Abenomics: More politics than economics

In Tokyo, newly-installed Prime Minister Shinzo Abe has unveiled a massive, multi-billion dollar stimulus package, ostensibly to get the static Japanese economy moving. The announcement came after the Prime Minister, in an obvious PR blitz, formed an “economic revitalization council” composed not only of Cabinet members but experts from the academe and the private sector, and called for greater monetary intervention to devalue the Yen.

If these are all designed to shed the Prime Minister’s image as a security hawk out of touch with important domestic concerns– an image that helped ruin his first administration from 2006 to 2007– to a premier who prioritizes the economy, then they’re probably working. Many in Tokyo are now saying that the new administration is a lot better than the one it replaced, simply because it is seen to be doing something. The media has even come up with a nickname for the Prime Minister’s economic policy: Abenomics.

The claim, of course, is that Abenomics could potentially resuscitate Japan’s economy the way Reaganomics did in America in the late 1980s, Thaksinomics in Thailand in the early 2000s, and, more recently, Aquinomics in the steadily-rising Philippines. Experts appear to be divided on whether this claim is valid or not.

Prime Minister Abe’s stimulus package adheres to the classic Keynesian principle of pump-priming the economy through aggressive government spending in order to encourage greater consumption and investments. In theory, this is an effective way to reverse economic contractions. The flip side, of course, is that massive state expenditures would result in the accumulation of more debt to cover the resulting budget deficit. For it to be successful, therefore, the spending spree must stimulate the economy enough for it to yield returns that would offset the ballooning debt.

What many in Japan don’t realize is that this same principle also served as a premise of the economic policies outlined by the Democratic Party of Japan (DPJ) when it first came to power in 2009– the DPJ was of course ousted, I believe unfairly, late last year for failing to solve the economic malaise that for the most part was a result of decades of mismanagement by the Liberal Democratic Party (LDP) regime. However, the difference between the two major parties’ policies is that the LDP prefers pump-priming the economy by spending on infrastructure and aiding big businesses, hoping that these would create jobs and generate economic velocity; while the DPJ prefers giving dole-outs directly to the people, like monthly allowances for children, free high school tuition, and free expressway tolls, in order to encourage spending and stimulate the economy from the grassroots up, and perhaps even encourage families to produce more children.

While the Democrats’ policies were generally dismissed in Japan as populist and irresponsible, they actually resembled Thaksinomics, which boosted Thailand’s economy for the first time after the 1997 Asian financial crisis. Prime Minister Thaksin Shinawatra’s economic policy of giving dole-outs to the rural poor in Thailand’s Issan areas resulted in an improved social safety net, which encouraged rural households to save less and spend more, which in turn stimulated the country’s manufacturing, services, and export sectors. Thaksinomics, in its various forms, was later on emulated by countries like India, China, the Philippines, and Indonesia. As for Japan, the DPJ wasn’t able to fully implement its populist policies since its governments were torpedoed by the elite bureaucracy, which appears to work in tandem with big businesses and its traditional partner, the LDP. Eventually, internal strife in the party resulted in the abandonment of its populist policies, leading to the defection of erstwhile party boss Ichiro Ozawa, the architect of DPJ populism, and his minions.

The focus of Abenomics’ stimulus package, meanwhile, seems to combine classic LDP strategy with Prime Minister Abe’s political ideology. On one hand, it calls for more construction of roads, tunnels, and bridges; and has more allocations for state subsidy for corporate innovation than for the speedy reconstruction of the earthquake- and tsunami-stricken areas in Tohoku. On the other hand, it allocates ¥3 billion for improving nuclear reactor technology, which betrays the Prime Minister’s indifference to widespread public clamor for the country to re-examine the viability of nuclear energy in light of the Fukushima nuclear disaster; and ¥180.5 billion for purchases of various military hardware like PAC-3 surface-to-air missiles, which has nothing to do with stimulating a stagnant economy.

Perhaps the most disquieting feature of Abenomics is the dramatic increase in government spending on infrastructure, which is to be funded through state-issued construction bonds. In other words, the Abe government wants Japan, whose debt is already double the size of its gross domestic product (GDP), to borrow more so it can build more roads and bridges. Considering that Japan is already unmatched in terms of the amount of concrete it’s covered with, this approach is bewildering.

To be sure, there are urgent areas of development. Japan’s ageing infrastructure, which mostly dates back to the 1960s, needs maintenance and repair. That’s the lesson of the unfortunate collapse of the Sasago Tunnel in Yamanashi that killed nine people late last year. Similarly, the reconstruction of Tohoku requires billions of dollars. Yet, as the Japan Times said in its editorial, “because the Abe administration decided on the total amount of the package first without initially selecting necessary projects, chances are high that money will be squandered on nonessential projects.”

Indeed, such “nonessential projects” have for many years characterized the LDP’s spending track. Through much of the party’s almost uninterrupted fifty-year reign, politicians have scrambled for pork barrel funds to construct huge white elephants throughout the country. These public works projects were at the heart of the feudalistic socio-political set-up in the countryside during the post-war years: They created the impression that LDP politicians were doing something for their districts, which in turn strengthened their Koenkai machineries and their respective dynasties, while keeping the construction firms, which fund the LDP, happy.

The highly inefficient Japanese construction industry, together with the agriculture industry and the rural post makers, served as the electoral backbone of the LDP in the post-war era, and was pampered by the party rather well indeed. In his 2009 paper entitled Insights From Japan’s Lost Decade, Prof. Michael Heng Siam-Heng of the East Asian Institute (EAI) in the National University of Singapore (NUS) identified this cronyism as one of the causes of current Japanese economic woes.

In fact, after the Japanese bubble, which caused the country’s Lost Decades, burst in the early 1990s, the LDP governments unveiled a series of similar stimulus packages that spent trillions of yen to further cover the entire country in concrete. These projects succeeded only in lifting the GDP by at most 0.5% and causing the ballooning of Japan’s debt to more than 200% of its GDP, which is way bigger than those of Greece and other troubled economies in the Eurozone. These dimal– some would say disastrous– results were not really surprising, considering that the jobs created by such a multi-billion dollar spending spree were limited to a single sector and were temporary in nature, and that the spending itself was never rationalized effectively.

Taking these into consideration, one can easily see that increased spending on mindless construction projects could once again worsen Japan’s fiscal position in the medium- and long-term. But for Prime Minister Abe and his party, it probably doesn’t matter; the priority is to lift the GDP and the employment rate in the short-term, which would be enough for the LDP to claim that Abenomics is yielding returns. Indeed, achieving temporary bullish economic figures, at all cost, is the motivating factor behind Abenomics.

At the end of the day, Abenomics is probably more of a political kabuki; a matter of form over substance. Short-term economic growth rates, however minimal, coupled with the projection of an image of an economy-centric Cabinet, however shallow, would help the LDP-led coalition win the Upper House election in July, allowing the party to consolidate its return to power.

That, in turn, would give Prime Minister Abe the leeway to pursue his fetish: Further revising World War II history and changing Japan’s pacifist constitution.

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6 thoughts on “Abenomics: More politics than economics”

  1. Sterling commentary. It is somehow comforting to know that the Japanese are also into self-delusion and self-service over survival. It makes the lunacy we see in the U.S. Congress seem less isolated, and the Philippines look downright pragmatic. As you may know, I worked for the Japanese directly for over a decade (banking industry) in an executive capacity. The amount of diligence and hard work by the Japanese was unmatched by we indolent and pampered Americans. The effort by the Japanese to avoid risk, at the personal level, was extreme. Yet the bank prospered under the conservative, demanding style. It is odd to see debt piling up, almost the same way the real estate bubble inflated, in happy denial. So small risks are avoided, and the big ones accepted because if every body goes down in flames, no individual stands out as the cause. Surreal.

    1. Interesting observation. I think it captures the Confucian culture of group over individual, and follow-the-leader-blindly-and-loyally mentality. Reminds me of that brouhaha in Olympus, where an American executive who spoke out on the company’s cover-up of its financial woes was ganged up by those outraged by his audacity to speak up.

      In a way, Abenomics and Aquinomics are two extremes. Abe wants to spend, despite the risks of wasting money. Aquino is too reluctant to spend, and too obsessed with details to ensure every peso spent would yield returns, that his PPP projects never took off substantially. I think The Economist has once advised China and India, also notorious for massive, sometimes irrational, spending, to follow Aquino’s lead, even as many Philippine economists are getting extremely frustrated with slow process of approving big ticket public works projects.

  2. Looking at Japan’s “new deal” of Mr.Abe from Europe, we should think about the immediate consequences of these measures on our currency and economy. If possible, we should think about a “third way” for the economic recovery, quitting the actual leading austerity policies. If Abenomics wouldn’t work here or persuade our leaders, Merkenomics could put us down and push recovery far away. It’s time for a new, daring Euronomics stimulus package, hopefully cooperating with other economical global top players. I tried to provide an overview at http://wp.me/p2CSSk-12

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