Japan: Abenomics revisited

The news that Japan’s real GDP dropped sharply in the last quarter of 2019 and the economy appears to be entering a new ‘technical’ recession (two consecutive quarterly contractions) in 2020 has produced a reaction from mainstream economics.

The worry is that ‘Abenomics’ – the economic policy approach of the current Liberal Democrat prime minister, Shinzo Abe – is failing.  Abenomics was introduced in 2012 after a fanfare of support and encouragement by such economic luminaries as Ben Bernanke, former head of the US Federal Reserve and now President of the American Economics Association;, and Paul Krugman, Nobel prize winner and leading Keynesian guru.  Both economists were invited by Abe to address the Japanese cabinet on the right policies to get Japan out of the stagnation that the economy had experienced through the 1990s and then after the impact of the Great Recession of 2008-9.

Bernanke, being a leading monetarist, proposed reducing interest rates and pumping huge injections of credit (quantitative easing) by the Bank of Japan into the banks –  just as he had done with the Federal Reserve in the US.  Paul Krugman supported that but also advocated increased government spending by running budget deficits in order to stimulate demand.  In essence, Abe was encouraged to adopt the two policy proposals of mainstream/Keynesian economics (monetary and fiscal) to get a capitalist economy out of stagnation and the recurrence of a slump.  Indeed, these policies are exactly what is proposed now to get the world capitalist economy out of its low growth in GDP, investment and productivity in 2019.

Abe adopted these policies as two of the three ‘arrows’ of Abenomics.  The other arrow was ‘structural reform’, a nice name for ‘neoliberal’ policies of reducing labour rights, privatisations, pensions and holding down wages so that costs of production are reduced and profitability of capital is raised.  At the time, I called Abenomics a Keynesian/neoliberal mix.  And I said Abenomics will prove to be a failure because “Keynesian policies in the 1990s did not work for Japan and they probably won’t work in this decade either.”  I concluded that “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.”

Well, after watching, we find that Abenomics has not worked and Japan is heading back into another slump after a yet another lost decade of stagnation.  So what is the response of the mainstream?  The Financial Times editorial was quick to tell us. “All the elements of Abenomics needed to work together to push the economy to a new balance: monetary stimulus to weaken the yen, fiscal stimulus to jump-start demand and structural measures such as trade deals to create growth opportunities and incentives for business investment. It was never going to be easy but this combination proved its worth. 2013 brought a sharp weakening of the yen and a burst of optimism.”

But then says the FT, the government tried to reduce its budget deficits and huge government debt ratios by introducing a consumption (sales) tax that hit fragile consumer spending and demand has collapsed.  The answer is that “the only sensible action Mr Abe can take in the short-term — other than a politically impossible reversal of the tax rise — is more fiscal stimulus. The problem, as it has been throughout the past seven years, is not Abenomics. The problem is not enough of it.”  Paul Krugman was also quick to support the FT’s message “If you have zero interest rates and a weak economy nonetheless, you need fiscal stimulus, not austerity.” The IMF also echoes this view:Japan needs to strengthen the mutually-reinforcing policies of “Abenomics”—including monetary easing, flexible fiscal policy, and structural reforms (particularly labor market reforms).”

But were a tax hike and reduced budget deficits (ie ‘austerity’) the cause of this new recession? Would more Abenomics really do the trick after failing for the last eight years?  It’s true that the annual budget deficit as a% of GDP has been falling since 2010 but throughout the period of the lost decade of the 1990s, budget deficits were widened sharply and yet Japan stagnated.  And the annual deficits have been higher since the Great Recession than in most of the 1990s.

Despite nearly three decades of government budget deficits, Japan has stagnated with an average real GDP growth rate of 1%, interspersed with recurring ‘technical’ recessions.  Indeed, Japan’s fastest growth period was from 2002-2007, when austerity was imposed by Koizumi!

So history does not support the Keynesian policy solution.  Moreover, it does not augur well for the policy conclusions of Modern Monetary Theory (MMT).  MMT exponents argue that governments should run ‘permanent’ budget deficits to boost government spending to the point where ‘full employment’ is achieved.  There would be no need to worry about the size of government debt because a country like Japan, which services that debt from Japanese citizens’ savings through the banks buying government bonds, will never default.

It’s true that Japan is unlikely to default on its debt, the highest public debt ratio in the world, particularly with interest at or near zero.  But on the other hand, Japan has done exactly what MMT suggests and has run permanent government deficits, spending it on construction and other projects and yet Japan’s economy has stagnated.

The MMT retort could be to say that the positive result of these deficits is that there is full employment in Japan.  The official unemployment rate is at a record low of 2.2%.

And employment has rocketed.

But this is a phenomenon that has been repeated in other G7 economies.  Both the UK and the US also have record low official unemployment rates and the rate in the Eurozone has also dropped sharply in the last ten years.  But in all these countries, this employment is not in well-paid, secure jobs, with training and career prospects.  Most are in ‘precarious’, low paid, low skill work.

In Japan, most of the new employees are women and older people who are taking up jobs in health and social care, temporary and part-time, the lower end of wage market. More than a third of the Japanese workforce is working in non-regular positions. Factors underlying this situation include the increasing number of older people who become contract or temporary workers after retirement.

Within the working-age population (15–64), the number of regular employees rose by 460,000 to 33.2 million, and the total for employees aged 65 and over climbed 100,000 to 1.1 million.  Meanwhile, there were 17.2 million non-regular employees aged 15 to 64 in 2017, down 30,000 on the previous year. The number of workers 65 and older with non-regular jobs rose by 150,000 to 3.2 million.

These workers are having to do two or more jobs to make ends meet.  Some people are working 70-hour weeks out of multiple jobs. According to Lancers research, some 4.5 million full-time workers in Japan have second jobs, where they work, on average, between six and 14 additional hours each week, on top of any overtime hours they clock at their primary job; a small number of them work up to 30 or 40 hours per week at their second jobs.

In the food-service industry, workers are in such short supply that McDonald’s recently resorted to an expensive advertising campaign aimed at recruiting housewives and retirees to help out with its busiest shifts. Convenience-store chains have hired more foreign workers, while small and mid-sized manufacturing companies have increasingly turned to automation.

But the one recruitment strategy that hasn’t really taken hold is increasing wages! Instead, Japan’s corporations have chosen to sit on the piles of cash they’ve earned from Abe’s fiscal policy. Each spring, over the past six years of Abenomics, the leaders of Japan’s major industries have ceded remarkably little ground to unions during the annual wage negotiations known as shuntō. Overall, workers are spending an average of 11 percent more time to earn the same salary they were bringing home about 20 years ago, and some are working unpaid overtime on top of that.

Employ, pay them little and don’t invest.  That has been the policy of the capitalist sector in most of the major economies since the Great Recession and the result is that the productivity of labour has hardly risen.  In the case of Japan, the population has been falling and ageing.  So per capita income growth has been better than total GDP growth.  Per capita Japan’s real GDP is up 10.8% since 2010 while real GDP is up 9.6%.  Even so, a Malthusian solution (reducing the population) is hardly a way of raising incomes for those still living.  And the Malthusian solution is set to worsen over the next generation as Japan ages at a fast rate.

That brings us to the third arrow of Abenomics: so-called ‘structural reforms’.  Reducing the cost of production by deregulating the labour market, privatising and cutting taxes on profits etc – these measures aim to help boost the rate of exploitation and the profitability of capital in Japan.  As I said in 2012, the real purpose of Abenomics was to raise the profitability of Japanese capitalism, at the expense of labour.  Neoliberal measures were applied under Premier Koizumi at the end of the 1990s and they had some success in raising profitability.  So 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.

Abe applied some more.  He cut corporate profit taxes sharply – Trump-style

while he hiked employee social security contributions to reduce the burden for employers.

The outcome was a shift in the share of labour in national income towards profit share. Real wages per employee fell and, with it, household spending.

But this has not been sufficient to restore profitability to even pre-GR levels.

*This rate of return measure is compiled from IRR series in the Penn World Tables 9.1 with an estimated update for 2018 and 2019 using the AMECO database on NRR.

After the great hi-tech expansion and credit bubble burst in Japan at the end of the 1980s, the profitability of capital plummeted in Japan, and, with it, investment and output.  The Koizumi reforms and the global credit boom after 2001 helped to restore profitability somewhat.  But then came the Great Recession and profitability dropped again. The period of Abenomics saw a small recovery up to 2017, but profitability has fallen back again and remains near Great Recession lows.

This is the underlying causal factor behind low investment rates and stagnation – as it is in many other major capitalist economies.  Neither Monetarist not Keynesian stimulation (the first two arrows of Abenomics) have done anything to reverse that.  Structural reforms to reduce labour and other production costs might help profitability but politically that would be very difficult to impose.  Abenomics continues to fail.  More Abenomics, as suggested by the mainstream/Keynesian voices, won’t change that.

13 thoughts on “Japan: Abenomics revisited

    1. I suppose a massive reduction in production costs through lower wages; or the liquidation of inefficient small Japanese businesses; and a significant rise in investment in new technology (although that would eventually deliver a higher organic composition of capital and lower profitability). Those measures would raise relative surplus value (the rate). A big increase in immigration of young cheap, skilled workers could also add to absolute surplus value. But the ultimate (but not long lasting) solution is a large slump to cleanse the capitalist economy of inefficient zombie companies, cheapen the workforce yet more and allow the survivors to employ labour-saving technology. But no country is island or series of islands (Japan) and world trade and capital flows are also big factors.

  1. ‘The official unemployment rate is at a record low of 2.2%’.
    And that 2, 2% rate is real? This unemployment rate in Japan and in many countries in the OECD are certainly the official ones, but they must be false and very low in the real rate. The cause is not only that jobs are increasingly precarious (temporary) and with low salaries, but a large number of new contracts are part-time. Therefore, the correct questions are: How many hours worked per year (quoted to social security) are done today in Japan and in OECD countries? or also, of the balance of contracts in force, what is its equivalent in full-time contracts (8 hours)? These 2 data if they give a figure of REAL unemployment rate
    ‘’ Abenomics continues to fail. More Abenomics, as suggested by the mainstream / Keynesian voices, won’t change that ’.
    On the other hand, Japan’s economy is not that it has been stagnant for decades but that it is on its annual growth ceiling. Which is a ceiling of natural growth and purely capitalist. Growth without any engine of public / socialist economy. The 2nd arrow, and very small arrow in size, of Abenomics (the fiscal stimulus) could not and can not improve in any way that low growth. It will continue that low growth and low profitability for medium and small businesses. Monopolistic companies-Nikkei 225 will not have that problem.

    1. Official unemployment data? Danger….
      The Bureau of Labor Statistics of the USA, offers up to six different unemployment indicators. From least to greatest and from U1 to U6. Web at bls.gov/lau/stalt.htm. The official unemployment data (U3) is 3.7% (4 trimester 2019), but the real data (U6, total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers) was 7.2%. That is, the real and correct data is the DOUBLE of the officer. For example, see this table of U6 indicators for EU countries. In 2013, in the United Kingdom the U3 rate gives 7, 5% unemployment but the U6 rate (the real rate) gives 17.5%.

  2. The U.N. Human Development Index Adjusted for Inequality gives Japan high marks, especially compared to the U.S. Japan ranks #19 in the non-adjusted for inequality ranking, but rises 15 places to #4 when adjusted. The U.S. ranks #15 (tied with UK) nonadjusted, but drops 13 places to #28 adjusted for inequality. (The UK doesn’t drop at all, stays in #15.) “Inequality Adjusted Income Index”, a submeasure in the whole scheme, Japan hits 6.3 and the U.S. hits 26.6, and much of Europe and Scandinavia hits between 12 and 17. South Africa and Namibia hit 56, Brazil and Mexico both hit 36. The BLS states that 70.4% of U.S. jobs are full-time year-round, meaning 29.6% are not. It looks like Japan is not that different, 67.6% FTYR and 32.4% not. The Netherlands and Finland look best in ratio of income going to lower 40% and going to top 10%. How many opiode overdose deaths, how many deaths of despair? In the U.S. I think it’s 70,000 and 150,000 a year, respectively. I also think the homicide rate is a fraction of the U.S. homicide rate. There must be a scholarly index for “trust” “family stability” “peace of mind”, that sort of thing, Nepal would score high.

  3. Yeah, what the mixture amounts to is how to reorganize the labor market to make it a friendly place for Japan’s capital to further exploit. They could have simply call it: how to increase the rate of exploitation. How else does the capitalist re-starts their role as the ones that earn unearned income? So, the working class will be brutalized into financing the leaches further. All that math.

  4. Michael writes:
    “It’s true that Japan is unlikely to default on its debt, the highest public debt ratio in the world, particularly with interest at or near zero. But on the other hand, Japan has done exactly what MMT suggests and has run permanent government deficits, spending it on construction and other projects and yet Japan’s economy has stagnated”.

    No, Japan has NOT done exactly what MMT suggests. Japan has allowed itself to be highjacked by neoliberal advisers right at the wrong time, by periodically jacking up sales taxes in an attempt to lower the national debt, which it does not need to do.


    “Japan national accounts – sales tax rise, growth collapses – as night follows day”
    Tuesday, February 18, 2020

    Mitchell has closely examined the Japan case since 1990.

    So you might need to read professor Mitchell’s article before you make claims about “what MMT suggests”.

  5. Good and timely article given that South Korea and Singapore are likely to enter into recession alongside Japan. China???? Its worth mentioning as well that the US govt deficit rose by 25% in the first four months and according to CBO data and is running at an annual rate of $1.2 trillion. As for the markets, the Nikkei 225 took all of this and the corona virus in its stride, showing that the unshakeable faith in central bank divine intervention, well remains unshakeable, that is until it gets shook up bursting a bubble which is now so big its bursting has to be characterised as an “economic extinction event”.

  6. Japanese are known to work extremely long hours. What if the working week was limited to 40 hours by law? Companies would have to hire and train more employees, efficient employees would be better compensated, and the workers would have plenty of spare time to spend their salaries—boosting entertainment & culture, tourism, sports and other hobbies sectors of the economy—and to start up their own companies. What do you think? Would than work?

  7. But what you are proposing for Japan for them to hike profitability are, I think, real austerity measures (“lower wages”, “immigration of young cheap workers”, etc.). Ok. But what’s the right thing to do, not only for profitability, but for justice?

  8. Hey Michael,

    Thanks for your work as always. Given that Japan is something of a window into the future for much of the developed world, I’m curious to know what you would advocate if you were designing policy for the country. We know the capitalist solution (destruction of accumulated unproductive capital, consolidation, investment in the most efficient firms, etc.) – but what is the Marxist solution?

    Let’s say one somehow manages to get control of the commanding heights – do you still require a managed period of failures and consolidation to root out failing firms?

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