Japan’s new leader is looking to revive the nation’s economy with the same strategy that floored it. Dr. Chris G. Pope explains.

Abe Shinzo stepped down in September after becoming Japan’s longest-serving prime minister. Having promised to bring back the Japanese economy to its former glory, he failed to do so. The man who replaced him was the chief cabinet secretariat of the Abe administration, Suga Yoshihide, – widely understood to have been Abe’s enforcer.

Suga was praised by proponents of a Green New Deal when he signalled his intent for Japan to become carbon neutral by 2050. However, Japan does not have the same history as the US. Though it benefited from the global order that the new dealers constructed after the Second World War, what prime minister Suga calls a “green society” need not entail the social democratic policies espoused in the New Deal and its present-day green reincarnation.

Suga is expected to detail his plans for carbon neutrality at the end of this year. However, a preliminary analysis suggests it is reliant on the development and deployment of carbon recycling in coal-fired power plants and blast-furnaces as well as biomass and other carbon-emitting methods of power generation. This guarantees nothing and the number of coal-fired power plants in Japan is increasing.

More importantly, in the same speech, Suga made clear his intent to proceed with Abenomics, Japan’s heretofore strategy of economic growth under Abe, which, contrary to Suga’s speech, did not restore the economy. It appears that the government has run out of ideas and is reliant on the tried and tested (and failed) economic orthodoxy to overcome the country’s economic hardship.

“It appears that the government has runout of ideas.”

So what was Abe’s economic growth strategy – Abenomics – Japan’s flagship policy combining monetarism and Keynesianism to address Japan’s debt-deflationary spiral,  a chronic problem that has beset the economies of many industrially advanced nations? Why did it fail? And what is the Suga government most likely to do to rejig the economy?

Abenomics was launched shortly after Abe’s election in 2012. He had spent the election criticising the incumbent Democratic Party of Japan for Japan’s economic performance after the Great Financial Crisis (GFC) and their handling of the Tohoku earthquake and Fukushima nuclear disaster. Although voter turnout was at a post-war low for a general election, Abe got his chance to deliver and promised to bring back the ‘good old days’ of economic development.

Despite warm reviews from Nobel Prize winners Joseph Stiglitz and Paul Krugman, the plan failed. And with Modern Monetary Theory not in vogue, the presumption among the elite in Japan is that despite the dwindling population, the public debt must, at some point, be repaid. Abenomics was supposed to save Japanese citizens from the kind of austerity we have seen in Greece and elsewhere, with the so-called “three arrows”:

  • An “audacious monetary policy” – quantitative easing (QE);
  • A “flexible fiscal policy” (public investment); and
  • A “growth strategy that encourages private investment,” – neoliberal structural reform.

The theory went as follows: the Bank of Japan (BOJ) increases the money supply, public investment stimulates demand, and neoliberal reform attracts investors to the country. In such an environment, the banks will lend more to businesses, particularly small ones that employ most of the country, and those businesses will invest in people which will bring up wages and the quality of life in Japan.

“But what do you do with all this new money once you’ve printed it? The conventional view is that either you give it to the people (howeverdefined politically) or you give it to the banks, as we have seenthroughout the world since the GFC.”

Abenomics worked on the assumption under Monetary Theory that an increase in the money supply necessarily entails an increase in nominal gross domestic product. So the idea was that, through QE, and then strategically informed investment and reform, Japan could increase the economic activity of the banks. That was expected to set off a chain reaction which would, eventually, lead to wage increases and an end to the deflationary nightmare that has haunted the country for decades.

But what do you do with all this new money once you’ve printed it? The conventional view is that either you give it to the people (however defined politically) or you give it to the banks, as we have seen throughout the world since the GFC.

While the government did the former as part of its Covid-19 response, Abenomics sought to do the latter because of fractional reserve banking – a justification that Barack Obama relied on when bailing out the banks too. Fractional reserve banking means that commercial banks can increase the money supply in a snowball-like effect because they hold only a fraction of the deposit of one client and lend out the rest to other clients, and so on. (That is to say, they make money out of thin air.) As a result, if the commercial banks feel secure enough to lend to businesses and people, then, the theory goes, Japanese citizens should feel the effects of growth.

It didn’t happen that way.

The problem was that the banks never felt secure in lending. That remained the case even when the government bought up already issued government bonds from financial firms and relatively high-risk securities from real estate investment firms and stocks from other companies. Figure 1 summarises the story of Abenomics fairly succinctly.

Figure 1 Created by author based on data from Bank of Japan and updated from Yamamoto and Toritani (2019)

The BOJ states that the Monetary Base (MB) refers to banknotes and coins in circulation plus current account deposits in the BOJ, while the Money Stock (M1), denotes cash and deposit currencies held by the public in commercial banks, agricultural cooperatives, credit unions and so on. Therefore, we see that from 2013, the MB increases dramatically as a result of Abenomics’ first arrow – QE. Moreover, the rate of credit creation, by which we mean the rate at which commercial banks take MB and lend it out to businesses and households, plummeted under the Abe government. This, of course, meant that the banks never felt confident enough to invest substantially in the real economy.

Recognising that Abenomics had fallen flat on its face, the government threw everything it could (including a large number of mainstream economic textbooks) at the problem to get the banks lending. This included the BOJ’s enactment of negative short-term interest rates and then yield curve controls, all to no avail. Moreover, there is a limit on how far you can go with negative interest rates. As commercial banks pass this rate on to their own customers, depositors might refuse to pay to keep money in their account with commercial banks (how much would you pay?) and instead withdraw their money, causing a run on the banks.

It is likely that Japan’s growing number of retirees would be angry with this given that most of them live off their savings, as would Japanese families struggling to make ends meet due to working in insecure and low-paying jobs as a result of decades of deflation. To avoid this, banks might not pass on these negative interest rates but this cuts into their own profit, making them more vulnerable to loan defaults. I am not sure what bank would lend more in this scenario unless ordered to do so as is possible in some other Asian countries but not Japan.

Abe also attempted to stimulate investment by rejigging the tax system so that more of the burden was on citizens and not corporations. Barring a few essential goods which remain at 8%, the consumption tax (or value-added tax) has increased from 5% to 10% during Abe’s tenure, while corporate tax was slashed. Policies like these clearly impact consumption, which was supposed to be the driving force out of deflation, as Figure 2 shows.

Figure 2 Created by author based on data from Japanese Government Cabinet Office

Abe raised consumption tax to 8% in 2014 and to 10% in 2019 and in both years, consumption shrank. What is more, it is unlikely that a weakening yen due to QE helped SMEs and struggling households given how reliant Japan is on energy imports. Given that overall household consumption accounts for over 55% of GDP in Japan it is difficult to see how constraining consumption like this in a country with a social security system that strongly encourages savings would lead to inflation. Further, cutting social security, as Abe has done, would only further incentivise households to save whether it is with a bank or elsewhere due to excessive negative interest rates.

Despite QE, Japan’s balance of trade did not rise significantly either, which begs the question of how feasible Abe’s model of export-led growth was in the first place. The three arrows of Abenomics did not stop the march of globalisation that has hollowed out Japanese domestic industry.

“I see little evidence of the government trying suggestions from heterodox approaches to economics.”

Given Suga’s commitment to Abenomics, it is likely that high-level discussions will centre on getting the banks lending. From this, the most likely diagnosis will be that Abenomics failed up to now because of Abe’s failure to push through neoliberal reforms. While Abe did, in fact, take significant strides in reforming the economy, proponents of a free-market society can always call for more reform. The US pulling out of the Trans-Pacific Partnership, an international investor’s rights and trade liberalisation agreement, might also be seen as the issue but the truth is that projected growth due to the TPP in Japan was negligible at best, and they joined another version of it without the US anyway.

When Japan emerges from the Covid-19 pandemic and recession, attention will fall immediately on to the next idea for economic growth. Given that Suga was a highly trusted stalwart of the Abe government and committed to Abenomics, I see little evidence of the government trying suggestions from heterodox approaches to economics. Rather, with Suga advocating labour flexibilisation in his speech, it is most likely that forcing through painful neoliberal economic reform will be Suga’s number one priority.  Such an act will only make things worse for Japanese citizens, as it will for the rest of the world if they follow suit. If citizens have no money to spend and the banks don’t lend, QE only transfers wealth upwards.

“A Green New Deal does not appear to be forthcoming in Japan.”

Despite promises of carbon neutrality, then, a Green New Deal does not appear to be forthcoming in Japan. Further, Suga’s commitment, as made clear in his speech, to high stock prices and a low yen suggest that the Japanese economy will be prescribed more rounds of trickle-up economics which so far, only proved to be a useful palliative for a government that needs to buy time. 


Chris Pope

Chris is an assistant professor at the Department of Contemporary Science, Kyoto Women’s University. He specializes in East Asian political economy and the political economy of climate change. He has …

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