In June 2013, I poured cold water on the positive views expressed by the likes of Paul Krugman on PM Shinzo Abe’s plans to turn the Japanese economy round through a mixture of Keynesian monetary and fiscal stimulus and neoliberal ‘supply-side measures – the so-called three arrows of reform in ‘Abenomics’ (https://thenextrecession.wordpress.com/2013/06/11/abenomics-a-keynesian-neoliberal/). I reckoned that Keynesian policies did not work in the 1990s to restore the rate of 1980s average growth after Japan’s credit bubble burst and they would not work this time either. I finished that post with the phrase: ‘watch this space’.
Well, over one year later, it looks as though Abenomics is failing, at least the Japanese people. The Bank of Japan has expanded its balance sheet by ‘printing money’ (or more accurately, increasing commercial bank reserves) to 50% of GDP, more than twice the level of the Federal Reserve and the Bank of England after their ‘quantitative easing’ programmes. The Japanese yen has fallen in value and the Japanese stock market has boomed, but Japan’s economy continues to crawl along. Japan’s economy has expanded at no more than 1% a year since the Great Recession ended. Under Abe, the growth rate has risen to 1.8%, but still no better than before the crisis.
Indeed, industrial production has been falling in 2014 after an initial boost in 2013.
Retail sales, an indicator of consumption growth is also dire, especially after the sharp hike in sales taxes imposed by the Abe government in April.
At the same time, inflation has risen as a deliberate policy of the government, designed to ‘stimulate’ businesses to invest on the expectation of higher profits. As a result, real incomes for the average Japanese household have fallen significantly. The so-called misery index (the sum of inflation and unemployment rates) is at a 33-year high!
So what has happened under Abenomics is a sharp rise in the rate of exploitation of Japanese workers and a fall in their living standards in order to boost profitability.
As in the late 1990s, when right-wing ‘Thatcherite’ prime minister Koizumi took over, his neoliberal policies managed to drive up profitability from all-time lows in the 1990s. But the Japanese public rebelled and threw out the Liberal Democrat government, hoping for relief from the ‘leftish’ Democrat opposition. They were sadly disappointed and then the Great Recession came to drive down profitability back to the previous low. Eventually, the Liberal Democrats under the right-wing nationalist Abe came back to power (in an all-time low turnout – see my post https://thenextrecession.wordpress.com/2012/12/16/japan-election-lowest-turnout-since-records-began/). The real agenda behind Abenomics is the restoration of the profitability of Japanese capital. Abenomics aims to do that by squeezing the living standards of Japanese households. This is the area where it is succeeding. And this is the outcome of Keynesian policies!
If we look at the net return on capital in Japan, as measured by the Eurostat AMECO database, we can see that after 1990, profitability dropped 30% before recovering dramatically under Koizumi until the Great Recession came along. Then it plummeted 25%. The subsequent recovery in profitability after the Great Recession ended then faltered in 2011 with the earthquake and nuclear disaster. But Abenomics is now having an effect.
Higher profitability (albeit only little higher than in 1990 and still 50% below the golden age of the 1960s) has not translated into rising business investment and export growth until recently. Instead Japan’s companies, just like in the US and the UK, built up huge cash reserves and/or invested in financial assets. And companies took more profits rather than boost exports by cutting export prices. In 2014, business investment in real terms has recovered somewhat, given the rise in profitability under Abenomics. But it is still below the pre-global crash peak and not much higher than in 2012.
And the Japanese trade account continues to deteriorate …
….while the government debt remains at astronomically high levels.
Abenomics may be working (a bit) for Japanese businesses, but it’s not doing so for most Japanese people.