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JAPAN’S CONSERVATIVE LIBERAL D EM O CR A TIC PARTY (LD P)— LED BY Prime Minister Shinzo Abe (pronounced “AH-bay”)—won a landslide victory in the December 2014 snap election for the House of Representatives, the lower house of the national parliament. The Liberal

Democrats and their partner party in the ruling coalition, the Komeito, won 326 of 475 seats, giving them a two-thirds supermajority in the House of Representatives.

Why did Abe win so handily? Since the end of 2012, the Abe government has carried out an eco­nomic revitalization program called “Abenomics”—its response to Japan’s ongoing economic stagnation, the “lost decades” of the 1990s and 2000s. Abenomics consists of three “arrows”: aggressive monetary “quantitative easing,” massive fiscal stimulus, and “structural reforms” to the economy. The main reason for Abe’s resounding victory is that he succeeded in persuading the electorate to stay the course, with slogans like “Abenomics is progressing” and “There is no other way to economic recovery.” Meanwhile, he shifted voters’ attention away from more controversial matters, such as his plans to restart Japan’s nuclear power plants (which were shut down after the March 2011 Fukushima nuclear disaster) and to bolster the country’s military forces.

Rather than leading to a rebound of domestic consumption and investment spending, which could lift the economy as a whole, however, Abe’s neoliberal reforms would lead to rising inequality and con­tinued stagnation. We certainly need significant public spending. The Abe government, however, has carried out pork-barrel public projects that will not revive the Japanese economy in the long term, while averting another recession. Rather, we must explore programs to facilitate the development of new industries, such as renewable energy (RE), instead of the defense and nuclear power industries that the Abe cabinet favors.

Prim e M in ister Shinzo A be laugh ing during a vis it by President Barack O bam a to A kasaka Palace in Tokyo, A pril 24 , 21 04 .

Credit: O fficial W h ite House p h o to by Pete Souza (public d om ain ).

W hat Is Abenomics?Abenomics has been mainly about more aggressive monetary “quantitative easing”—central bank pur­chases of various kinds of bonds (other than short-term government bonds, purchases of which are considered “conventional” expansionary monetary policy) from banks and other private owners of financial assets. The Bank of Japan, the country’s central bank, has been engaging in “Quantitative and Qualitative Monetary Easing” (QQE) since April 2013, with the goal of raising the inflation rate to 2% within two years. } }

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A B E N O M I C S

According to advocates of Abenomics, infla­tionary expectations driven by aggressive mone­tary easing would reduce real interest rates (that is, interest rates adjusted for inflation, which are calculated by subtracting the inflation rate from the nominal interest rate). In turn, lower real interest rates will make corporations willing to borrow more, raising investment spending and generating domestic employment. The increase in investment would lead to strong corporate profits, eventually translating into higher wages, which would in turn increase consumption spending by households. This is basically a form of “trickle-down economics,” in the sense that, according to its advocates, strong corporate profits would trickle down to everyone else in the economy.

R ather th an lead ing to a rebo u nd o f dom estic

consum ption and in ves tm ent spend ing , w hich

could lif t th e econom y as a w h o le , Abe's

n eo lib era l re form s w ou ld lead to rising

in e q u a lity and con tinued s tag n a tio n .

Under the QQE program, the Bank of Japan (BOJ) pledged to double the size of the monetary base (currency in circulation plus banks’ reserves on deposit at the central bank). By the end of October 2014, unsatisfied with the results of the program, it decided to accelerate this enlargement of the monetary base. W ith the BOJ being twice as aggressive as the U.S. Federal Reserve in its bond-buying, its balance sheet has gone above 50% of GDP.

Economist Paul Krugman has strongly sup­ported Abenomics— “the sharp turn toward mon­etary and fiscal stimulus adopted by the govern­ment of Prime Minster Shinzo Abe”— and hailed it as a model for other countries to emulate. In a 2013 column in the New York Times, he stressed that Japan could be the first major country to climb out of the kind of recession and stagnation in which has also befallen Western countries since the global financial crisis in 2008.

The Effects o f A benom ics So FarThe effects of aggressive monetary easing have, mainly, been limited to higher stock prices on the Tokyo Stock Exchange and the drastic depreciation of the Japanese yen in foreign exchange markets. The Nikkei 225, the index for the Tokyo stock market (analogous to the S&P 500 for the New York Stock Exchange and NASDAQ), has soared. The yen, meanwhile, has depreciated by more than 42% relative to the dollar in the last two years. Some have pointed to these developments as proof that Abenomics is working.

In fact, these effects will not contribute to the trickle-down dynamic that advocates of Abe’s pol­icy expect, for two reasons. First, aggressive mone­tary easing will not stimulate overall household consumption spending. The dramatic stock mar­ket rally has sparked a “wealth effect,” which might lead those who own a lot of financial assets— feel­ing flush with their new riches— to spend more. Meanwhile, however, workers’ wages have not kept pace with inflation. In addition, the Abe govern­ment introduced a sales tax hike, from 5% to 8%, in April 2014. Such conditions tend to make ordi­nary people reduce their consumption spending. The benefits of trickle-down Abenomics clearly have not reached everyone.

Second, corporations, particularly big multina­tionals, are hoarding their profits. Corporate profits have been rising significantly, underpinned by the drastic depreciation of the yen. This has boosted the competitiveness of Japanese industry in global mar­kets. But corporations have held onto most of these profits as internal reserves, rather than engaging in investment spending that would lift the economy. According to Japan’s Finance Ministry, the reserves of Japanese nonfinancial companies reached a record 304 trillion yen (nearly $3 trillion) by of the end of fiscal year 2013. As a consequence, Japan’s GDP shrunk for two consecutive quarters, a common def­inition for recession, after the second quarter of 2014. (Figures for the first quarter of 2015 were not available at this writing.)

W h a t K inds o f Policies W ill A b e Push Now?Abe’s landslide victory in the snap election could not only enable him to stay in office until late 2018, making him longest-serving prime minister in Japan since World War II, but also give him abundant political capital for further pursuing his economic agenda.

16 | DOLLARS & SENSE | MAY/JUNE 2015

On what kind of policies will Abe spend this political capital? First of all, he will likely purse the “third arrow” of Abenomics: structural reforms of the economy. The Abe cabinet announced a “Revision of Japan Revitalization Strategy: 10 Key Reforms” in June 2014. Parts of the strategy, such as enhancing women’s labor-force participation and advancement could be epoch-making in Japan, if they worked well. But most of structural reform plans are based on a neoliberal approach of low corporate taxation, deregulation, reduction of fis­cal deficits, and free trade. Broadly, Abe would likely push four neoliberal policies:

• First, lowering corporate taxes, while planning the second stage of the sales tax hike from 8% to 10% in April 2017. The Abe government has agreed on the basic outline of fiscal year 2015 tax reforms, including a 2.51 percentage- point reduction in the effective corporate tax rate. The tax cut could be a further boost for big corporations that have already received the windfall from the depreciation of the yen.

• Second, accelerating the push for labor market “flexibility.” Labor market deregulation would

make it easier for big corporations to fire full­time employees, lowering incomes for wage earners even further.

• Third, radically reducing social welfare spending in the fiscal year 2015 budget, in order to reduce the massive fiscal deficit.

• Finally, completing the final stage of negotia­tions over a free-trade agreement, the Trans-Pa­cific Partnership (TPP), with the United States.The TPP would open the agricultural market in Japan to an unprecedented level of imports, which would inflict big damage on many Japa­nese farmers.

D o W e H ave a P rogressive A lte rn a tiv e fo r R ev iv ing th e Econom y?Many voters understood the problems with Abenomics before the December snap election. An November opinion poll by Nikkei, Japan’s leading economics and business news company, reported that 51% of the public opposed Abenomics, compared with 33% who favored it. Disappointingly, a lack of strongly progressive alternatives from the opposition parties helped Abe win his landslide victory. } }

Soyam isaki (Cape Soya) W ind Farm in W akkan ai City, H o kka id o , Japan,August, 2 0 1 1 .

C red it: S. K aw am ura, W ik im ed ia Com m ons, C reative Com m ons A ttr ib u tio n -S h are A like 3 .0 license.

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A B E N O M I C S

What kind of policy should we implement to avert a return to recession? As economist Richard Koo argues in his recent book The Escape from Balance Sheet Recession and the QE Trap, we have to carry out not austerity policies but fiscal stimulus, which can stabilize the economy. Reasonably, the Abe government announced expenditures totaling 3.5 trillion yen (US$29 billion) in 2015. But fiscal stimulus and monetary easing can only buy time to sow the seeds of economic revival in Japan. Now is the time to explore an alternative program for long­term recovery.

First, we need to increase real wages, which could lead to a rise in consumption spending. Abe and Haruhiko Kuroda, governor of the Bank of Japan, are trying to encourage big companies to raise wages in 2015, which is part of their pro­gram to achieve 2% inflation. To spread the ben-

Japan has to learn th e lessons o f th e

Fukushim a nuclear d isaster and s ta rt to

deve lop ren ew ab le energy. This could end

d e fla tio n and m ove th e co u ntry o n to a path o f

su sta inab le econom ic g ro w th .

efits of economic recovery through the economy as a whole, however, we have to extend higher wages not only to workers at big corporations, but also to those at small- and medium-sized enterprises (SMEs), which are the main engines of the Japanese economy.

Second, we need a new set of public invest­ment projects that could foster basic industry for the next generation. Japan is a global leader in renewable energy technology. In fact, the country accounts for the majority of renewable-energy patent applications world­wide. (Japan’s share is 55%; the United States’, 20%; Europe’s, 9%.) The Japanese government should drastically redirect the energy research and development (R&D) budget away from nuclear power generation— which reached 69% of total energy R&D spending in 2010— and toward renewables.

The financial system in Japan has the potential to serve as a bridge between lenders and financial investors who want to finance RE projects, and borrowers who plan to start renewable energy busi­nesses. On the lending side, Japanese individual investors have been among those most interested, worldwide, in “World Bank Green Bonds,” which are designed to raise funds for green economy proj­ects in developing countries. On the borrowing side, many firms and entrepreneurs, some sup­ported by local governments, have applied to start businesses including solar, wind, geothermal, and biomass power generation.

A “feed-in-tariff” (FIT) law, passed in July 2012, allows private providers to sell renewable energy to big electricity companies at prices to be fixed by the central government. This has fostered a boom in RE business, particularly in solar power generation. According to Japan’s Agency for Natural Resources and Energy, renewable-energy generating capacity has increased from about 567,000 kilowatts in July 2012 to nearly 72 mil­lion kilowatts in October 2014. These develop­ments imply that Japan has both extraordinary financial resources that could provide funds to RE businesses and numerous firms and entrepreneurs eager to make use of them, if given a chance.

As Koo explains, Japan’s “lost decades” and its deflation are attributable to insufficient private investment demand. It could take a significant amount of time for these alternative programs to create new investment opportunities and lift the economy as a whole. But Japan has to learn the les­sons of the Fukushima nuclear disaster and start to develop renewable energy. This could end defla­tion and move the country onto a path of sustain­able economic growth. L2&J

JUNJI TOKUNAGA is an associate pro fessor in

the D epa rtm en t o f Economics, D okkyo Univeristy,

Saitam a, Japan.

SOURCES: Paul Krugman,"Japan the model,"New York Times, May 23,2013;"W ithout reforms, Japan's leader remains vulnerable," Wall Street Journal, Dec. 15,2014; "Acquisitions, financing worries behind Japan Inc.'s bulging reserves!' Nikkei Asian Review, June 23,2014;

Richard Koo, The Escape from Balance Sheet Recession and the QE Trap (Wiley, 2015);"Japan cabinet approves Y3.5tn stimulus spending,"

Financial Times, Dec. 27,2014; "Patent-based Technology Analysis

Report-Alternative Energy Technology," World Intellectual Property

Organization, 2009;"Japan and nuclear power,"Mainichi, Jan. 22,2012.

18 DOLLARS & SENSE j MAY/JUNE 2015

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