Abe's Economic Black Magic
If reform were easy, it would have been accomplished long ago. The problem is that reforms aimed at promoting competition would hurt many entrenched firms and their workers. Since a Japanese worker’s current job at his current firm is his main social safety net, a desire to avoid social dislocation is the main reason Japan protects moribund firms. To ease the pain of reform, Tokyo should use fiscal and monetary stimulus as an anesthesia.
In the past, Japan has enacted reforms that worked, such as deregulating the financial market, forcing resistant banks to clean up the massive nonperforming loans that were hamstringing economic growth, ending laws that allowed small stores to block the entry of larger ones into their neighborhoods, and giving new entrants in the cell-phone business equal access to the mobile infrastructure of a previously dominant monopoly. These reforms ushered in huge productivity gains in retail and telecommunications (and for users of telecom), while partially unlocking distribution channels for newcomers.
Nothing in Abe’s program, however, remotely resembles those advances. His proposed agricultural reform, for example, would merely replace a subsidy focused on production levels with one focused on income, while giving no incentives for tiny inefficient farms to consolidate or for agribusiness to expand sufficiently. His talk of increasing career opportunities for women omits any mention of the main obstacle: that most of them get taken off the promotion track once they become pregnant. And while Abe has raised taxes on consumers, he is talking about cutting taxes on corporations. His claim that this would promote investment is false, as even the Ministry of Finance acknowledges. Japan’s corporate giants already have far more cash than they choose to invest at home. But a corporate tax cut might raise stock prices and gain Abe more corporate support.
His plans for the electricity sector, meanwhile, would ostensibly allow room for newcomers by separating generation from transmission. In reality, the existing regional electric monopolies will be allowed to form a holding company that controls both parts. He has done nothing to force rectification in the nuclear utilities, some of which falsified their safety records with the connivance of the regulators in the lead-up to the 2011 Fukushima nuclear accident. As a result, a justifiably distrustful population has so far blocked a restart of the reactors that previously supplied a third of the country’s electricity. The resulting electricity shortfall and higher energy costs are propelling automakers and other efficient exporters to shift even more of their capacity overseas. All told, the third arrow has turned out to be nothing more than a bunch of nice-sounding goals for growth, job creation, and investment -- without a plan for achieving any of them.
The most obvious litmus test of the third arrow is Abe’s handling of the negotiations for the Trans-Pacific Partnership. In recent months, these talks have stalled largely because Abe’s team has insisted on keeping tariffs and other barriers high in a few agricultural sectors (such as beef, dairy, and pork) that employ less than 100,000 households but where high prices boost Japan Agriculture’s income. As of mid-May, an agreement had not been reached. Even if a deal is eventually signed, Abe’s capitulation to small interest groups means that it won’t be used as a catalyst for domestic reform, unlike the way South Korea used its trade agreements with the United States and Europe, and as reformist officials in the Ministry of Economy, Trade, and Industry have urged Japan to do as well.
Abe certainly has the clout to take on these vested interests: he still enjoys an approval rating around 60 percent, and his party holds an overwhelming majority in parliament. Yet it seems impossible to find a single case in which the prime minister has truly challenged a powerful domestic constituency. Instead, he is wasting his political capital on denying seven-decade-old war crimes and refusing even to admit that Japan committed aggression, claiming Japanese ownership of islets long controlled by South Korea, and trying to change school textbooks to reflect these retrograde views. Even when Abe’s ideas on security are sensible -- such as his proposals for Japan to exercise a right to collective self-defense -- the need to overcome resistance in pacifistic Japan diverts Abe’s energy. Inevitably, this puts the third arrow on the back burner.
The sad fact is that Abe’s heart does not beat to the rhythm of reform and revival. Instead, Abenomics is a means to an end: to gain enough popular support to pursue the goals that really move him -- security and history issues. But Abe can stay insulated from the political consequences of his economic mismanagement for only so long. Eighty percent of Japanese polled say that his policies have failed to improve their lives at all. Abe remains popular because people still expect Abenomics to start working. Sooner or later, however, its failures will become impossible to ignore, and Abe will lose the political power to make necessary reforms -- even if he somehow gained the stomach for them.
Japan will eventually reform and revive. Its tragedy is that it is filled with smart, ambitious, creative individuals who are trapped in once vibrant but now ossified political and economic institutions. The whole is so much less than the sum of its parts. The country will revive when it finally undertakes the necessary institutional overhaul. But that takes a visionary leader; Abe is not that leader.