The Magazine

Japan’s Sun May Be Rising

A different cure for economic stagnation.

Aug 19, 2013, Vol. 18, No. 46 • By CHARLES WOLF JR.
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Whether by design or inadvertence, Prime Minister Shinzo Abe’s plans for reviving Japan’s economy after two decades of stagnation differ sharply from the stimulus and austerity policies pursued by the United States and the European Union to recover from the deep recession of 2008-2009. These differences augur well for Japan’s prospects.

Prime Minister Shinzo Abe addresses a street rally in Tokyo, July 4.

Prime Minister Shinzo Abe addresses a street rally in Tokyo, July 4.


“Abenomics” is metaphorically depicted as a quiver of “three arrows.” The first is monetary policy; the second, fiscal policy; and the third​—​“creating wealth through growth”​—​is structural and reformist in character, although less clearly specified than the other two.

It’s worth noting that there are a few elements it shares with the U.S. experience, and one element shared with EU practice. Abenomics’s first arrow, aggressively easy monetary policies by the Bank of Japan, uses the same terminology​—​quantitative easing, or QE​—​adopted by the Federal Reserve during the past several years. Japan’s QE is a simulacrum of QE in the United States.

Japan’s QE is moving rapidly to double the economy’s monetary base by 2014. By way of comparison, the Federal Reserve’s QE boosted the U.S. monetary base by 40 percent between 2008 and mid-2013. In both countries, monetary policy aims at maintaining near-zero interest rates, although relaxation of this target is more likely in the United States than in Japan. And unlike the Fed’s version, a declared objective of Japan’s QE is to raise the yen/dollar exchange rate (that is, to depreciate Japan’s currency) to a target rate between 100 and 110, and thereby to stimulate Japanese exports. At the start of Abe’s tenure last December, the yen/dollar rate was 87; currently, it is 99.

Abenomics’s second arrow​—​fiscal policy​—​can also be compared with stimulus policies in the United States, and has one element in common with austerity policies in the EU. Like U.S. fiscal policy, Japan’s counterpart entails continued and large debt-financed government spending. The ratio of Japan’s general government debt to gross domestic product was 214 percent when Abe became prime minister​—​by far the highest ratio among the world’s developed economies, and about twice that of the United States. However, less than 10 percent of Japan’s total debt is owed to foreign entities, while about one-third of U.S. debt is held by foreign creditors (mainly China, and to a lesser extent Japan). Abe’s fiscal policy has raised the already-high ratio of government debt-to-GDP to 224 percent to stimulate demand and offset the chronic deflation plaguing Japan’s economy in the past two decades.

To help finance this large-scale debt, Abenomics fiscal policy includes a page from the EU’s austerity playbook: an added consumption tax intended to boost government revenues by 5 percent​—​the only instance where Japanese and EU policies overlap.

While there are thus a few similarities between Japan’s current path and the efforts of the EU and the United States, the similarities are dwarfed by differences both qualitative and quantitative.

The qualitative differences were evident in a recent meeting between a visiting foreign economist and spokespersons of the cabinet secretariat, the Bank of Japan, and the Ministry of Finance. The meeting opened with an explicit statement that the new policies are intended to be “pro-business as well as pro-growth”​—​an eminently reasonable approach in an economy whose private sector accounts for approximately 80 percent of GDP. In the profusion of economic policy debates in the United States and EU, such a clear and sensible declaration of intent is rarely, if ever, encountered.

The content and intent of Abenomics’s third arrow displays the sharpest differences from both the U.S. and EU precedents. While acknowledging the central role of Japan’s world-class brands in such industries as automobiles, electronics, earth-moving equipment, and robotics, the third arrow aims at a more open, competitive Japanese economy: allowing freedom of entry for start-ups, welcoming and nurturing a more aggressive venture-capital industry, and encouraging entrepreneurship and innovation. The relative scarcity of these qualities in Japan’s economy is acknowledged by the spokespersons, and evidenced
by the tenfold difference between annual new start-ups in the United States and Japan (though U.S. GDP is only about three times that of Japan).

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