Japan’s Sun May Be Rising
A different cure for economic stagnation.
Aug 19, 2013, Vol. 18, No. 46 • By CHARLES WOLF JR.
Although Abe proposes legislation, funding, and regulatory action to advance these aims, a gap exists between means and ends. That said, the third arrow represents a striking contrast between the path Japan is taking, and that followed in the United States and EU. One token of intent is Abenomics’s proposed 10-point reduction in Japan’s corporate tax rate, currently the highest among the advanced economies. The U.S. cor-porate rate (35 percent) would then have that distinction, while Japan’s rate would drop to 28 percent—incidentally, China’s is 25 percent.
Although the three arrows are the core of Abenomics, there is another dimension that, while formally unrelated, may indirectly affect it. This dimension is Abe’s declared aim of making Japan’s military establishment “more normal”—that is, similar to the military establishments of other countries—by relaxing the unique restrictions imposed on Japan’s self-defense forces by Article 5 of its constitution. Whether and how this issue is resolved, Japan’s defense budget is likely to experience a slight increase. In past years, the defense budget has hovered slightly below 1 percent of GDP. Henceforth, it is likely to hover slightly above that threshold. This increase in spending and procurement will, of course, be only a small part of the fiscal stimulus embodied in the second arrow of Abenomics. As the increase occurs, however, Japan will be unique among America’s major allies in increasing its defense budget, although as a share of GDP the Japanese figure will still be relatively low.
What are the chances that Abe’s efforts will succeed in reviving Japan’s economy from its torpor? In many ways, the obstacles facing Japan are even greater than those faced by the United States and EU. Japan’s zero-growth stagnation has lasted much longer (since 1990) than the subprime crisis afflicting the United States and EU, to which Japan was much less exposed. Japan’s protracted stagnation spawned chronic deflation, thereby imposing unique disincentives to consume or invest: When future prices are expected to decline, current spending tends to be postponed.
Japan’s revival is further impeded by acutely unfavorable demographics: a declining and aging population, and a rising dependency ratio of the elderly relative to the working-age labor force. Mitigating these conditions will require measures beyond Abenomics. Japan’s difficulties have been aggravated by the tsunami and nuclear disasters of 2011. And the ability of Japan’s world-class companies to uplift and drive the economy has been eroded by aggressive competitors in the United States, Korea, Germany, and China.
Yet Japan also has significant advantages in responding to these challenges. Abe’s political position has been strengthened and secured for at least three more years by the Liberal Democratic party’s dominance in both the upper and lower houses of Japan’s Diet. Furthermore, his ability to implement the three-arrows program is less constrained by special interests, lobbies, and labor (company unions are prevalent in Japan, rather than the national trade unions of the West). While business leaders profess strong support for Abenomics—especially some of its tax and structural reforms—their plans eschew any reliance on government subsidies or bailouts. The Nikkei’s rise of 32 percent since Abe became prime minister in December is a bellwether of Japan’s collective expectations about the economy.
If and as these expectations become reality—including evidence of military “normalcy”—Japan’s prominence in the global arena will be enhanced. The sun that has been setting may rise again. Still, a realistically optimistic assessment of the chance of success is likely to hover slightly above fifty-fifty.
Charles Wolf Jr. holds the distinguished chair in international economics at the RAND Corporation and is a senior research fellow at the Hoover Institution.
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