Friday, August 05, 2016

The Grand Illusion

Dr. Noah Smith has been one of the great defenders of Abenomics, that amorphous mass of Keynesian stimulus, Friedmanesque monetary policy and Nice Words About Structural Reform, particularly changes in work-life balance allowing women greater access to executive and management positions.

Dr. Smith, however, seems to have undergone a change of heart about the economics of the prime minister. Either that or he has a particular onus against one particular recent seemingly huge announcement: a 28 trillion yen stimulus package, the details of which will be examined in the Diet this Fall (the overal plan received Cabinet approval this week).

Japan's New Stimulus Is Just the Same Old Thing

Japanese growth is still sluggish. Consumers aren't consuming much, and businesses aren't investing. The government doesn't have many options to remedy this, and the Bank of Japan, which has sent both long-term and short-term interest rates into negative territory, has basically no more room to maneuver.

The dreaded Zero Lower Bound is starting to bite. The BOJ is buying more stocks, but this too has its limits -- eventually companies become de facto nationalized, as the government becomes the majority shareholder. That's scary both because it would affect corporate governance, and because it would be politically unpopular. It's also unclear how much of an economic boost the stock-purchasing program has given the country anyway. The BOJ could resort to policies like a higher inflation target or the much-discussed "helicopter money" approach, but so far it has been afraid to take these steps.

With the BOJ seemingly out of the game, demand-side macroeconomic policy is up to the parliament. So this week the government of Prime Minister Shinzo Abe proposed a new fiscal stimulus package. It is moderately sized: about $45 billion in U.S. dollars this year, and about $60 billion in low-interest loans, to be followed by slightly less next year.

That move might win a few halfhearted cheers from Japan's battered consumers, but it's unlikely to have much of an effect...

(Click here to read more)

Later today (inshallah) Langley Esquire will be posting to YouTube a conversation Timothy Langley and I had yesterday on exactly the same subject.

(For the Langley Esquire YouTube channel, click here)

What should be setting everyone's teeth on edge about both the stimulus package and Abe's recent Cabinet picks, aside from the knowledge that both are in-your-face I-got-mine-suckers giveaways to cronies, is that with majorities in both houses of the Diet, a prostrate opposition, an emasculated bureaucracy, a totally compromised bond market, increasingly compromised equities markets and no rival power centers within the ruling Liberal Democratic Party, the Abe government has failed to pass a single fundamental structural reform of consequence. No other G7 or OECD leader enjoys the freedom and dominance of Abe Shinzo and his LDP. Abe & Friends nevertheless remain timid and/or clueless.

Amaterasu Omikami, save this blessed land from these poseurs and legacy turkeys.


  1. Michael, what fundamental reforms do you want to see implemented? Or pehaps what kind of reforms are fundamental? I see this comment frequently from western media, financial writers etc. but it would appear that everyone has their own idea of what constitutes a fundamental strucural reform. In my thinking, freeing up retail electrical distribution, breaking the monopoly of JA, corporate governance initiatives, TPP, equal pay for equal job, privatiziation of every airport but two in Japan are all structural reforms that are underway or will be shortly. The 2016 Revitalizaion Strategy Document lays out quite a number of initiatives and activities but as is the nature of true structural reforms the benefit from them take quite a while to menifest. Is the issues no reforms, or the wrong reforms or failre to deliver or that reforms are taking too long to manifest? Some thoughts.

  2. Philippe11:15 PM

    Something I’ve been wondering for a while: how much did the economic policies of the Noda administration contribute to the “success” of the first 1 - 1½ years of the Abe administration? I would even suspect that after that the economy essentially functioned on inertia and a tad of of lucky stars (for Abe Shinzo).

  3. Mr. Neiheisel,

    The problems with the reforms so far passed come in various forms. Some, such as the decapitation of JA Nokyo, are not even reforms, as they leave the bulk of the rotten structure intact. Some, such TPP and equal pay for equal work, have fates that are not in the hands of the government and seem destined to fail. Some, such as corporate governance initiatives, will fail due to perfunctory implementation and self-defeating personnel selections. Some, such as privatization of airports, have unclear benefits (since the airports cannot become, as the expressways and the railways have, real estate developers - what is the point of privatization?). Some, such as retail electrical deregulation, are impressive sound and light shows, but with limited upside for newcomers in a declining consumption market.

    The main problems in Japan are
    1) persons of talent, experience, education and discipline are locked in meaningless busy work
    2) returns on invested capital are ignored.

    Reforms that do not address these two issues are window dressing.

  4. Well as I said many people have their own idea of what reforms are critical and different perspectives on whether the ones attempted have been implemented. Taking on JA I thought was a pretty big break for Abe as this ended the monopoly of a vested group that has supported the LDP for decades. And he paid for it by losing the 5 upper house seast as you pointed out. He did this not only to be able to make a series of changes required to innovate Japanese agricultural sector - land transfer, automation, dealing with incredible aging of average farmers - that JA routinely blocked but also be able to move forward on TPP. This one I see taking time to evolve but once JA hold is broken a series of changes can now be made. I will disagree regarding corproate governance as it is in fact pikcing up momnetum. This will also lead to more moves in the near future. Round 1 was simply the educational and beginning of movement phase but more is coming. I am a bit closer to this intiative than the others given some realtionships I have so have a better view as to what the thinking is. And this one is very specifically directed at improving ROE/ROA of japanese companies so hits your #2. As far as your #1 I agree with you but wonder how you legislate this. He is using the bully pulpit to try and highlight and drive changes to gain greater labor mobility. Some of this is in pension portability. But as long as the japanese society places an eormous positive view of remaining in the same company forever and a day this is a tough to legislate. Any ideas how to do this?

  5. Thomas A.12:30 PM

    Regarding your response above, Michael:
    The main problems in Japan are
    1) persons of talent, experience, education and discipline are locked in meaningless busy work
    2) returns on invested capital are ignored.

    From what I see on the ground in Kansai, labor liberalization simply means the greater use of limited-term contract workers with no future, no hope of promotion or higher pay, and separate and unequal pay scales from seishain. This is compounded by the use of part-time workers whose employers are exempted from contributing to the health insurance and social security schemes, leaving workers themselves to make outsized contributions to a vastly inferior system that many of them simply avoid paying into at all. As I see it, this all directly leads to problem 1 that you refer to.

    For this reason, I simply fail to understand how greater labor liberalization will result in anything but the increased immiseration of the working population and the loss of social insurance contributions and job security for even more workers. Now, if you could have some kind of flexicurity system whereby all workers could be guaranteed a portable set of benefits along with retraining, and equal pay for equal work was mandated, I could see the logic of greater liberalization. But all those things cost money and would result in a reverse of current trends towards a greater and greater share of the national largesse going upwards. It would appear therefore the decision has been made that it's easier to squeeze more out of a docile workforce than to make investments in improving it, even the results of said squeeze is diminishing.

  6. "Now, if you could have some kind of flexicurity system whereby all workers could be guaranteed a portable set of benefits along with retraining, and equal pay for equal work was mandated" -- as I read thru the LDP Strategic Vision Statement for 2016 all of these items are in fact part of the policy and are being targted for legilation in the fall session. it is very clear to all that jawboning the big corproates alone is not going to work. They must push the wage increases from the bottom not the top of the wage system.

  7. Anonymous10:40 PM

    Nice to see some teeth here. We have the bond and stock markets being nationalised as we speak. This is fine if there is a foreseeable recovery and upwards growth in GDP and population but....we all know that is impossible unless Japan suddenly becomes the nuclear fusion energy hub of the world or reinvents the iPhone while opening the immigration gates a tad. In the queens Janglish, it ain't gonna happen kimi. So we get our fix in the stocks and bonds, but how long can this be dragged out in deflation, another 25 years? Like climate change, policy mistakes of this magnitude grow exponentially quicker.

  8. Anonymous8:00 AM

    I guess we will find out soon enough who is right.

    "They heard the hum of the motors, counted the rotors, and waited for us to arrive"

    All go down together- by Billy Joel