Shinzo Abe’s “Abenomics” has failed. But why?

Who would have thought that it would be in the Land of the Rising Sun that three arrows could miss their target so wildly?

Of course, I’m talking about the Prime Minister of Japan, Shinzo Abe’s, three arrows of fiscal stimulus, monetary easing and structural reform that were intended to claw Japan out of a dangerous cycle of recession and deflation. At the time, it seemed like the perfect policy, with fiscal stimulus intended to increase demand for goods and services and monetary easing by the Bank of Japan intended to generate the 2% inflation that Japan has so longed for, increasing aggregate demand and therefore triggering a virtuous cycle of economic growth. In addition to this, the structural reform intended to increase the competitiveness of Japanese industry with regards to the world as a whole should have ideally bolstered and healed Japanese companies’ future prospects, after years of sluggishness. Yet as so often turns out, while Abe’s plans seemed to be worth their weight in gold on paper, they have failed to revitalise Japan and return it to the supreme economic status which it once had. Amongst a whole host of other indicators, Japan’s inflation rate fell to -0.4% in July 2016, lowering the proverbial coffin into the ground of another seemingly great set of economic policies. But why has it failed when it looked so good on paper? How has Abe fallen flat yet again? Could external factors be preventing the three arrows from working their magic?

Well, when you take into account Japan’s rapidly changing demographic, the answer to the latter question would be resoundingly in the affirmative. Since 2010, Japan’s population growth has been negative and birth rates have steadily declined while life expectancy continues to rise. On the health side of things, this is a massive breakthrough for the country, but economically, what it means is that Japan now is faced with the problem of a gradually dwindling labour force. Hence, although Abe is injecting billions upon billions of fiscal stimulus into the economy, the decline in labour force has resulted in a decrease in consumer demand in spite of his policies, due to less people having the money in their pockets to actually spend in the first place. In this regard, what Abe could further focus on is spearhead a further push for immigration to bolster aggregate demand and consumer spending, in turn boosting growth before the arduous and potentially unfruitful wait for Japanese societal norms regarding children to change (he has made great strides towards this with his Abenomics 2.0 programme). Perhaps in the case of Japan, this policy would be far more beneficial to her than any fiscal package that Abe could come up with; it would certainly at least be worth a try.

One side effect of recent Japanese economic policy (in particular the monetary policy of setting negative interest rates) has also been a devaluation of the Japanese yen, allowing Japanese firms to become complacent in the face of high profits. Due to the weak yen increasing Japanese firms’ revenues from abroad, the result is a lack of incentives for these firms to innovate and increase productivity. Due to this, the economy’s productive capacity has stagnated, hindering its potential for long run economic growth. Recent reports indicate that distinguished figures such as former chairman of the Federal Reserve, Ben Bernanke, declaring that “monetary policy is reaching its limits” in many developed countries. Due to this, it is feasible that the cut in interest rates to negative levels, while effective on paper, has not worked so well in reality because it disincentives innovation within Japan, and without innovation, it is extremely difficult for a capitalist framework to thrive and prosper. Therefore, perhaps an appreciation of the yen against the dollar would not be as disastrous as many pundits claim, and instead, may indeed provide a route by which Japanese firms can finally move forward.

Social attitudes in Japan currently are also not exactly conducive to economic progress. Due to many of the current Japanese young generation having known nothing but economic stagnation, deflation (or very low inflation), and failed government policy, these young people, traditionally some of the big spenders in a modern economy, have failed to provide the Japanese machine with a much needed boost. It has gotten so bad that one individual said to the Financial Times that she feels as if she is “more conservative than [her] grandmother.”, such is the backwards direction which Japan has gone in with regards to spending. The solution to this is much less science than it is alchemy, and the only way which Japan can really try and fix this problem is a bottom-up approach to incentivise spending amongst young people. In my opinion, this could be achieved by portraying spending on goods and services as some sort of natural duty, invoking patriotic sentiment and therefore triggering spending to lurch from its slumber. However, Japan’s problems are both deep and wide ranging, and will take years, or perhaps even decades of consistently successful government policy to solve. While Abenomics is well-intentioned, it simply has and will not work in practice, and perhaps what Abe and his fellow policymakers need to do is to think a little bit outside of the box.

How will Obama be remembered?

This image is licensed under the Creative Commons Attribution 2.0 Generic license – The photographer is Will White.

On January 20, 2009, the United States of America finally turned its back on George Bush and appointed Barack Hussein Obama as their 44th President. At the time, it was looked at as a landmark occasion; the first African-American President in the history of the most powerful country in the world. Many now say that this victory for equality has been overshadowed by backwards, regressive policy that has gone against the very agenda of progressivism that Obama stood for election for. However, others instead espouse the idea that Obama has laid the proverbial stepping stones for future progressives to unite America through economic policy. Regardless of whichever side you take, it’s undoubtable that the Obama administration has divided opinion like almost no other in contemporary politics and economics. Obama’s tax cuts for the wealthiest in society are something which have been campaigned for by many in the past, but some on the left side of the spectrum still regard him as far too business-friendly to be in any way compatible with the vision of equality for all Americans. In this regard, many of his policies have not necessarily been the most popular, yet it is still important to take into account the economic climate which the 55-year-old inherited from his Republican predecessor; the images of widespread depression and angst certainly add context to the debate, context that is needed when analysing any presidency from an economic perspective.

Today, in a global economic environment of stagnation and extraordinarily low interest rates, many are justified in claiming that we have never really escaped the proverbial wreckage of the Great Depression. Yet more economists than not claim that Obama’s Keynesian fiscal stimulus package to the tune of $787 billion, largely in the form of tax cuts to families, was instrumental in making sure that America did not stuck in a period of prolonged economic stagnation, amidst an environment of lesser trust in the prospects of the economy, and therefore less investment. According to James Feyrer and Bruce Sacerdote of Dartmouth College, the multiplier effect (the increase in final income arising from any new injection of spending) was between 1.96 to 2.31 for low-income spending, 1.85 for infrastructure spending, and finally in the range of 0.47 to 1.06 for stimulus as a whole. While this was not the only study carried out on Obama’s fiscal stimulus package, the methodology of the survey the two economists used is significant because they not only compared employment growth at state and county level, but they also compared month-by-month data to see how employment figures were changed at the point when the stimulus was injected into the economy. The significant upward trend generated by the stimulus here is thereby significant as it supports heavily the claim that the package was needed in order to usher America out of the stagnation that it previously endured; so Obama doesn’t seem to have done too badly so far.

The Dodd-Frank Financial Reform Bill also was a significant piece of legislation that Obama signed during his presidency. Described by the Washington Post as “the most ambitious overhaul of financial regulation in generations”, there’s no denying that the Bill has had and will continue to have significant effects on the way financial firms think about their operations going forward. However, it does not ameliorate the problem of the massive moral hazard which banks are allowed to possess when analysing whether to cut down on their portfolio risk or not. In the former Governor of the Bank of England, Mervyn King’s book “The End of Alchemy: Banking, the Global Economy and the Future of Money”, King argues that this is precisely what could lead to another catastrophic recession, and argues instead for a “pawnbroker for all situations” solution, one in which banks have to take significant measures before having any chance of being bailed out. Whilst I would suggest that one reads King’s book for more insight into this claim, the fundamental underlying principle is that banks will take risks if you allow them to, putting taxpayers at risk of having to bail them out once again, and for this reason, I argue that the legislation Obama approved has not gone anywhere near far enough.

And now we come to perhaps the most contentious issue of all: Obamacare. Although the program still has its glaring faults and areas where it should really be improved in order to improve the accessibility of healthcare for every American, it has to be said that the healthcare program has had overwhelmingly positive effect. For example, businesses with over 50 employees are required to have a health insurance program, with tax credits for these businesses also being put in place to help them finance this program. In my opinion, this strikes a near-perfect balance between stamping the need for increased healthcare coverage for the most vulnerable members of society and easing financial constraints on business, allowing these firms to flourish and expand their operations. If I had to summarise Obama’s economic policy in a few words, I’d use the phrase “getting there”. Whilst the African-American has made key policy moves that have steered America in the right direction, there are still large gaps that need to be filled and policy moves that need to be implemented to progress America’s economy further. He hasn’t done it all, but he’s definitely laid the foundations.

Shrey Srivastava, 16