[EAI Japan Commentary] Abenomics Enters its Third Year: The Shine of Policy Operation, The Shadow of Policy Content

Author

Lee Jeong-hwan_ Professor, Kookmin University. He received his Ph.D. in Political Science from the University of California, Berkeley. His primary research area is Japanese politics and economics.

As Abenomics, aimed at revitalizing the Japanese economy, enters its third year, the achievements and limitations of its three pillars—monetary easing, fiscal policy, and growth strategy—are becoming increasingly apparent. While the efficiency of the policy process, the setting of concrete policy objectives, and bold execution have emerged as strengths in terms of policy operation, limitations are identified in the lack of consistency among policies and the insufficient measures to address the social impact of policy outcomes. The South Korean government, which is pursuing economic policies similar to Abenomics, needs to carefully consider both the strengths in policy operation and the limitations in policy content of Abenomics.

Two Years of Monetary Easing: Achievements and Limitations

Two years have passed since the Bank of Japan decided on "Quantitative and Qualitative Monetary Easing aimed at achieving a 2% inflation rate within two years" at its Monetary Policy Meeting on April 4, 2013. This was the moment when Haruhiko Kuroda, appointed Governor of the Bank of Japan on March 20, 2013, by Prime Minister Shinzo Abe, materialized and revealed the first arrow of Abenomics, monetary easing, in his first Monetary Policy Meeting after taking office. Recently, as Governor Kuroda marks his second anniversary and the Bank of Japan's "different dimension" monetary easing also reaches its second year, many domestic and international critics are evaluating the past two years of Abenomics, focusing on its monetary easing policy.

Although the 2% inflation target has not been met, Governor Kuroda's monetary easing policy is generally evaluated favorably. For example, in a survey conducted by The Wall Street Journal among 33 economists in the United States and Japan, 20% gave Governor Kuroda's two-year performance an A, and 50% gave it a B. Significant support was given to the policy objective of overcoming deflation and achieving a virtuous economic cycle through 2% inflation, as well as the boldness of the Bank of Japan in pursuing it. The two reasons for failing to achieve 2% inflation—the consumption slump caused by the consumption tax hike in April 2014 and the decline in crude oil prices in the latter half of 2014—are understood as exogenous variables beyond the control of Governor Kuroda's Bank of Japan. The prevailing assessment of Governor Kuroda is, "It doesn't have to be exactly 2%; please continue as you are!"

The biggest beneficiary of Governor Kuroda's monetary easing policy is Japan's stock market. The Nikkei index, which hovered around 8,000 in the summer of 2012 before the Abe administration took office, surpassed the 10,000 mark after the administration's inauguration. The Nikkei index, which was around 13,000 when Governor Kuroda began full-scale monetary easing in the spring of 2013, continued to rise over the past two years, briefly exceeding 20,000 on April 10, 2015. In the past two and a half years, the Nikkei index has risen 2.3 times. The impact of monetary easing was not limited to expectations of economic recovery. The Government Pension Investment Fund (GPIF), a major player in the Japanese stock market, invested a large portion of the funds from selling government bonds to the Bank of Japan into the Japanese stock market (approximately 3 trillion yen in 2014), driving up stock prices. The Bank of Japan itself has become a major player in driving stock market growth, purchasing Exchange Traded Funds (ETFs) worth 1.7 trillion yen in 2014 alone, bringing its total holdings to 7 trillion yen.

On the other hand, the expectation that the yen's depreciation due to monetary easing would greatly benefit Japanese export companies has been limited, contrary to expectations. The Japanese government itself acknowledges that, compared to the yen's depreciation from 2005–2007, the current yen depreciation has had less impact on export prices. This is because, with the expansion of overseas production, changes in the comparative advantage of Japanese industries, and the increasing influence of global value chains, Japanese companies are prioritizing profit margins per unit of export goods over expanding export volumes through price reductions.

Prime Minister Abe's strong request to the Japanese business community for wage increases stems from the perspective that the performance of companies resulting from export growth and domestic demand stimulation should trickle down to households. However, neither export growth nor domestic demand stimulation has been significant so far. In addition to the limited impact of yen depreciation on exports, the contraction of Japanese household consumption following the consumption tax hike has significantly slowed economic growth since the second quarter of 2014. Asset value appreciation through the stock market is not the goal of monetary easing. If asset value appreciation does not lead to significant economic growth, Governor Kuroda's monetary easing could potentially result in a speculative bubble and a money game.

However, positive news for Prime Minister Abe and Governor Kuroda in 2015 is that Japanese companies are showing a forward-looking attitude towards economic prospects and capital investment plans. According to a survey on economic outlook conducted by the Nihon Keizai Shimbun in March 2015, 75% of executives expect the Japanese domestic economy to improve in 2015. Furthermore, 85% of respondents indicated plans to use the record-high internal reserves of Japanese companies, exceeding 300 trillion yen, for capital investment and M&A. The fact that business leaders primarily cite the recovery of personal consumption as the reason for their optimistic economic outlook is also positive news.

2015: The Year of Growth Strategy Implementation

However, from the perspective of long-term economic growth in Japan, the key lies in whether the growth strategy, the third arrow of Abenomics, can lead to institutional reforms that raise the potential growth rate of the Japanese economic system. This is consistently evaluated from a market-oriented perspective as being entirely up to Prime Minister Abe. The growth strategy, the third arrow of Abenomics, has been a target of much criticism since the early days of the Abe administration due to its lack of clarity, compared to the first and second arrows (dynamic fiscal policy). Without rushing in response to criticism, the Abe administration has been slowly and deliberately fleshing out the details of the growth strategy in line with the general pace of Japanese policy-making.

The growth strategy, compiled and first announced in June 2013, includes specific details under three main objectives: industrial revitalization, creation of strategic markets, and global strategy. While blueprints for the timing and methods of achieving these details were presented, the international assessment of the first growth strategy in June 2013 was largely negative. The mainstream international view was that it was merely a compilation of existing policies, lacking concrete plans for key tasks such as corporate tax reduction, labor reform, and agricultural reform, which are essential for fundamental change in the Japanese economic system.

In contrast, the revised growth strategy announced in June 2014 has been met with a more favorable reception. While it shares the same four main objectives—promoting investment, integrating with the global economy, strengthening human capital utilization, and creating new markets—the 2014 revised growth strategy presents corporate tax reform, labor market reform, and agricultural reform as key tasks, receiving positive evaluations from domestic and international market participants.

The reason why 2015 is a turning point for the realization of the growth strategy is that the Abe administration plans to legislate the core tasks of the growth strategy during the ordinary Diet session in 2015. Regarding corporate tax reform, the abolition of the special reconstruction corporate tax in March 2014 and a 2.51% reduction in the effective corporate tax rate from the fiscal year 2015 have been decided, with plans to lower the effective tax rate to 31.33% in 2016. Labor market reform's core content is the creation of a discretionary labor system based on performance, reducing protection for regular employees. The most noteworthy aspect of agricultural reform is the dissolution of the Central Union of Agricultural Cooperatives (JA), which has served as a supervisory body for unit agricultural cooperatives, thereby dismantling the vested interest maintenance mechanism within the agricultural sector.

The Abe administration has secured a political environment favorable for handling these politically sensitive reform tasks relatively smoothly from May 2015 onwards. Throughout the political calendar, including the Upper House elections in July 2013, the decision to postpone the second consumption tax hike in November 2014, the dissolution of the House of Representatives and general election in December 2014, and the unified local elections in April 2015, it has been cautious and burdensome to address the most controversial and core plans of the growth strategy in the Diet. However, that situation has now passed. Thus, following Prime Minister Abe's visit to the United States in late April 2015, it is highly probable that the legislation of the core tasks of the growth strategy will be actively pursued.

Problems with the Growth Strategy

The Abe administration's growth strategy, represented by corporate tax reduction, labor market reform, and agricultural reform, has a neoliberal character. The details of these reforms go further than the structural reforms during the administration of Prime Minister Junichiro Koizumi. While the first growth strategy in June 2013 did not clearly differentiate itself from Koizumi's structural reforms, the revised growth strategy in 2014 more boldly pursues deregulation to promote corporate investment and restructuring in less competitive sectors. The perspective of structural reformers, who argue that the Japanese economic system needs to become more market-friendly on the supply side, is reflected in the details of the growth strategy. However, the current growth strategy of Abenomics has two problems.

The first problem is the absence of an overarching policy direction that aligns with the neoliberal nature of the detailed measures. The Abe administration has not formulated the specific details of the growth strategy in accordance with the overarching direction of a "small and efficient state" characteristic of neoliberalism. The core of this misalignment between the overarching direction and the specific details is the lack of consideration for fiscal soundness in the growth strategy. The reason fiscal soundness has been relegated to a lower priority in the growth strategy is that Abenomics itself is a policy combination that, in the debate over economic policy priorities between structural reformers and reflationists, primarily adopts reflationary policies and includes structural reform policies as a catch-all.

Amidst the trends of monetary easing and fiscal expansion, the Abe administration is not actively pursuing the measures necessary to fulfill its promise of balancing the primary balance by 2020, the first step toward fiscal consolidation. The Ministry of Finance estimates that balancing the primary balance by 2020 is impossible, and Governor Kuroda also urged the government to strive for fiscal soundness at the meeting of the Council on Economic and Fiscal Policy on February 12, 2015. Governor Kuroda's remarks stem from concerns about the potential surge in interest payments on Japan's massive national debt, which exceeds 240% of GDP, amidst inflation caused by monetary easing. Japan's tax burden as a percentage of GDP is very low, around 9%, while its annual fiscal deficit reaches about 11% of GDP. In this situation, the Abe administration's calculation regarding fiscal soundness relies on the expectation of a natural increase in tax revenue due to economic recovery, rather than placing concrete fiscal soundness plans at the core of the growth strategy's specific content. The first problem with the growth strategy is that, unlike the detailed plans for micro-level institutional reforms on the supply side, fiscal soundness on the macro level is being managed with vague expectations.

The second problem is the potential tension between the social consequences of the specific measures and the asset value appreciation resulting from monetary easing. The detailed measures of neoliberal structural reform imply austerity in the daily lives of ordinary citizens. In particular, labor reforms aimed at reducing protection for regular employees and agricultural reforms linked to joining the Trans-Pacific Partnership (TPP) signify a deterioration in the living standards of social strata that have been stably incorporated under the long-term rule of the Liberal Democratic Party since the postwar period. Furthermore, corporate tax reform is designed to lower the effective tax rate for corporations with taxable income exceeding 8 million yen, while increasing it for those below 8 million yen. Amid concerns about the negative political consequences arising from the social impact of these specific measures in the growth strategy, the Abe administration's active pressure on companies for wage increases emerged. However, it is still too early to definitively predict whether wage increases, primarily benefiting large corporations, will spread broadly.

Many economic publications (e.g., The Wall Street Journal, The Economist) diagnose income inequality, a central theme raised globally by Thomas Piketty in "Capital in the Twenty-First Century," as an exceptional phenomenon in Japan. Instead, they emphasize the need for labor system reform, arguing that the overprotection of regular employees, which hinders income disparity, is a constraint on the revitalization of the Japanese economy. While the issue of overprotection for regular employees is a persuasive assessment, economic publications offering a market-oriented perspective have the drawback of discussing income disparity in Japan solely based on wage income. Japan's total income accounts for only about a quarter of total wealth, and the proportion of asset value, other than income, in total wealth is significantly higher compared to the United States. This means that the conditions are in place for wealth accumulation through asset value appreciation to outpace income growth. Despite the significant proportion of asset value, the social stability of Japanese society has been maintained by employment security and, through it, the security of family livelihoods.

The asset value appreciation in the stock market resulting from monetary easing has led to wealth expansion, primarily for large corporations. However, for ordinary Japanese people whose economic lives are tied to their workplaces and communities, this rise in asset values is not a tangible reality. On the contrary, reform proposals that necessitate austerity in daily life weigh heavily on them. This situation is similar to the mid-2000s when the discourse on a "gap society" emerged in response to Koizumi's structural reforms. In the current political climate, where the Democratic Party, which advocated for the expansion of universal welfare, is absent, the Abe administration is unlikely to face difficulties in maintaining power due to this tension. However, the tension arising from the conflicting natures of the growth strategy and monetary easing signifies a weakening of the inclusive mechanism that undermines the political stability of Japanese society. The Abe administration shows its limitations by failing to present firm political and economic alternatives to reforms that shake the foundation of the livelihood security system and by relying on the goodwill of companies to increase wages. Replacing the weakening political and economic inclusive mechanism with the ideology of "Beautiful Country, Japan," symbolizing tradition and patriotism, does not seem very realistic.

The most regrettable aspect of Abenomics as it enters its third year is the operation of the second arrow, dynamic fiscal policy. The fiscal expenditure of 10 trillion yen for economic stimulus included in the supplementary budget in January 2013 was primarily directed towards public works projects aligned with the goal of national resilience. However, Japanese public investment to date has focused solely on the short-term economic stimulus effect of the investment itself, with a lack of meticulous operational strategies for smartening public investment. If fiscal expansion is necessary, operational strategies that maximize its secondary effects are needed, and a possible alternative could be public investment centered on livelihood welfare. While the establishment of concrete plans for livelihood welfare-centered public investment requires considerable time, if the temptation for short-term economic stimulus is resisted and concrete plans are well-developed, it could potentially function as a mechanism to complement the growth strategy, which imposes austerity on the lives of the Japanese people.

Implications for South Korea

Concerns that the yen's depreciation resulting from Abenomics' monetary easing would worsen the export competitiveness of South Korean companies competing with Japanese firms in the global market have diminished in prominence in South Korea, as Japan's monetary easing has continued for over two years. Beyond a simple comparison of final product export prices, the decline in import prices of intermediate and capital goods from Japan, within the intricate global value chains where companies from both South Korea and Japan are deeply intertwined, has actually been beneficial for some sectors of South Korean companies. Therefore, the impact of yen depreciation on the export competitiveness of South Korean companies is multifaceted.

The implications of Abenomics for South Korea are more prominently revealed not in the economic relationship between the two countries, but in a comparison of the execution mechanisms of economic policies that are similarly underway in both nations. The economic policies of Deputy Prime Minister and Minister of Economy and Finance Choi Kyung-hwan, who took office in July 2014, bear a strong resemblance to Abenomics in many aspects. The expansionary macroeconomic policies for domestic demand stimulation and economic system reforms, such as public sector reform and deregulation, advocated by the Choi Kyung-hwan economic team, are very similar to Abenomics. However, when comparing the policy promotion systems of the two countries, the advantages of South Korea's policy promotion system are not clearly evident. A strength of Abenomics is its clear and concrete presentation of policy objectives through quantification. While the Choi Kyung-hwan economic team also presents policy objectives, their specificity is relatively lower compared to Abenomics. Furthermore, the Abe administration has streamlined its decision-making process through bodies like the Council on Economic and Fiscal Policy and the Industrial Competitiveness Council, and has established a system to secure momentum in policy-making by appointing experts such as Koichi Hamada as Special Advisors to the Cabinet. Prime Minister Abe stands at the center of this efficient and momentum-driven policy-making process.

Meanwhile, the potential risks of Japan's Abenomics pose the same challenges for South Korea. When efficiency-oriented structural reforms are combined with expansionary economic stimulus policies that lead to asset value appreciation, social backlash and conflict against structural reforms are amplified. To overcome these risks and maintain social stability in the long term, more decisive livelihood stabilization measures must be pursued concurrently.■

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