Abenomics: a Keynesian neoliberal

Japan has revised up its first-quarter real GDP growth to 1% quarter over quarter.  So the Japanese economy expanded at an annualised rate of 4.1% between January and March, the fastest rate recorded by any G7 economy.   Does this mean that ‘Abenomics’ is working? Well, not so far.  After all, this quarterly GDP figure does not tell the story.  The annualised 4.1% growth was only a recovery from a 3.6% fall in the second quarter of 2012.  Indeed, year on year GDP growth in Japan in the 1st quarter was only 0.2%, the lowest since the 4th quarter of 2011.  So no real pick-up yet.

Japan yoy growth

As John Ross pointed out in his latest post (http://ablog.typepad.com/keytrendsinglobalisation/2013/06/abenomics.html), Japan’s real GDP is still below its peak back at the end of 2007.

Japan GDP

In a previous post (https://thenextrecession.wordpress.com/2013/02/14/japans-lost-decades-unpacked-and-repacked/) I discussed the great experiment of the Abe government in trying to restore economic growth by applying all Keynesian remedies at once – monetary and fiscal stimulus along with a very sharp depreciation of the currency against its major trading rivals.   In that post, I argued that Keynesian policies in the 1990s did not work for Japan and they probably won’t work in this decade either.

Will I be proved wrong?  I doubt it.  But what is interesting about ‘Abenomics’ is that it is not just ‘Keynesian’ in approach but also ‘neoliberal’.  Japan’s economic growth was relatively better in the 2000s up to the Great Recession and the tsunami than in the 1990s.  That was because Japan’s corporate profitability improved. It did so because the then neo-liberal government of prime minister Koizumi opted for the restructuring of the banks, privatisation of state agencies and higher taxes on consumption.  This produced a short revival in profitability, at the expense of average living standards, reduced pensions and worse work benefits.

Japan rate of profit

So it is the success or otherwise of Abe’s new neoliberal policy that will decide whether Japan’s capitalist economy can get going.  We’ve had a Y10.3tn ($105bn) fiscal stimulus package in January and a new regime at the central bank that is now committed to buying billions of dollars of Japanese government bonds.  Now we are going to have the ‘third arrow’ of deregulation, cutting corporate taxes, privatisation and a reduction of labour and pension rights.  This is the real programme for driving up profitability.  The government aims to relax rules governing the sale of non-prescription drugs, allow selected cities to experiment with lower taxes and deregulation and ‘liberalise’ the power sector.

The Keynesian-style policies create a contradiction that even some Keynesians realise: it’s the level of Japanese government debt.  What will happen if Japan’s ultra-low interest rates start to rise?  Will that not cause a sharp rise in debt servicing costs and thus eat into funds for investment?  This question is usually posed by Austerians, but it seems that some Keynesians are concerned too.  As Noah Smith put it in his blog (http://noahpinionblog.blogspot.co.uk/2013/06/the-zero-upper-bound.html): “if monetary expansion can only cause the kind of recovery where interest rates rise, Japan is in deep shiitake….  Japan’s only options will be stagnation, default or hyperinflation. “

Indeed other ‘moderate’ Keynesians like Brad de Long are confused about whether Japan’s monetary experiment will work anyway (http://delong.typepad.com/sdj/2013/06/confusion.html).  “I’m sufficiently confused. I don’t have much confidences in my priors. My priors seven years ago were that Central Banks could push nominal GDP to whatever path they wanted through normal policy tools” but now “we really should be worrying about are the “unknown unknowns” of debt accumulation–just as nobody understood the systemic risks produced by subprime. And “unknown unknowns” are, by definition, unknown…. so I have very serious doubts about my ability to analyze the situation we are in. Whenever I cast myself back in time and think how confident I was ten years ago, and how wrong my first response is, maybe I should give up this business and stop pretending I have knowledge. Because certainly I would not have thought we would be here now.”

Dear, oh dear!  What worries de Long is not that Japanese debt is too high but that financial markets will panic: “there is a good equilibrium out there, an equilibrium which would support considerably more government debt than we have…. But that markets should recognize this doesn’t mean that markets will recognize this. It doesn’t mean that we know that markets won’t get scared of additional deficit spending and tip us over into fiscal dominance.”  Paul Krugman and Dean Baker dismiss De Long’s worries.  For them, the Japanese experiment must be supported as it is going to prove that Keynesian-style policies of monetary injections and fiscal stimulus will work.  Abe himself is hedging his bets on Keynesian policies, as he is also going to try to force through typical ‘supply-side’ neoliberal measures.  Krugman and Baker say little about those.

Japan now has a policy recipe that the IMF in its new anti-austerity mode would approve: fiscal and monetary stimulus along with reducing the power of labour and government regulation.  So Japan’s experiment combines all known mainstream economic potions in one bottle to take on the ‘unknown unknowns’.  Watch this space.

3 Responses to “Abenomics: a Keynesian neoliberal”

  1. kyleathompson Says:

    Let’s not forget the esteemed Joseph Stiglitz, who is taking the Krugman-Baker line even further in actively pushing disinformation through his column in the NYT in order to advance the Keynesian argument:

    http://opinionator.blogs.nytimes.com/2013/06/09/japan-is-a-model-not-a-cautionary-tale/?hp

    “From our own recent experience in America, we know the devastating effects of even a short (albeit much deeper) recession: in America, we’ve had soaring inequality (with the top 1 percent securing all of the gains of the “recovery,” and even more income), increased joblessness, and a middle that has been falling farther and farther behind. Japan’s example shows that full recovery doesn’t happen on its own. Luckily for Japan, its government took steps to ensure that the extremes in inequality that happened in the United States weren’t manifest there, and now is finally being proactive about its growth.”

    This passage implies that 1) The Japanese government has RECENTLY introduced redistributionist measures to reduce inequality and 2) That inequality has fallen in Japan. As Michael has astutely observed, the Koizumi reforms had exactly the opposite intent and effect. Any Japanese person, even the underconsumptionists in the Communist Party, will tell you that Stiglitz is wrong. In fact the Communists are strongly against “Abenomics,” which is the exact opposite response you would expect from them if in fact the LDP was implementing some kind of Left-Keynesian wonder program. Japan more equal than the United States, but that isn’t thanks to recent LDP policy.

  2. Cameron Says:

    Is Robert Kurz right when he says “The truth is that the central banks purchase public debt not in order to bolster real demand but to prevent the decline in value of their titles to wealth and to save the banks that cannot successfully liquidate them.”?
    I noticed the panic when Japanese 10 year bond hit 1%. Their banking stocks were down 6-9% that day.

    Is money printing a stimuli or has it also become a permanent condition of social reproduction due to insufficient value creation?
    I’m beginning to wonder!

  3. Benedict@Large Says:

    If I didn’t know better, I’d swear Abenomics is MMT by another name.

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