Is Abenomics a busted flush? You might think so from the surge of negativity in the Japanese and foreign media. Tabloid headlines blast Japanese Prime Minister Shinzo Abe on a daily basis, while overseas commentators announce the death of his "voodoo economics."
There is no smoke without fire. Recent data have been worse than expected, notably the awful second quarter gross domestic product numbers. There have been policy missteps, some excusable, some less so. As a result, the Abe government's opinion poll ratings have fallen from the stratospheric to the merely impressive. It is still unknown whether the recent underwhelming cabinet reshuffle will change this trend.
Despite this, the achievements of Abenomics are real and tangible. Since Abe took office in December 2012, employment has risen by 1 million to 63.5 million. Job opportunities are more plentiful now than they have been for two decades. In 2013, the Tokyo stock market had its best year since the early 1970s -- adding a trillion dollars to the national wealth. Closer to the hearts of homeowners are real estate prices, which are also on the move, thus relieving the curse of negative equity. Meanwhile, foreign travelers have been flooding into Japan, putting the tourism account in the balance of payments into the black for the first time in 45 years.
Crucially, the new regime at the Bank of Japan has succeeded in raising both inflation and inflationary expectations. Real interest rates are negative for the first time since Japan's great asset bubble burst a quarter of a century ago. Slowly but surely the balance of advantage is shifting from the risk-averse to the risk-takers.
Two missteps
There are two key reasons, however, for the current summertime blues. First, the Abe government underestimated structural factors that make the work of reflation more difficult, but are ultimately signs of positive change.
Exports have flat-lined despite the weaker yen because Japanese companies have become more competitive, not less. Having moved production of low value added items off-shore, managements no longer need to slash prices to secure market share. Instead they can reap fatter profit margins -- which are good for stock prices, and for long-term corporate strength, but bad for short-term economic activity.
Likewise, the tight labor market has yet to translate into substantial wage gains because workforce participation is soaring, mainly thanks to part-time and female workers. In other words, the labor market has become more flexible. A Japanese woman aged between 25 and 55 is now more likely to have a job than an American woman of the same age, or a Spanish man.
The second key factor was a policy blunder. This April, Abe pushed through a 3-percentage-point hike in the consumption tax recommended by financial bureaucrats, rating agencies, the International Monetary Fund and several prestigious overseas publications. Could such experts be wrong? Quite easily -- their track record has been consistently dismal. Tax revenues are lower than they were a year ago.
Clearly, Abe should use fiscal policy to stimulate demand, not crush it. One idea would be to copy the South Korean plan of taxing excess corporate cash flow, thus incentivizing higher wages, investment and dividend payments.
The BOJ will need to do more, too. Both the U.S. and the U.K. had to implement several rounds of monetary easing. Critics claimed there would be no effect, or alternatively that hyperinflation was inevitable. Not coincidentally, though, these are the developed countries with the best growth profiles today.
Promises into policies
All in all, Abe's achievements overshadow the efforts of his predecessors, including the globally celebrated Junichiro Koizumi, who was prime minister from 2001 to 2006. Abe's greatest failing so far is not that he has been too extreme but that he has been too respectful of the consensus. The recent reshuffle, with its doling out of key posts to senior figures from party factions, is another indicator of this tendency.
Abe needs to recover his original radicalism. He needs to redouble his focus on reflating the economy, overruling his timorous economic officials when necessary. Instead of "reinterpreting" the pacifist constitution to allow a more active Japanese military, as has been attempted many times before, he should kick off a formal process of constitutional reform.
Then, when the stock market is well into its next bull run, and the streets are buzzing with the feel-good factor, he should call a snap "love me or leave me" general election, just as Koizumi did in 2005. But unlike the flamboyant Koizumi, Abe should serve the full additional term and turn the promises into policies, thus cementing his status as a transformational leader.
Pushback is to be expected, especially when the policy focus expands from economic revival, a goal that commands broad support, to include more contentious issues of security policy. But it would be weak leadership to leave such serious matters unaddressed. Some of Abe's most ardent critics are against the very idea of a self-confident Japan playing an active regional role. In response, he can point to his recent summit with Indian Prime Minister Narendra Modi as an endorsement of his strategic vision.
As for voodoo economics, contrary to its depiction in B-movies, voodoo is a complex spiritual system that encompasses many areas of human experience. There is no reason why economic activity should not be included. Keynes emphasized "animal spirits," and monetary theorists talk about molding expectations. "Strong spirits" happens to be the Japanese term for bullishness. Inducing that psychology is vital to Abe's further success.
Peter Tasker is an analyst with Arcus Research in Tokyo.
