What might the failure of Abenomics mean for Japan? Big, unpredictable changes, perhaps with a happy ending.

Summary:  Japan has remained in economic stagnation for so long we have come to consider that as normal. It’s not. Slow decay of a nation eventually ends in reform (as expected in Japan by experts for 2 decades) or regime change. Abenomics aroused excitement as the start of powerful reforms, as Japan’s last chance. The past few months’ data suggest that failure lies ahead. If so, after that will come exciting and unexpected events (but not necessarily beneficial or pleasant events). They will affect the world (especially if Japan walks a path on which America and Europe follow). Let’s review the evidence, and look ahead to the possible happy ending.

“GDP figures for July-September turned out not so encouraging.”
— Prime Minister Shinzō Abe, 17 November 2014 (source: Reuters)

”The war situation has developed not necessarily to Japan’s advantage …”
— Emperor Hirohito of Japan in his first radio broadcast, 15 August 1945

Japan: setting sun

Contents

  1. Dark day for Abenomics
  2. Implications
  3. What’s the problem with Japan
  4. The bad news, and the possibility of a happy ending
  5. For More Information

(1)  Dark day for Abenomics

In the dark days before Abenomics, as Japan neared the quarter-century milestone for stagnation despite massive economic stimulus (running the government’s debt up to incredible levels), experts wrote that “Something is wrong with Japanese politics“, and about the necessity of “Restoring Political Stability“.

Abe has been prime minster since 26 December 2012. His political strength came from the desperation of his people after almost a quarter-century of the hopes of recovery he aroused, and his bold measures to revitalized Japan (“Abenomics”). Now that Japan enters a triple-dip recession, let’s turn from Wall Street’s happy outlook to ask about the effects should Abenomics fail? And it is failing, despite strong corporate profits and massive stock market gains, as described in this report by Alhambra Investment Partners: “The Inevitable End“.

Japan: real GDP, QoQ, SAAR
Real GDP, from Alhambra Investment Partners, 17 November 2014

Perhaps even worse, Abenomics has lowered the value of the yen. While wonderful for corporate exporters and good for their workers, this has proven horrific for everybody else as the cost of imports rises faster than wages (and faster than fixed incomes, such as pensions) — without the promised economic acceleration. Another recession will further increase stress on people, as the yen drops even more — with even less offsetting job and wage growth. This trend cannot continue without ugly consequences.

 

Japan: wages, real and nominal.

Japan: real and nominal HH income
From Alhambra Investment Partners, 11/11/2014

(2)  Obvious Implications

The third of Abenomics’ “Three Arrows” is deep structural reform of Japan’s economy. He’s announced reforms, most recently in June. Most analysts consider these too small.

As the graph below shows (done before the dismal GDP news), the 3rd Arrow might also prove too late — fired after Abe’s political power had peaked. A recession might diminish the political power needed to push these (and necessary larger ones, later) through against the famously entrenched special interest groups that run Japan.

Polll of support for Japan's government, by CLSA, 13 November 2014
From Christopher Wood, CLSA, 13 November 2014 – click to enlarge

Abe’s expected to call for a snap election, before his support evaporates. Which it’s likely to do if the recession continues, as explained in this excerpt from a lecture by Professor J.A.A. Stockwin (Prof of Japanese Studies, Oxford), Paris for the Fondation France-Japon, 3 May 2011:

The most striking of these is the rapid turnover of prime ministers that has been occurring. Between 2006 and 2011 Koizumi, Abe, Fukuda, Asō, Hatoyama and now Kan have successively occupied the prime minister’s residence. That is 6 prime ministers in 5 years … since Koizumi stepped down in September 2006, not one of his successors has yet managed to stay in post for as much as a year. Over the same period there have been 3 British prime ministers, 2 French presidents, and 2 German Chancellors.

There are some other indicators of political instability as well. Prime ministers come to office with relatively high approval ratings, usually in the 50% to 60% range, but these rapidly fall, so that towards the end of their tenure public opinion polls showed an approval rating of 26 % for Abe, 19% for Fukuda, 13% for Asō, 17% for Hatoyama, and about 20% currently for Kan.

Another indication is that voting patterns, which used to be remarkably stable and predictable, have become exceedingly changeable and difficult to forecast. Huge blocs of voters seem to change their votes at each election, mainly against the government in power at the time. The LDP was elected in a landslide in the House of Representatives in 2005, the DPJ almost exactly reversed that position in its favour in 2009, and if elections were held today it seems quite possible that the position would be reversed once again. Since the 1990s those declaring no party allegiance to public opinion pollsters have been a majority of electors, and there is anecdotal evidence that many electors have a low opinion of politicians in general, while perceiving that prime ministers are endemically weak.

… In Japan as in other democratic countries, the electorate rewards governments when things are going well and punishes them when things are going badly. The mass media, with one eye on the electorate, are particularly tough on governments whose policies do not work out well, even when the failure of policies is brought about by difficult economic conditions rather than by lack of effort or perspicacity on the part of governments. Opposition parties also, quite naturally in terms of their aim of replacing the ruling party or parties in office, readily take advantage of a government’s difficulties to disrupt its performance.

This instability makes it difficult to build a consensus on new public policy, especially painful ones. The public’s low confidence in politicians and political institutions gives new governments little time to show results. That’s an ugly combination. Japan’s people hoped that Abenomics was the solution, a break with this past. Yet another disappoint might return Japan to years of impotent political instability.

(3) What’s the problem with Japan?

Before we look at deeper results from Abenomic’s possible failure, let’s consider the problem. Western experts explain that Japan has not sufficiently copied the West, and needs more neo-liberalism (the “third arrow”). However if the US and Europe are following Japan, that’s not the problem. Keiichi Tsunekawa (National Graduate Institute for Policy Studies, Japan) points instead to Japan’s political and social institutions, much as Karel van Wolferen did in his prophetic book The Enigma of Japanese Power (1989; essential reading for anyone seeking to understand events in Japan): “Political Economy of Stagnation and Instability in Contemporary Japan”. Abstract:

Different from dominant literature in the field, this paper does not regard the inadequate neoliberal reforms as the main source of economic stagnation and political instability of contemporary Japan. This paper argue s that the real problem Japan faces today is policy drift in which any policy, either more neo-liberal or more statist, does not last long enough for voters to judge which policy and supporting institutions are most appropriate for renewed and sustained growth of the economy. This policy drift is a reflection of the lack of a consistent ruling coalition, which in turn is the result of the specific mode of state formation and transformation in Japan.

In the specific political context in postwar Japan, the state was formed as a combination of the developmental and clientelist sub-states. Partially because they were so successful and entrenched and partially because organized labor failed to champion the welfare – state agenda, the developmental and clientelist sub-states have not been replaced but joined by the welfare and neoliberal sub – states as the economy matured. As a result, socio-political cleavages blurred and created a huge group of amorphous voters.

Rapid shifts of voters between parties by “amorphous” voters unable to commit to one political agenda? The causes differ, but this sounds like America, with our frequent “decisive” elections (most recently in 2008 and 2014, both sparking discussion of a broken major party).

Update: two views of Japan’s problems in the New York Times, 20 November 2014:

  1. Paul Krugman: “Structural Deformity” — Japan needs more economic stimulus; structural reform is less important.
  2. Japan’s Economic Woes Cast New Doubt on Abenomics” — Others say Japan needs more structural reform, not just more stimulus.

(4)  The bad news, and the possibility of a happy ending

After a quarter century of economics stagnation, supported by multiple rounds of government stimulus, marked by repeated failed solutions, what might come next.  The two readings above suggest the alienation of large fractions of society from Japan’s political system (imposed on them by the US after WW2). Nature abhors a vacuum. Something will replace this. Some group of leaders will replace the endless series of almost interchangeable grey bureaucrats who have run Japan into the ground. It’s not possible to reliably predict when, or who, or what they’ll be.

Regime change in Japan would be the second large milestone in the end of the post-WW2 geopolitical era (a transition begun on 9 November 1999 with the demolition of the Berlin Wall). It’s been a long slow slog for Japan but, however the painful the transition, Japan might become a rising sun: a highly education but shrinking population seems perfect for the next industrial revolution (now starting). See the posts below for details.

“If something cannot go on forever, it will stop.”
— Herbert Stein’s Law (US economist, 1916-1999)

“There are decades when nothing happens; and there are weeks when decades happen.”
– attributed to Lenin

(5)  For More Information

(a)  Posts about Japan:

  1. As Japan sails into the shadows, let’s wish them well and wave good-by, 14 July 2009 — Long stagnation, no signs of a cure
  2. Japan can again become the land of the rising sun. We should watch and learn from them., 1 November 2012 — Falling population & automation are great for Japan
  3. Must our population always grow to ensure prosperity?, 25 November 2013 — More about the benefits of a shrinking population & automation
  4. Japan leads us into a new future, taking the next step in the great monetary experiment, 21 March 2014

(b)  Posts about government economic stimulus programs:

  1. A solution to our financial crisis, 25 September 2008 — Among other things, large monetary action
  2. The lost history of money, an antidote to the myths, 1 December 2012
  3. Government economic stimulus is powerful medicine. Just as heroin was once used as a powerful medicine., 19 September 2013
  4. The easy way to understand unconventional monetary policy, 7 February 2014

(c)  Posts about the great monetary experiment:

  1. The World of Wonders: Monetary Magic applied to cure America’s economic ills, 20 February 2013
  2. The World of Wonders: Everybody Goes Nuts Together, 21 February 2013
  3. The greatest monetary experiment, ever, 20 June 2013
  4. Do you look at our economy and see a world of wonders? If not, look here for a clearer picture…, 21 September 2013

 

 

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16 thoughts on “What might the failure of Abenomics mean for Japan? Big, unpredictable changes, perhaps with a happy ending.

  1. I guess if you go extra crazy blowing real estate and equity bubbles you pay an extra high price. This from who else but Steve Keen:
    To give an indication of how extreme–and how insane–this speculation became, at one stage in the late 1980s, the Imperial Palace in Tokyo, with an area of under ten square kilometres, had a nominal land value that exceeded that of the state of California. In a matching stockmarket frenzy, the Nikkei peaked at just under 40,000 on the very last trading day of 1990. It had since slumped as low as 7600, before recovering to the mid 16,000s now.

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    1. The Mississippi company collapse lead directly to the French Revolution with a lag of seventy years. The Great Depression and surrounding events lead to WWII time lagged about twenty years. Financial crises can echo down the canyons of history for a long time.

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    2. Peter,

      We are talking about economic effects of the bubble in Japan. And nothing remotely on the scale of the Mississippi Bubble (whose effects you exaggerate. The French Revolution had many and deep causes, going back to the reign of Louis 14th)).

      The crash and depression led to Hitler taking power in 1932 — which led to war (after a series of incredible mistakes by everybody involved) to war six years later. Zero similarity to e ends in post-1989 Japan.

      As I said, your analysis was absurd.

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    1. Guest,

      Thanks for the link to Edward Hugh’s website. He’s always worthwhile reading!

      I agree. After ignoring demographics for so long, some are swinging over to regard it as decisive. With regard to Japan I believe the aging = doom theory is wrong on several levels.

      First, one of the two usual recommendations is daft (even insane): boost the population via immigration. Few societies have America’s ability to absorb immigrants (the Nordics are learning about the difficulty of this, unpleasantly. Watch Europe’s struggle with this). Japan has to be one of the least promising candidates. Also, it’s madly over-crowded. Allowing the population to drop by 1/2 or 2/3 (back to levels a 100 or 150 years ago) would make it a far nicer place (and reduce their load on the environment).

      Second, a shrinking highly educated population might be the perfect formula for the next industrial revolution (now just starting). The social disruption from rising unemployment is mitigated by falling numbers of young people.

      For more about these things see:

      1. Japan can again become the land of the rising sun. We should watch and learn from them., 1 November 2012 — Automation as saviors of Japan
      2. Must our population always grow to ensure prosperity?, 25 November 2013 — Falling population is great for Japan

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    2. If I read Hugh numerous articles correctly, he is saying that, in Japan, immigration and increased natality are totally unrealistic, so the only culturally acceptable medium-term relief there is making sure women enter the workforce in great numbers. In the long-term however, something else must be done.

      And we are back to the fact that approaches based on traditional economic models (e.g. more babies, more immigration) will just not work in the changing environment. No economic theory in the last 250 years ever considered in depth what to do with an aging and then declining population. All business, banking, public finances and social security approaches assume a growing market or population.

      So indeed, maybe with increased automation and resource depletion a diminishing demography is actually a good thing.

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    3. Guest,

      Economists love to assume that their’s is the master social science, and they can prescribe accurate solutions for matters beyond economics. Looking back at economists’ thinking gives little basis for this confidence.

      I don’t believe that the problem with applying economic theory is only that it doesn’t cope well with falling population. It does not consider any demographic change well.

      But that’s the small problem. The larger one is the next industrial revolution might introduce radically new factors, unlike anything in history. When economists so confidently opine about this, they do so not on theory — but by assuming that the future will be like the past. In fact, the modern era is one of discontinuities in history (e.g., the effects of nukes on warfare).

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  2. “All the effects of the late 1980s bubble in Japan were burned off 10 or 15 years ago.”

    Unless you were a person or company that purchased property at the height of the bubble and are stuck in an negative equity mortgage.

    In regards to immigration, it isn’t necessarily a bad thing, just that it is almost universally implemented incorrectly – those in power have misplaced ideas about the sort of world they want, as opposed to how the world actually is in reality. Ensure that your immigrants are highly skilled, with degrees, and are coming from a compatible culture. Be more discriminating (not necessarily a bad word) in your choice of immigrants. Keep out those from potentially hostile or incompatible cultures and societies.

    In regards to being “madly over-crowded”, as with most things, this is relative. Tokyo and Osaka are (Only ever been to Tokyo), and they have been described as “Black Holes” sucking the life out of the countryside. Also read about the “Straw effect” where improved infrastructure increases the rate of people leaving smaller cities for Tokyo or Osaka. Many of Japans country towns are expected to disappear entirely in the coming decades, because they are hollowing out rapidly. This is already extremely visible, even in big cities like Niigata (Niigata Prefecture apparently has some of the fastest depopulation in the country). Just take a walk around google street view of any of the regional cities and see the depressing state of the infrastructure and upkeep of the buildings, not to mention the apparent lack of people.

    Search google images for “シャッター通り” (Shattā-dōri) – Shuttered Streets, and see what you find.

    “Allowing the population to drop by 1/2 or 2/3 (back to levels a 100 or 150 years ago) would make it a far nicer place” – Not if the cities end up looking like Detroit – in fact with a declining tax base, supporting more retirees, who is going to pay for the demolition of all of the eyesores? Vacant buildings are a magnet for delinquent children, vandalism and arson – a problem in Japan as elsewhere. Not helped by a skewed tax system in Japans property market (Vacant houses at 8 million and rising).

    “The social disruption from rising unemployment is mitigated by falling numbers of young people.” In fact some of the fastest growing segment of the population involved in crime is the elderly in japan – theft, assault, murders. There is a risk that Japans population may sink faster, as young emigrate in search of opportunities.

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    1. Celebau,

      I see you’re a glass-half-full guy! That’s a good perspective for an analyst. Let’s see if we can show you the sunny side of the coin.

      (1) “Unless you were a person or company that purchased property at the height of the bubble and are stuck in an negative equity mortgage.”

      Commercial mortgages are not 25 year loans. They’re much shorter duration. Plus, almost all the bad debt from 1989 has either been restructured or written-off. That was 25 years ago, an eon in finance.

      (2) “In regards to being “madly over-crowded”, as with most things, this is relative.”

      Theoretically true, but wrt Japan that’s too outrageous to discuss.

      (3) “Not if the cities end up looking like Detroit”

      You’re totally missing my point. Detroit’s problem was poverty, not underpopulation.

      (4) “some of the fastest growing segment of the population involved in crime is the elderly in japan – theft, assault, murders.”

      I’d like to see a citation for that. Also, the base level must be insanely low vs. anything in the US (except infants).

      (5) “There is a risk that Japans population may sink faster, as young emigrate in search of opportunities.”

      As I said, the problem is economic growth — not underpopulation. Hence the importance and potential of the new industrial revolution.

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    2. “Ensure that your immigrants are highly skilled, with degrees, and are coming from a compatible culture.”

      1) If one looks at what immigrants are doing, one sees a massive proportion of them in occupations that require low or no skills: construction, agriculture, mining, hotel and restaurant sector, cleaning and waste disposal, etc. Everywhere in the world, in the USA as in Qatar, in South Africa as in Malaysia. Filter out those low-or-no-skills immigrants, and the economy will be in dire straits.

      2) What is a compatible culture has historically varied. In the USA, white, catholic Irish immigrants were considered culturally incompatible long ago — nowadays it is the reverse. The same happened with Jews. African immigrants from Burkina-Faso have been considered by native Ivoirians to be culturally incompatible. In Switzerland, there is some resentment against Germans immigrants, heavy xenophoby in India against Bangladeshi immigrants, and Japanese never got rid of their xenophobic attitude against Korean immigrants — every case one of “compatible cultures”. I suspect that the speed with which immigration flows take place is actually a much more important factor.

      Things are therefore much more complicated than the aformentioned standard argument, so let us throw it once and for all onto the rubbish heap.

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    3. guest,

      “Ensure that your immigrants are highly skilled, with degrees, and are coming from a compatible culture.”

      (1) “Filter out those low-or-no-skills immigrants, and the economy will be in dire straits.”

      Perhaps. I believe that is grossly overstated. While true in, for example, the Gulf States, I wonder about other nations. Perhaps if US employers were cut off from cheap labor, they’d pay and train more. History shows that the size of a nation’s underclass can be reduced by jobs, and that the labor supply changes with wages. Also, automation is eliminating low-skill jobs at a fearsome rate.

      (2) What is a compatible culture has historically varied. … I suspect that the speed with which immigration flows take place is actually a much more important factor.”

      Speed is certainly a factor. There are others. The speed of growth (immigrants are less accepted in slow or no growth economies). Also important is the ability of a society to absorb immigrants from other cultures, which varies greatly (the US on one end of the curve; Japan on the other) — and the ability of particular immigrants to adapt. Also, “compatible” implies a binary — yes/no. It’s obviously a varying quantity. Like all social dynamics, it’s complex.

      (3) “Things are therefore much more complicated than the aformentioned standard argument, so let us throw it once and for all onto the rubbish heap.”

      That strikes me as a strange argument. Almost nothing important can be adequately discussed in comments. This is the equivalent of chatting at a bar. The limitations of these discussions don’t disprove the theories being discussed. If we were talking about quantum mechanics, would you say that this discussion meant that it should be “thrown away”?

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  3. In some ways Japan is being out Japaned by China, ie out worked, out mercantiled, and too soon to tell but possibly out qualitied. And not just Japan. South Korea has the same problem. Indeed the world has spent the past few decades adjusting to the emergence of China and will continue to do so path forward.

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  4. Given the afforementioned demographic considerations, namely Japan’s extremely stable population (somehting like 0.15% annual growth over the past quarter-century), I think it’s more useful to look at the GDP per capita, in which case it doesn’t look as bad.

    http://www.google.com/publicdata/explore?ds=d5bncppjof8f9_&met_y=ny_gdp_pcap_cd&idim=country:JPN:USA:KOR&hl=en&dl=en#!ctype=l&strail=false&bcs=d&nselm=h&met_y=ny_gdp_pcap_cd&scale_y=lin&ind_y=false&rdim=region&idim=country:JPN:USA:KOR&ifdim=region&tstart=659001600000&tend=1384848000000&hl=en_US&dl=en&ind=false

    Like

    1. Todd,

      (1) “Japan’s extremely stable population”

      You just be kidding. The past 25 years is irrelevant. Japan’s population is decreasing. Demographic trends are fantastically difficult to change, once in motion.

      Did you really not know this?

      (2) “per capita GDP”

      They have stabilized it during the past 25 years by massive and increasing fiscal and monetary stimulus. You might as well look at a patient wired up under intensive care. “Look, his vitals are stable! He must be ok.”

      Like

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