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Japan's poor GDP figures show it has learned no lessons

Shinzo Abe needs to tackle roots of economic malaise rather than raise taxes

| Japan

Japan's role in the global economic discourse these days is often as an example of what not to do. From Washington to Beijing, officials struggle to avoid a Japan-like lost decade.

Yet as 2020 unfolds, it is fair to ask whether Tokyo has internalized the lessons its peers are studying.

News that gross domestic product shrank an annualized 6.3% in the October-December period is as bad as it gets for a Group of Seven nation. So, frankly, are the analyses of Japan's worst quarterly showing since 2014.

Let us dispense with the obvious. Yes, it would have been better if Prime Minister Shinzo Abe had not hiked consumption taxes in October from 8% to 10%. He should have learned from 2014, the last time the government raised consumption taxes in a deflationary environment.

That boost, from 5% to 8%, triggered a quick downturn as Abe trampled on economic green shoots with ill-timed fiscal tightening.

It would have been better if Abe had not hiked consumption taxes. (Photo by Tomoki Mera)

It is not like that was a one-off. In 1997, Prime Minister Ryutaro Hashimoto boosted taxes during a deepening bad-loan crisis -- and caused a downturn.

Now Abe has repeated these mistakes.

He did so despite 22 months of the trade war hurting exports and business confidence. He acted despite signs that the Bank of Japan's historic easing had failed to boost inflation. He did it even though U.S. President Donald Trump is threatening to impose tariffs on cars and auto parts or weaken the dollar at any moment.

This week's GDP analyses, it follows, are asking the wrong question. It is not what happened, but why?

Tokyo is raising consumption levies to display a determination to curb the developed world's biggest debt burden. Really, though, it shows that 30 years after the 1980s bubble economy, Japan is still treating the symptoms of its deflationary funk, not tackling the underlying causes.

Continued complacency was not what voters signed up for December 2012 when they returned Abe to the premiership. Bold talk of economic revival, structural reform and restoring Japan's global standing dazzled investors, too. In 2013, the year Abe triumphantly hit the floor of the New York Stock Exchange proclaiming "buy my Abenomics," the Nikkei Stock Average surged 57%.

Japan's about-face in the fourth quarter of 2019 is a stark reminder of the epic decoupling between asset prices and the real economy -- not just Tokyo property prices racing ahead of fundamentals, but the way stocks are booming while generalized living standards largely walk in place.

Abe erred by throwing conventional cures at an unconventional set of conditions. Sure, so did virtually all of his predecessors from Toshiki Kaifu, who was at the helm from 1989 to 1991 when the bubble burst, to Yoshihiko Noda, who Abe replaced in 2012.

Yet Abe sold voters a new approach -- a deregulatory revolution that seemed one part Ronald Reagan, one part Margaret Thatcher, one part Korekiyo Takahashi.

The latter reference is to an early 1930s finance minister often called the John Maynard Keynes of Japan. Takahashi's aggressive stimulus efforts during the 1930s inspired Abe's reflation regime.

We can debate what U.S. President Reagan and U.K. Prime Minister Thatcher got right and wrong in the 1980s. Yet they shook up their economies in ways historians are still examining. A key Abe misstep was too much Takahashi -- massive monetary loosening -- and too little emphasis on freeing economic sectors from bureaucratic meddling and arcane labor laws.

Abe can certainly claim some wins on the corporate governance front. But what is great for the investor class -- like record dividends -- is not enriching the masses. Though real wages showed signs of breaking higher in 2014 and 2018, the windfall Abe advertised fizzled. The lesson is that incrementalism is no way to rekindle Japan's innovative spirit, increase productivity and incentivize business creation.

By deploying doctrinaire responses to wholly unique circumstances, Japan's public debt rose on Abe's watch. Despite a 2014 tax hike intended to pay down IOUs, Tokyo's debt-to-GDP ratio is nearing 240%. The BOJ's balance sheet, meantime, is now larger than the economy. That limits Governor Haruhiko Kuroda's latitude, or willingness, to add more liquidity to a fast-slowing economy.

It is high time Abe shifted regulatory incentives toward startups and became creative with tax policies to increase innovation and prod giant exporters to pass profits to workers. It only seems right that Japan Inc. share the spoils from BOJ policies. Yet Abe, just like a revolving door of leaders before him, is better at spinning change than executing it. This spin is no substitute for true disruption and building innovation.

Others -- from the U.S. and Germany to China and South Korea -- are learning from Japan's mistakes. Why isn't Japan?

William Pesek is an award-winning Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades."

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