66 Finance & economics The EconomistSeptember 5th 2020
A
s anexerciseinpoliticalbranding,Abenomics has been an
unusual success. When Abe Shinzo returned to power as Ja-
pan’s prime minister in December 2012, he said he would revive
the economy by loosing off three “arrows”. The first, expansive
monetary policy, would banish deflation. The second, flexible fis-
cal policy, would restrain public debt without jeopardising the re-
covery. The third arrow, structural reform, would revive productiv-
ity and lift growth. The image stuck, even after the government
tired of it.
Mr Abe’s archery excited keen interest elsewhere. Many other
mature economies, after all, look a little Japan-ish. They combine
greying populations, faltering growth, high public debt and stub-
bornly low inflation, despite miserly interest rates. “Yes, we are
probably all Japanese now,” concluded Jacob Funk Kirkegaard of
the Peterson Institute for International Economics, an American
think-tank, last year, even before the covid-19 pandemic added to
the debt, disinflation and despair. As Mr Abe departs after almost
eight years in charge, what lessons can others draw?
The first lesson is that central banks are not as powerful as
hoped. Before Abenomics, many economists felt Japan’s persis-
tent deflationary tendencies stemmed from a reversible mistake
by the Bank of Japan (boj). It had combined fatalism with timidity,
blaming deflation on forces outside its control, and easing mone-
tary policy half-heartedly. In 1999 Ben Bernanke, later a Fed chair-
man, called on the bojto show the kind of “Rooseveltian resolve”
that America’s 32nd president showed in fighting the Depression.
Sure enough, in April 2013, the bojmade a display of new deter-
mination, promising to buy enough assets, including government
bonds and equities, to raise inflation to 2% within about two years.
In 2016 it introduced negative interest rates, a cap on ten-year bond
yields and a promise to let inflation overshoot its target (which the
Federal Reserve emulated last month). These efforts stopped per-
sistent deflation, a feat that is often forgotten. But they could not
lift inflation close to the central bank’s target (see left-hand chart).
One reason may be peculiar to Japan: its regular workers are
economically monogamous, enjoying long-term employment re-
lationships with a single firm. They are almost impossible to fire
but also difficult to poach. Thus, although Abenomics lowered un-
employment to just 2.2% by the end of last year, regular workers
did not benefit from a bidding war for their talents. Firms instead
spent more on part-time workers. Yet because these recruits col-
lect a relatively small share of the country’s wages, their improvedpay put little upward pressure on prices.
Another threat to the power of central banks could recur else-
where. Japan’s public became so accustomed to unchanging
prices, it assumed the future would mirror the past. That assump-
tion, which shaped pay negotiations between unions and employ-
ers, then became self-fulfilling. This was a difficult legacy for Abe-
nomics to overcome. Proponents of monetary activism were right
to criticise the bojfor not fighting this mindset earlier. They were
wrong to think those past mistakes were easily reversible once
Abenomics began. “I was too optimistic and too certain about the
ease with which a determined central bank could conquer defla-
tion,” admitted Mr Bernanke in 2017.Big is beautiful
As well as showing that monetary policy is less powerful than
hoped, Abenomics has shown that high public debt is less danger-
ous than feared. Japan’s gross government debt was almost 230%
of gdpwhen Mr Abe took charge and is even higher now. But the
cost of government borrowing has remained negligible. Indeed,
yields for five-year bonds are negative.
Fiscal scolds point out that yields on bonds are low because the
central bank is buying so many of them: its holdings now amount
to 99% of gdp, whereas the Fed’s equal about 20% of American
gdp. The term “financial repression” gets bandied about, as if Ja-
pan’s central bank is conspiring to let the government spend more
than it should, at the expense of the private sector. But that gets
things backwards. The central bank is doing everything it can to re-
vive private spending. Until it succeeds, though, the government
has to fill whatever gap in demand remains. The shortfall in priv-
ate spending is what makes government deficits necessary. It is
also what makes them so cheap to finance.
What about the third arrow of Abenomics? Before its lost de-
cades, Japan taught the world how to raise productivity in big
firms, through “lean manufacturing”, just-in-time delivery, and so
on. Unfortunately, the country also shows how badly productivity
can lag in small firms. Many operate in service industries, where
productivity is notoriously low. Yet even in manufacturing, small
enterprises are less than 40% as productive as their larger counter-
parts, according to the Ministry of Finance (see right-hand chart).
Just because a firm is small does not mean it is new or particu-
larly entrepreneurial. In Japan, three-quarters of small firms are
over ten years old and two-thirds of the owners of small and mid-
dling enterprises will be 70 or older by 2025, according to the oecd.
The government provides plenty of support to small firms. It guar-
anteed loans worth 4.4% of gdpin 2016, compared with an average
of just 0.1% in the oecd, a group of mostly rich countries. In a re-
port last year, the group expressed concern that such guarantees
weaken the incentive for banks to monitor their borrowers and
push them to improve.
For the many countries that have expanded similar guarantees
in response to the covid-19 pandemic, Japan thus provides a useful
lesson. Governments must be careful to ensure that this necessary
effort to ensure the survival of small firms in the short term does
not permit stagnation in the long term.
Abenomics will almost certainly outlast the prime minister
who introduced it. None of Mr Abe’s potential successors, includ-
ing Kishida Fumio, his party’s head of policy, Ishiba Shigeru, a for-
mer defence minister, or Suga Yoshihide, the chief cabinet secre-
tary, are likely to renounce it. They may, however, be tempted to
rebrand it. Suganomics, for example, has a nice ring to it. 7Free exchange Parting shot
What can the world learn from Abenomics?Hardly a bullseye
JapanSources:BankofJapan;OECD;
JapaneseMinistryofFinance*Consumption-taxadjustedseries
†IntroducedinJanuary 2019210-1-2
20181614122010Consumer prices*
% change ona yearearlierSMEsLargeenterprises15
12
9
6
3
0
2003 10 1715Output per worker in
manufacturing , ¥mConsumption-
tax increasesTarget†