2014; another in June 2015)
- Japanese Economy Revitalization Headquarters (under it:
Industrial Competitiveness Conference)
- Initially, 3 roadmaps and 3 plans (12 pillars – 37 items – 56 subitems)
Source: Japan Revitalization Headquarters, PM Office
Supporters of Abenomics (2013)
J. Stiglitz—“Depreciating yen to end deflation is the right policy.
Just as I recommended 10 years ago.”
Paul Krugman—“I evaluate Abenomics highly; no other country
could do this policy mix.”
IMF Managing Director Lagarde—”Inflation target of 2% is
desirable as long as central bank independence is secured.”
Fed Chairman Bernanke—“I support it as a policy to end
deflation.”
Prof. Heizo Takenaka (Keio Univ.)— “Abenomics is 100% right.”
Prof. Koichi Hamada (Abe’s advisor)— “Don’t worry about recent
stock market drops—they are just corrections of excess
optimism. The real economy is improving.”
Prof. Takatoshi Ito (GRIPS)— “BOJ economists think QE is
ineffective. But many researchers and officials support QE as
a tool to change inflation expectation.”
Critiques of Abenomics (2013)
George Soros (investment guru)—”Japan’s monetary policy is
bold but very risky; it may trigger a collapsing yen.”
Prof. Kunio Okina (Kyoto Univ.)— “If deflation mind is dispelled
but fiscal discipline is not secured, monetization of fiscal
deficit will generate a serious dilemma between financial
stability and price stability.”
Kazuo Ueda (Tokyo Univ.)—Monetary expansion increased
interest & yen volatility. If long-term interest rates rise,
expected positive impact on real economy will not happen.
Ryutaro Kono (BNP Paribas)— “The monetary transmission
mechanism is broken. Under such circumstances, monetary
expansion may destabilize asset prices, raise long-term
interest rates, and put BOJ in a macro policy dilemma.”
Nikkei Newspaper commentary—“The growth strategy lists only
easy measures; bold reforms in such key areas as medical
service, agriculture, corporate tax rates, etc. are not
clarified.”
Call rate
(interbank shortterm interest rate)
Bubble
Zero
interest
rate
policy
Zero
interest
rate
policy
Lehman
Shock
Money &
bank
lending
Excess reserves
are built up at
commercial banks
during zero
interest rate
periods
My View on Abenomics (2013)
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Compared with DPJ’s total impotence, Abe is doing much
better. He has brightened Japan’s short-term psychology—
but that is not enough for long-term growth.
A policy mix of fiscal, monetary and growth policy is nothing
new; but Abe’s policy presentation is innovative.
Growth policy is central, while fiscal & monetary policies are
supplementary. New industries must emerge, then macro
policies should support them. Abenomics is strong in fiscal &
monetary areas, but growth policy remains weak & random.
If long-term interest rates start rising, government will be
completely bankrupt.
Pumping money into a broken transmission mechanism risks
asset bubbles and financial instability. Market psychology is
unpredictable and BOJ cannot control what will happen.
Proper policy procedure is not followed: there is a disconnect
between visions and listed actions.
Pumping money
into an integrated
world is risky.
Global and national good & asset markets
Inflation
target of 2%
Bank of Japan
Aggressive
monetary
policy
Global & national
liquidity glut
General
goods &
services
Consumer
durables
Government
bonds
Quantitative
expansions
US & EU
(US Fed: trying to end QE3 gradually)
Foreign
money & assets
(F/X instability)
Driven by
unstable
market
psychology;
unpredictable
direction &
timing
Energy &
commodities
Precious
metals
Investment
in emerging
markets
Real estate
& REIT
Stock market
Standard Policy Making Procedure
(Five Necessary Conditions)
The entire process should take about 1 year for policy revision and 2-3 years for new policy
5. A secretariat with sufficient authority and
responsibility to coordinate the entire process
Top leader
1. Vision
2. Consensus building
3. Documentation
Brainstorming
Studies
& surveys
Set broad
goals &
direction
Drafting
work
Comments
& revisions
(Drafting may
be outsourced)
Stakeholder
consultation
4. Substantive
stakeholder participation
Ministries
＆agencies
Businesses
Academics &
consultants
Regions &
localities
Finalize
& approve
Growth Strategy in Abenomics
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Broad visions are given (three arrows, three plans, etc.) but
they are not new—contents are basically the same as past
ideas of previous governments.
Concrete growth measures were presented too quickly
without deep consultation with stakeholders. They are just a
collection of various ideas proposed by committee members
and officials in charge.
Visions – (targets) – (policy areas) – random actions?
Growth Strategy is a loose wish list, not an action plan. Easy
ones are implemented first without specifying prioritization,
required results, timing, budgeting, etc. Because the list is
broad & unsurprising, it can cover almost any policy.
A special budget of 3 trillion yen was announced (July 2014).
Ministries try to get more funding by proposing something
related to Growth Strategy. But this may worsen the
scattered and passing nature of proposed measures.
Growth Strategy in the Second Year:
“Implementation Stage” (2014)
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Cabinet approved 124-page “New” Growth Strategy (June 24,
2014) but it is still a wish list of ideas without consultation or
action plans. PM Abe now declares an implementation stage.
Added policy areas:
 Recovering an earning power—corporate tax cut (to 29%?
welcomed by businesses); corporate governance; tripartite
convention; investing pension funds in equity market
 Producing workforce—demographic targets; childcare
facilities; reform tax deductions; mobilizing foreign
trainees and domestic workers
 Reform rock-solid regulations—revise work rules; medical
reform; organizational reform in agriculture
 Energy—restart nuclear power, electricity reform, etc.
 Tourism—easing visa requirements for ASEAN people, etc.
Comments (2014)
Prof. Heizo Takenaka (Keio Univ.)— “New Growth Strategy is better
received abroad than a year ago.”
Japan Economic Journal (June 30, 2014)— “This is the 9th Growth
Strategy of the Japanese government since 2001. None of the past
Strategies produced results. Their contents were more or less similar:
job creation, special zones, creating demand for environmental or
medical industries, hiring young workers, etc. Short-lived governments
had little time to work on policies. Subsidies were usually wasted.
Ministries were happy to report new spending, but there was no
monitoring of effectiveness. Unproductive policies must be ended.
Money and policy must be directed to fewer programs.”
Abenomics in the Third Year:
“Stage Two” (2015)
Cabinet approved “Revised Japan Revitalization Strategy
2015” in June 2015. [Annual minor revision may continue
without any substantive change in methodology.]
PM Abe on June 24:
“The economic virtuous circle that emerged this year [rising
profits & wages] should not be aborted. We must continue this
momentum to revive all micro, small and medium enterprises.
We must deliver the fruits of economic recovery to all over
Japan. That is the mission of Abenomics, and all hinges on the
implementation of Growth Strategy. Today, we boldly
sgrengthened Growth Strategy.”
Note: critiques say Abenomics has benefited large
firms & stock investors, but has not reached SMEs or
rural areas; income gaps are widening.
PM Office’s Summary
(Source: PM Office homepage, June 2015)
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“Corporate profits and wages are rising but investment
remains low. Investment is key to productivity growth.”
“Many concrete policies have already been decided and
executed under Growth Strategy with unusual speed
(i) Agriculture sector reform
(ii) Health sector reform
(iii) Energy market reform
(iv) Labor market reform
(v) Pilot initiatives in special zones.”
“Government will strictly monitor & check key performance
indicators (KPIs) and continue to flexibly revise policies and
policy groups.”
“Abenomics Stage 2”
(Source: PM Office homepage, June 2015)
PART I--Productivity revolution through investment for
future
1. Promote investment & earning power
1/ Further corporate governance reform—productive dialogue with
shareholders, corporate tax reform, public-private dialogue
2/ Innovation ventures—create Japanese Silicon Valley, competition among
universities
3/ High-quality infrastructure for Asia and other growth markets
2. Accelerate new-age challenge (4th Industrial Revolution)
IoT, big data, artificial intelligence, cyber security, My Number system
3. Strengthen potential of individuals
Reduce working hours, use female & aged labor, customized career
development, new TVET institutions
“Abenomics Stage 2” (cont.)
PART II—Local Abenomics
Absolutely increase earning power of medium, small & micro enterprises;
effective publicizing of support measures
Activate and increase productivity of service sector: local bank support,
productivity movement through PPP, use of IT, business benchmarking
Mainstreaming agriculture & fishery, medical & age care, tourism
PART III—Reform 2020: PPP projects for growth
Auto-drive car, hydrogen society, frontline robots, tourism management,
inward FDI
 No methodological change and only minor content change from the first year.
It is an average, not spectacular, reform effort.
- Too many flashy words with no concrete targets, medium-term budgeting, etc.
- Still a random wish list with annual modification (“flexible revision”)
- Ministries have incentives to propose projects listed in Growth Strategy items
without scrutinizing effectiveness.
2% Inflation Target to Be Missed
[But is inflation caused by weak yen & high imported prices really good for
the Japanese economy? Is inflation targeting desirable? Effective?]
Consumer Price Inflation (Excluding Fresh Food)
% change over previous year
BOJ’s target
Base 2010
Note: two lines represent different technical methods of splicing indices.
Budget Improves as Revenues Rise
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Strong profit pushes up corporate income tax receipt.
Consumption tax raised from 5% to 8% (April 2014).
Government leans toward more spending than fiscal
consolidation.
Level of dependence on
JGBs =
Borrowing _____
Borrowing+Fiscal revenue