An oft-repeated joke among economists has it that there are four kinds of economy: developed, developing, Argentina and Japan. The joke needs updating: while Argentina is still mired in its traditional problems, Japan is no longer such an unusual economy.
This is partly thanks to the success of Shinzo Abe, now the longest serving Japanese prime minister[1], and his signature economic reforms known as Abenomics. Less positively, however, it is because other developed countries have become increasingly like Japan. This makes the experience of Abenomics both a salutary lesson and a warning for the rest of the rich world.
The 2010s should not be remembered as another lost decade for Japan. They represented a turning point for the world’s third-largest economy. The rate of nominal growth, which reflects changes in prices as well as changes in the size of the economy, has been higher since Mr Abe began his reforms. The ratio of government debt relative to national income has stabilised for the first time in decades.
Abenomics was based around the idea of “three arrows”: higher spending from the government, loose monetary policy from the Bank of Japan and a package of structural reforms to raise the long-run growth rate of the economy. The goal was to rescue the country from two decades of near stagnation and permanent deflation. Monetary and fiscal stimulus, launched when Mr Abe became prime minister, appeared to work quickly. Growth has been steady, if unspectacular.
The inflation target has never been hit and price growth remains stubbornly low. Yet Japan is no longer an outlier on this point: European and American central bankers have likewise struggled to hit their targets for price growth. Abenomics cannot be blamed for a global phenomenon. The rest of the world is equally struggling to cope with ageing populations and lower rates of productivity growth.
The third arrow of Abenomics, structural reform, has been the greatest disappointment. Other than resurrecting the Trans-Pacific Partnership and striking a mini trade deal with the US[2] that prevented a further loss of access, the record is mixed. The headline rate of female labour force participation is now higher than in the US yet many Japanese women complain about rampant discrimination[3] that locks them out from higher-paying jobs.
A broader agenda of deregulation has never been as aggressive as investors wanted. Reforms of corporate governance, the labour market and healthcare have all disappointed. Again, Japan is no outlier here: many European economies have struggled to change the structures of the economy since the financial crisis; Barack Obama’s healthcare reform and Donald Trump’s tax reform have so far not delivered on what was promised.
The Abenomics experience provides lessons for the rest of the world. The first is that central banks have more ammunition than is often thought. The Bank of Japan has gone much further than its peers in stimulating the economy: it pioneered tiered interest rates and including equities within an asset purchase programme. It is still the only major central bank to directly target long-term interest rates.
The second lesson is the most positive. While the overall growth rate has been lacklustre, many other countries would be proud to achieve Japan’s growth rates for income per person. Living standards have continued to rise and the country has kept a lid on inequality. When Japan goes on show in the Olympics next year, the rich world will be looking on with a mix of admiration and sympathy.
References
- ^ now the longest serving Japanese prime minister (www.ft.com)
- ^ mini trade deal with the US (www.ft.com)
- ^ about rampant discrimination (www.ft.com)
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