When I was in college in the late 1980s, the US was obsessed with Japan. Earlier in the decade, national newscasts ran footage of people destroying Japanese cars with a sledgehammer to protest Honda’s and Toyota’s success at the expense of Detroit. The most indelible symbol of this concern was the Japanese purchase of Rockefeller Center in 1989, which seemed to cement Japanese superiority in our national consciousness. On a more personal level, the international studies section of the political science department taught a course in then modern Japanese economic development. I remember reading about the close collaboration between various government ministries and industry, along with the Japanese practice of Keiretsu, where creates an inter-locking series of businesses that act in concert. The professor argued the Japanese method of doing business was far superior to the US, which, given the then success of our competitor, was difficult to argue with.
But then came the collapse of the Japanese real estate bubble and the ensuing lost decades, when Japan was mired in weak growth and deflation. As summarized by Wikipedia:
The Lost Decade or the Lost 10 Years (失われた10年 Ushinawareta Jūnen?) is the time after the Japanese asset price bubble’s collapse within the Japanese economy. The term originally referred to the years from 1991 to 2000, but recently the decade from 2001 to 2010 is often included, so that the whole period of the 1990s to the present is referred to as the Lost Two Decades or the Lost 20 Years (失われた20年, Ushinawareta Nijūnen). Over the period of 1995 to 2007, GDP fell from $ 5.33 to $ 4.36 trillion in nominal terms, real wages fell around 5%, while the country experienced a stagnant price level. While there is some debate on the extent and measurement of Japan’s setbacks, the economic effect of the Lost Decade is well established and Japanese policymakers continue to grapple with its consequences.
In an attempt to overcome the numerous issues associated with this phenomena, new Prime Minister Shinzo Abe instituted a program named “Abenomics,” that had three provisions: a massive government stimulus, a QE program to devalue the yen and structural reforms. While the first two arrows were implemented within 6 months after Abe taking office, the third arrow is proving more difficult to fulfill.
After two years into the program, let’s assess its effectiveness, starting with government spending:
According to the top chart, total public investment (darker black line) began increasing at the beginning of 2013 and continues rising. The bottom graph shows the total value of contracted public works (the thick black line), and then breaks that information down into local (thinner black line, right scale) and national government (lighter grey line, left scale) expenditures. Notice that while the national government spending did increase, local government spending did the bulk of the work. The combined conclusion to draw from these two graphs is government spending did increase, as promised.
To analyze the net impact of this spending, let’s first look at overall GDP:
In the 1Q13, headline GDP growth sharply increased. But the pace of growth consistently declined for the remainder of the year. Growth again increased in 1Q14, but contracted sharply in 2Q14 after the government increased the sales tax. Growth continued to languish for the remainder of the year. And the contribution of government spending to overall growth was weak at best, as evidenced by the continually declining percentage contribution of this GDP component.
However, it could be argued the stimulus had an ancillary effect of positively impacting business sentiment. The results of the Tankan business survey support this thesis:
Both manufacturing and non-manufacturing sentiment began increasing sharply at the beginning of 2013, right after Abe’s election and the implementation of the first two arrows. Sentiment continued increasing for the remainder of 2013. While it decreased for the duration of 2014, it remains positive.
The net impact on consumer sentiment, however, has been negligible:
Sentiment was stable for the first three quarters of 2013. But then it moved lower by a few points, where is stayed for the remainder of the Abe’s administration.
The BOJ began a stimulus program on April 4th, 2003. But because markets were aware of the Abe’s plan before implementation, they sent the yen lower at the beginning of Abe’s administration:
The yen initially dropped ~20% as a result of the anticipated policy actions; it continued moving lower as the BOJ began its QE program. The depreciated yen, however, did not translate into a large export boost:
Most Japanese companies have moved their manufacturing offshore, meaning a lower yen has less of an impact on exports than intended.
There has, however, been an initial increase in inflation:
The chart above shows the absolute price level (top graph) and the Y/Y percentage change (bottom chart). While we do see an initial price bump at the beginning of 2014, that bump didn’t continue rising. This means the Y/Y percentage change (lower chart), while still higher than previous readings, is now decreasing.
There is, however, better news from the GDP price deflator:
The deflator increased to over 2% in 2014, and has continued to print at this level for the last three quarters.
That leaves the structural reforms. Unfortunately, there has been little progress here:
Even though Abe’s coalition has held a resounding parliamentary majority for over two years, there has been little concrete progress on structural reform, leading many observers to question the government’s commitment. Complicating matters, a growing scandal over political donations has already cost Abe several of his top allies.
This shouldn’t surprise anyone. The needed reforms would require a deep and lasting change to Japan’s overall business environment, upending vested interests that have become deeply ingrained over multiple decades. Asking them to give up power will be difficult at best.
So, how is Abenomics doing? Fair at best. They’ve implemented a stimulus program that increased government spending and raised business sentiment. But, overall GDP growth petered out quickly after the initial rush. And although the BOJ did devalue the yen, the offshoring of Japanese production facilities limited the impact. While inflation initially increased, the pace of increases is slowly declining. Finally, the much needed structural reform hasn’t happened in any meaningful way, leaving perhaps the most important element of the plan completely unfulfilled.
Hale Stewart is a former bond broker who has been writing about economics and financial markets since 2006 on the Bonddad Blog. He is also a tax attorney with a domestic and international practice while also forming and managing captive insurance companies for US companies. You can follow him on twitter at:@captivelawyer