Japan’s Prime Minister, Shinzo Abe, has been the boldest prime minister that Japan has seen for decades. And he is now one of the longest-lasting. The stark plans which he took into office in December 2012, termed “Abenomics”, were aimed at restarting the ailing Japanese economy. 

 

Following a property bubble in the early 1990s, the Japanese economy froze. Manufacturers moved many factories out of Japan. Consumption slumped. Gross Domestic Product (GDP) stalled. Deflation set in. The government debt as a percentage of GDP rose to an alarming level, ameliorated only by the fact that much of that debt was held by Japanese rather than foreigners.

 

Prime Minister Abe’s plans were comprehensive. A Quantitative Easing (QE) program to push cash into the economy, assist exporters by putting downward pressure on the exchange rate and push up the inflation rate. The QE program has been injecting into the economy a massive USD 650 billion per year. There has been a huge devaluation in the Yen. Surely this would have been enough?

 

However, Mr Abe’s foreshadowed supply-side reforms have not eventuated. Labour markets are still stuck in the 1960s: jobs for men for life; effective discouragement against women entering the workforce. The population keeps aging.  And the consumers remain ‘on strike’.

 

This is not to say that Japanese companies are in a bad state. They are healthy, with enviable corporate earnings. They hold USD 2 trillion in idle cash. That is part of the problem: the cash is idle. 

 

But the lack of corporate innovation, plus the lack of government reform of labour markets is seeing stagnant productivity growth.

 

Despite the massive QE, and despite the large devaluation (down one-third over the last couple of years) making Japanese goods cheaper on global markets (which has been one of the causes of global deflation), GDP is stuck due to the limited domestic corporate investment and no consumption growth. Hence the desired increase in inflation has not occurred. 

 

Japan has had a very low unemployment rate for decades, and the latest unemployment figures (3.3 percent) indicate a shortage of unskilled labour, a very different picture from other OECD countries. This would suggest that wage demands should provide a useful, and desired, impetus to the inflation rate. But this is not happening, and the wage increases being offered by Japanese employers are so tiny that little inflationary impact will result.

 

And so, the failure of the Government to implement the foreshadowed supply-side changes is having an unfortunate impact on the expectations for Abenomics. 

To this are added cultural rigidities: attitudes towards women in the workforce; attitudes against accepting foreign workers. 

 

Policy has now turned to Research & Development (R&D) as a means of improving investment and productivity, even though Japan spends a lot on R&D compared to other OECD countries. And, in conjunction, university courses are being reviewed with the intention to concentrate even more on science and maths at the expense of the liberal arts.  Without detracting from the importance of R&D, this approach seems backwards-looking, and does not recognize the significance of the liberal-arts as a base for the development of the services sector and as a base for the creativity required by the social media sector which has been generating the largest new companies in the last 20 years. Indeed a recent survey (by the Global Entrepreneurship & Development Institute) calculating a Global Entrepreneurship Index puts Japan way down at number 33.

 

Unless the supply side policy reforms are introduced, as well as a more westernized approach taken to foreign workers (unskilled and highly skilled) and women in the workforce, the problems facing Japan will not be solved. GDP growth is patchy and annualizing at under 1 percent. Inflation is nowhere near the 2 percent target. The International Monetary Fund is sounding an alarm bell. These problems remain: low wage growth, low productivity growth, truculent consumers, low domestic investment, an aging population and a failure to get on top of the government debt ? one of the highest in the world.

 

Recently, China overtook Japan as the second largest economy, a matter of strategic importance to Japan, and not just league-table bragging. Abenomics was designed to reverse the stagnation of the Japanese economy. It risks failing.

 

Mike B. Bradshaw has been an officer of the Treasury, Canberra, an investment banker, and a consultant in Europe, the USA and Asia. He now works on project financing.