Shinzo Abe’s policies failed to boost real wages as deflation gave way to rising prices. GIAN EHRENZELLER/The Associated Press
Shinzo Abe has often framed his economic vision as a “three-arrow” policy package: an integration of fiscal stimulus, free money, and structural reform that together will lift Japan out of its prolonged stagnation.
In doing so, the former prime minister referred to the Japanese folk tale of three brothers each given an arrow. Separately, their arrows could easily break; together, the arrows – and the brothers – were unbreakable.
Mr Abe, who was assassinated on Friday, meant the mention of the three arrows as an illustration of the irrefutable logic of what has come to be known as Abenomics. This parable did prove strikingly relevant, but not in the way he would have hoped.
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Two of his arrows fired in 2013 hit the target. Massive fiscal stimulus did boost Japan’s growth. Negative interest rates and quantitative easing finally defeated the persistent deflation brought on by the real estate collapse of the 1990s. But the third arrow failed, as the Abe government failed to fully counter the productivity-reducing effect of an aging population. And as the proverb suggests, two arrows out of three are not enough – a lesson that other countries, including Canada, should heed.
According to David Edgington, professor emeritus at the University of British Columbia and former director of the school’s Center for Japanese Studies, Mr. Abe’s policies have failed to raise real wages as deflation gave way to rising prices.
“While inflation has picked up a bit, most of the extra money put into government bonds by the Bank of Japan has gone into the stock market,” he said, adding that the country has become a much more unequal society under Abenomics.
Still, there is no doubt that Mr. Abe faced a monumental economic challenge when he returned to office in 2012. Japan’s economy was stagnating in 2011. Prices were falling with a deflation rate of 0.27 percent. And GDP growth remains at 0 percent.
Against this backdrop, Mr. Abe sought to shock Japan’s economy into life.
In the same way he advertised his economic policies to the Japanese people using the country’s folklore, Mr. Abe embraced a Western-style demonstration to present Japan’s revival to the world: “Buy me Abenomics,” he urged during a speech on the New York Stock Exchange in 2013.
As a combination of economic and political measures, Abenomics was actually quite conventional. The idea of leveraging monetary and fiscal policy to avoid deflation while pursuing a promise of supply-side reforms aimed at reallocating labor and capital to more productive areas of the economy is hardly radical thinking in most developed countries.
Yet the policies marked an abrupt break with the Japanese economic orthodoxy that had prevailed for the previous two decades before Mr. Abe began his second term. Most importantly, Japan’s central bank has long argued that deflation is largely beyond its control, a byproduct of an aging population, and that the best it can do is provide a supportive environment for interest rates while the government is doing the hard work of raising Japan’s real potential growth.
Under Abenomics and the Bank of Japan’s new governor, Haruhiko Kuroda, the central bank has instead unleashed an era of unprecedented easing. He adopted an inflation target of 2 percent for the first time. And it injected liquidity into the economy through quantitative easing, introduced negative interest rates and declared its willingness to let inflation exceed its target. (All measures, by the way, that many of the world’s major central banks ended up adopting.)
“For years you had reflationists in Japan banging on the walls and pointing to things that American and European economists were saying, without success,” said Tobias Harris, a Washington-based Japan analyst and author of The Iconoclasta biography of Mr Abe published in 2020.
“Abe ended up becoming a vehicle for these outsiders who were looking for someone to carry their deflationary ideas.”
By the time Mr. Abe stepped down in 2020, citing health concerns, Abenomics had achieved decidedly mixed results for Japan’s economy.
Prices initially responded well to the Bank of Japan’s aggressive policies, with inflation reaching 3.7 percent in 2014 as the country enjoyed record employment. However, a consumption tax hike in Japan that year caused spending to fall and tipped the country into recession. It also costs the government and central bank confidence in their fight against deflation. While inflation largely remained positive before the pandemic, it never again reached the bank’s target, rarely rising above 1 percent.
Nor do the supply-side reforms promised by Abenomics amount to much. He did liberalize the country’s electricity market and resurrect the Trans-Pacific Partnership trade agreement, but he made no deeper changes.
“Abe has been able to offer a lot of carrots to corporate Japan, but he’s always been reluctant to use sticks to try to get them to change their behavior in ways that support his political goals,” Mr. Harris said.
However, Mr Harris believes that Abenomics has led to a lasting philosophical change on the part of the Japanese government. On the global trade front, the country wants to play a leadership role in integration that it has not wanted before.
But Japan’s structural problems are hardly unique. Worries about deflation have been offset by massive fiscal and monetary stimulus. Persistently weak productivity growth and increasing pressure from an aging population. This describes not only Japan, but also Canada less than two years ago.
Deflation at least proved to be a passing concern as inflation picked up in 2021 and this year. But productivity remains a major challenge for Canada, especially as baby boomers fully retire.
Trevor Kennedy, vice-president of trade and international policy at the Business Council of Canada, said every economy in the world, including our own, could learn from Japan’s experience with Abenomics.
“In fact, we should all be paying attention to Japan, including how it is managing its aging population,” he said. “We may all be facing a similar future, certainly demographically.”
In the latest federal budget, the Canadian government painted a comforting picture of a long-term decline in the country’s debt burden. But this scenario is based on a sharp and sustained increase in productivity that has not yet been supported by any major policy change.
In an echo of Abenomics, the federal Liberals have run significant deficits since coming to power, which continue into 2022 and beyond, even though the economy is clearly overheating. For now, however, there is no hint of the wide-ranging tax increases Japan has introduced to reduce its national debt.
Ottawa strengthened immigration targets and laid the groundwork for nationally subsidized child care. Both measures should help boost the workforce, although their effect on productivity is less clear. On these two fronts, Canada outpaced Japan.
But there is at least one arrow that is flying in Japan but still stuck in Canada’s quiver: a concerted push to keep older workers in the labor pool.
One of the first moves the federal Liberals took when they took office in 2015 was to reverse a planned gradual increase in eligibility for federal old age benefits to 67 from 65 starting in 2023. This policy would have reduced fiscal pressure on Ottawa and encouraged older Canadians to stay in the workplace.
Japan is belatedly moving in the opposite direction. The official retirement age for civil servants will begin to gradually rise to 65 from 60 by 2031, starting next year. The retirement age for private sector workers is effectively being pushed back to 70, and there are plans to cut benefits for those aged between 60 and 64.
All these changes happen relatively quickly. Workers in their 50s and 60s, not just those early in their working lives, are seeing the terms of retirement rewritten. This may be the most basic lesson of Abenomics: the longer the delay, the greater the pain.
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