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Tuesday, Jan. 22, 2013

'Abenomics' out of the gate


Special to The Japan Times

HONG KONG — Prime Minister Shinzo Abe would do well to consult professor Noriko Hama of Doshisha University. Asked by The Japan Times what the country needs, she replied in feisty fashion: "The three things Japan should do in 2013 are raise wages, raise interest rates — and cut the crap."

It was good advice, which challenges some obvious deficiencies in "Abenomics" as economists call the new policy of new Prime Minister Shinzo Abe.

Give credit where it is due. Only two weeks after being chosen as Japan's prime minister, Abe's government announced a huge package of stimulus measures, with a headline number of ¥20.2 trillion, of which ¥10.3 trillion will come in government spending. The aim is to boost Japan's sickly recession-hit economy by 2 percent and create 600,000 new jobs. If nothing else, Abenomics means action.

The barrage of advance publicity, the big numbers and speedy action have already had the beneficial impact for Japan's big exporters of weakening the yen to 89 against the dollar. In spite of the praise, the disturbing fact remains that this is very much the medicine as before, and it is not clear if Abe has the imagination to tackle Japan's underlying economic problems.

Japan is still like a contented frog luxuriating in a warm bath, unable to understand that the water is being heated toward boiling point from several gas jets. Abe's measures may lower the water temperature slightly, but his heavy spending will increase the explosive risk of already high government indebtedness. He has done nothing to tempt the frog to escape its dangerous lethargy.

A cynical critic might point out that the measures are likely to produce an immediate short-term boost — in time for July elections for the Upper House, where the government parties are in a minority.

It is too easy to be blinded by the huge numbers and forget that between 1992 and 2008, Japanese governments launched 18 stimulus packages, together worth a nominal ¥205 trillion. The result was the same each time, a short-term boost to the economy but no long-term structural change, followed by a new stimulus package that repackaged old measures.

This Abe stimulus promises — yet again — a focus on infrastructure and a mixture of new projects along with repairs to roads, bridges and tunnels to make sure that they are earthquake resistant. Without seeing the laundry list of spending proposals, it is not easy to judge their effectiveness.

In the past, Japan's big construction companies and politicians have benefited from a mutual back-scratching policy that gave the companies new business, politicians new roads, railways and town halls to boast about along with handsome contributions to their campaign funds.

Japan today could do with new infrastructure spending, but mainly to check, repair and renovate aging projects, which is less glamorous for politicians seeking re-election than sparkling new schemes.

The area of northeastern Japan, ravaged by the triple whammy of earthquake, tsunami and nuclear meltdown two years ago should receive faster and better directed spending. The nuclear cleanup, directed largely by construction companies, which have failed to call in foreign expertise, has been patchy and slow, and residents claim that the government has forgotten them.

Within the Abe package, a huge sum of ¥3 trillion has been earmarked "to improve the competitiveness of industry and spur innovation." Whether and how the government can inspire and direct a sophisticated but aging economy seems doubtful. Abe expressed confidence: "We are making a bold shift toward an economic policy that will create wealth through economic growth. We need to say goodbye to the shrinking economy and aim for a strong economy where innovation and new demand lead to more jobs and income."

These are fine words, but infrastructure spending will only create jobs while the money is flowing. Abe has promised to defeat deflation, which has dogged the Japanese economy for two decades, and has been actively hectoring and cajoling the Bank of Japan to set a 2 percent inflation target. Some economists are impressed.

Bill Witherell of Cumberland Advisors believes that 2013 could be "the Year of Japan" as Abe finally gets the country's act together. Peter Tasker of Arcus Research points out correctly that manipulating a currency to depreciate and help keep the economy moving is widely practiced and Japan's only sin is to be the first Group of Eight economy to admit doing it.

Japan's manufacturers welcome the yen's decline. Akio Toyoda, president of Toyota Motor, said, "We're beginning to see the light." For efficient motor manufacturers, the fall in the currency will help restore their competitive edge.

But for others, particularly electronics concerns, more than a lower yen is needed. Many big companies have become sluggish and unprofitable, as Panasonic, Sharp and Sony demonstrate, and have been out-thought and out-produced by nimbler rivals from South Korea, China and Taiwan.

Anecdotes have limitations, but can offer a vivid impressionistic picture that leave gray facts and statistics cold.

In the last few months, my Canon printer, only three years old, broke down. It was telling me that it had a paper jam and refused to budge from this opinion. I took it back to Yodabashi Camera, from where I had bought it. They did not want to know. Canon, they said, was no longer making the model and there was no after-sales service nor repair service available, not from Canon, not from Yodobashi. And they refused to take the old printer for disposal.

I bought a new printer, an OKI model, on the advice of the Yodoabashi Camera staff, offering five years onsite warranty. After four months it broke down, and the electronic display said it needed a new part. It took 10 days for OKI to turn up.

Yes, faults happen even to the best-made machines; just ask Boeing about the Dreamliner. But good companies remember that their customers are the reason for their existence and their frontline staff are the face they show to the world. Japanese companies forget this at their peril.

Japanese society is changing. Supermarket chains are tightly squeezing staff and customers alike. Part-time staff face cuts in hours and no pay increases, are docked 15 minutes pay even if they arrive a minute late, are expected to turn up 20 minutes early — unpaid — to go through security checks, and take meal breaks unpaid. Before it became part of Aeon, Saty used to offer sheets of ¥20 coupons to early Saturday shoppers. Aeon scrapped the discounts and now boasts of 1 percent discounts on triple packs of meat.

Noriko Hama is right when she says, "The deflationary spiral refuses to budge because people's wages do not go up. People whose earnings are stagnating are justifiably cautious about spending."

All of Abe's favored measures have a potentially dangerous downside. Other countries may manipulate their currencies and spark a currency war. If Abe has any sense, he could push the yen to 100 to the dollar and then try to call for a new era of stable currencies.

A bigger danger is that Abenomics will add to Japan's immense debts. When the construction boost fades, even long-suffering Japanese investors who own most of their country's debts may begin to question the low returns they are getting. Even if not, the diminishing savings of an aging population and the likelihood of current account deficits will exacerbate the need to fund the deficit externally.

Abe's measures for all their fanfare and trillions do nothing to give a new spark of life to an economy that is becoming moribund and is beset by structural problems of an aging population imposed on an already high-cost economy by international standards.

It costs 2.5 times as much in Japan as in the United States to rear a child. Why aren't politicians addressing problems like these instead of pouring tax money down a hole?

Kevin Rafferty is a veteran journalist specializing in economics and finance.


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