prime minister shinzo abe promised a firestorm of structural reform arrows. what came was a drizzle of reformlets with most of the rest being stuck in the announcement phase. the tale of an uncertain outcome.
discussing the merits and demerits of abenomics has something of debating whether the glass is half full or half empty: it often says more about the beliefs of the one who is doing the analysis than about the actual policy at stake.
a look at the glass-is-half-full abenomics review by the cabinet office (link) is enough to see that many grand effects are being talked into existence more than actually are clearly visible without doubt: to show the positive effects of shinzo abe's policies they have to resort to miniscule changes in statistics: such as quoting the paltry 900,000$ that have been invested in startups by local governments in over one year as proof for new levels of support for entrepreneurship; or nippon individual savings accounts (nisa), quoted as channelling 'considerable' assets from private households into the equity market - in truth, they have met with only a lukewarm reception by the population and remain far behind the objective to induce a wider (and younger) range of people to invest (see chart below): only 12% of nisa have been created by investment beginners according to sumitomo mitsui asset management, and only about 11% of nisa were held by people under the age of forty.
all mentioned data sets and more available at 'data sets'
in fact, the track record of abenomics is much more mixed even at the start of its third year than the cabinet office would like to acknowledge. this feature assesses the progress made in implementing reforms against the yardsticks the abe government set for itself to measure the success of its abenomics programme. and by its own standards, the report card looks very mixed, but there are encouraging signs.
qu'est-ce la troisième flèche? everything
abenomics aims to restore japan's mojo by tackling three areas: earning power, human resources, and deregulation. this feature will have a look at each of these key areas to measure the progress of abenomics. the cabinet has further released a set of ten key sub-measures that are meant to create ripple effects, lifting japan's economy out of the doldrums:
japan's earning power
so far the plan. indeed a lot is rippling, the cabinet office is right on that score. the bigger question, however, is whether things are rippling in the right direction.
first, in the field of 'restoring japan's earning power', the abe administration has lowered the corporate tax rate by 2,4%. it has also successfully nudged the government pension investment fund (gpif), one of the world's biggest pension funds, towards a more risky balance sheet, and implemented a corporate governance code, the japan stewardship code, to which gpif signed up as well.
looking at as gpif’s lacklustre performance over the past years (mirroring the japanese economy, in which it is so heavily invested in), a more balanced and international portfolio might indeed be a good thing, especially in the long run. but given japan’s strong stock market performance, particularly coupled with the sluggish performance elsewhere, it is questionable whether this rebalancing has done much good for japan’s public welfare (see chart below):
the wider earnings of japan inc. have certainly been robust over the past two years (see chart below), but this has little to do with the marginally lower corporate tax or abe’s third arrow. rather, they are based on the more volatile performance of the stock market and the weakened yen, and fuelled by last minute splashing before the april 2014 vat-tax hike, as becomes clear when looking at the numbers since 2012; and since the second quarter of 2014 profits have been sliding again. of course, some of this has to do with the very large profits in the first quarter of 2014, just before the vat-tax hike that are distorting the year-on-year comparison, but the trend is clear:
how much corporate performance is linked up with kurodanomics (the monetary easing arrow of the wider abenomics programme) rather than shinzo abe’s third arrow becomes clear when looking at the distribution of these company profits. more than half of all profits by 1411 companies listed in the first section of the tokyo stock exchange is made by only thirty firms (see chart below):
what do companies performing well do with this money? private investment has certainly seen a positive turnaround since the beginning of 2013 (see chart below). the fact that the private sector's appetite for investment in japan has picked up is good news for abe and one of the keys to reviving the economy: according to the bank of japan (link), cash and deposits held by japanese firms amount to a whopping ¥230tn – that is about half of the size of japan’s entire economy (about ¥530tn). shovelling a piece of that cash pile onto japan's economy is thus crucial to reviving its lacklustre fortunes. the abe administration can tell a largely positive story in this regard. private investment has been performing robustly since 2013. but given higher earnings, japanese firms are still not necessarily eating into their immense cash piles.
in addition, when japan's executives open their wallets at all, it is often not for their japan but their overseas operations: 2013 has seen a record $135bn of outward fdi. and while the administration is taking a joyride on every piece of news that a japanese firm is bringing home part of its production to take advantage of the weak yen, this long-term trend of strong overseas investment is unlikely to abate anytime soon. think, for example, demographic change, and a shrinking domestic market.
overall, the balance sheet for the corporate sector contains enough positive items for executives to still look with some optimism to abenomics. both, the boj’s tankan survey, and more broadly the cabinet office’s economy watchers survey suggest that corporates are still hopeful and patience with prime minister abe’s reform efforts is not wearing thin - yet.
conversely, however, abe’s patience with the private sector is wearing out. after trying to coax them into paying higher wages as well as into splurging some of their cash, both with mixed success, he pushed forward new guidelines for corporate governance. though non-binding, it is naming and shaming firms into appointing outside directors and into being more responsive to shareholders. again, there are encouraging signs, from fanuc (its retro-homepage is a truly delightful treat: link), an old-fashioned car parts maker installing an investor relations office and promising higher dividends, to increasing numbers of outside directors. according to the japan stock exchange (jpx), in 2010 less than half of all firms listed on the tokyo stock exchange’s first section had an outside director. now three out of four appoint at least one outside director.
this development began long before abe, but it certainly got a boost from the renewed vigour with which the government was pushing for better corporate governance. the question is, however, whether quantity makes all the difference: after all, between 2004 and 2012, before abe took over, the share of firms with outside directors nearly doubled. but this is also the time of the olympus scandal and unabated criticism of japan’s shameful track record of corporate governance. underlying all of this are many structural issues the new stewardship is not tackling, either: most importantly that outside and independent directors are not screened strictly enough as to make sure that they will actually be truly from ‘outside’ and ‘independent’ appointees, instead of merely friendly chums to the insiders on the board. but certainly, the new code is a welcome step in the right direction.
so the story of abenomics and japan’s earning power is one of ‘yes, but’. profits have gone up, but are distributed very unevenly; investment has grown, but not so much that firms would need to eat into their massive savings – and a lot is going overseas; so far, however, corporate japan is still willing to take a leap of faith with abenomics.
the second part of abenomics’ third arrow takes aim at workers. as if kurodanomics and abenomics was not enough ‘–nomics’, prime minister abe pledged that womanomics would also be central to his third arrow. and indeed, since 2012, the female labour force participation rate has picked up momentum (see chart).
much of this, however, is due to an evenly sharp uptick in the number of women working part-time. their share has increased from 28% in 1990 to 43% in 2012 and hit a record 47.5% in 2014 (the dashed line in the chart above). women now make up 70% of all part-time workers. the aspiration of abe’s womanomics, however, is not just to bring women into the labour force, but to help them onto career tracks – and, of course, into taxable jobs with social security. on this account, abenomics has not gone very far. ironically, abe’s success in bringing more women into the workforce, but on flexible and low-wage part-time contracts, may even be counteracting his push for higher wages.
this major goal, central to his strategy to turn around deflationary expectations and stir up optimism in japan’s economy – and by extension spending and investment – is proving elusive enough as it is. japanese firms, mostly larger firms that are on the winning side of kurodanomics, indeed agreed to wage hikes. but too many of abe’s own policies are working against this goal: for one, the mentioned increase in part-timers, who by now constitute almost 40% of japan’s workforce (see chart below). they are excluded from bonus pay and most other benefits that fulltime employees enjoy. firms now add part-time workers at roughly double the rate or more (at 3.8% in april 2015) they hire fulltime staff (1.3%).
but even more so, the boj’s monetary easing programme that comes with inflationary pressure works against abe. kurodanomics chips away at the increased wage earnings (see chart below). base pay has indeed picked up under abe, who prodded japan’s corporate leaders on innumerable golf outings into raising wages. mostly, however, firms increased their employees’ bonus pay which can be given or withheld at the company’s discretion and also excludes part-time workers. hence even increased bonuses were not enough to cancel out inflationary pressures: real wage growth has persistently been negative since monetary easing started. for the first time in two years, this number now may come around, boosted by another round of shunto wage negotiations and lower inflation. should the numbers hold up and workers have more cash to spend than before, it will be a major win for abe.
this very ambiguous development is clearly reflected in the up and downs of the cabinet office’s consumer confidence survey. largely, consumers are still looking into the future more optimistically under abe than before. unlike their bosses, however, consumers seem to have given up their initially high hopes for a quick turnaround in their economic fortunes and their leap of faith for abenomics is much shorter than that of their bosses (see chart below).
unsurprisingly, private spending has remained restrained since the start of abenomics, with major deviations from the general pattern only in march 2014, just before the sales tax hike, and one year later in the year-on-year comparison (see chart below). while abe’s economic policies have thus created a favourable climate for the internationalised sectors of the economy, the domestic mood is still rather glum. but here is another maybe: in april, retail sales have picked up by 5%, the highest in two years. should this be more than a blip it could signify another important partial victory for abe in bringing japan’s outward-facing sectors and domestic economic sectors more into synch. after all, the stark contrast in outlook and share of gains between well-off capital owners (shareholders), big business and exporters on the one hand, and smaller and domestic businesses and average consumers on the other, is a major disconnect in his abenomics strategy.
the third abenomics goal under the heading of ‘human resources’ is to attract foreign talent. here, the administration’s performance has been meagre and underperforming even its own, very low, standards. when introducing a new visa for ‘high skilled workers’, for instance, the government aimed to ‘limit the inflow’ to 2000 such visas annually. in fact, only 313 foreigners entered under this visa in 2012. in 2013, 779 of these visas were given out, and until june 2014 a total of 1446. over two years after its introduction, this policy goal of prime minister has underwhelmed. the total number of foreign workers in japan has seen a more impressive rise, by about 70,000 from 2013 to 2014, but much of this is due to strong growth in work permits for foreign students.
under the heading of ‘human resources’, too, abenomics is thus a tale of buts and maybes: abe has certainly succeeded in ‘reforming ways of working’, by bringing more women into the workforce, or by proposing a decoupling of work hours and pay in favour of getting paid for work actually done with his ‘white collar exemption’. but a mushrooming irregular labour force was certainly not one of the intended outcomes, nor the related wage depression. neither did japan certainly become a dream destination for the highly skilled from all over the world. for abenomics to work on this account, abe needs to be bolder in his reform efforts. a few b-rate greencards and talking up employment conditions will not prop up japan’s recovery for long.
in the end, all the cliff walking under the headings of ‘restoring japan’s earning power’ and ‘human resources’ will only lead to firmer ground if abe is making good on his promises of structural reform. the leap of faith by japan inc. is based on this promise, and so is the hope for a turnaround of the labour market: firms will only hire more fulltime employees if hiring such an employee does not mean making a nearly irreversible pact for life, no matter what. without a more flexible labour market, the present hiring formula of ‘part-time hiring = ≥2x fulltime’ will not change.
the progress of abenomics on this count is blurry at best. when it comes to the ‘promotion of venture businesses’, the first goal under this heading, abenomics failed to stir up entrepreneurial attitudes in the wider population. the slide in the number of fundraising startups has continued under abe (see chart below).
abe’s activity log on this matter is brief. the government is short of ideas and initiatives to reverse this trend and make today’s youngsters as entrepreneurial as their parents’ and grandparents’ generations were – as evidenced by the necessity to quote the paltry 900,000$ that have been invested in startups by local governments in over one year as proof for new levels of support for entrepreneurship (link).
abe’s performance certainly looks stronger in the agricultural policy domain where he is aiming for bringing about a more ‘pro-active agricultural policy’. it is here where abe can claim some of his greatest achievements: reforming the agricultural production system (gentan system) and the ja zenchu, japan’s powerful farm lobby. these reforms have been talked down as being merely a starting point or as only cosmetic changes to the grip of ja zenchu on japan’s farmers. but even in their limitations, these reforms matter: the japan institute for international studies and training, for instance, reckons that the public burden on taxpayers to produce ¥1.8tn worth of japanese rice is about ¥1tn (see chart below).
abe deserves credit just for the mere fact of going up against these powerful, entrenched systems and ja zenchu – something no prime minister has dared before him. japan’s moribund (literally: japan's farmers are on average 65 years old) agricultural sector needs a shake-up if it is to become more than a drain on taxes and a stumbling block to any free trade negotiations. it also matters for clearly showing what abe and his considerable political capital can do if he set his mind to it.
this issue is thus directly connected with the tpp negotiations, which are seen as a major stepping stone for abe to push through structural reform efforts. with provisions in the agreement, such as on procurement or investment, tpp will also force structural reforms on japan through the backdoor. still far from being a done deal, the administration can be commended on the comparatively smooth sailing in these negotiations. compared with previous, also much smaller free trade agreements (fta), the negotiations went smoother, without monkey wrenches being thrown into the process and the administration deadlocked internally – in contrast, the japan-korea fta, for instance, just as the japan-mexico fta, got stuck in limbo between ja zenchu and keidanren, japan’s business lobby.
arguably, abe has cleared some of the biggest hurdles on the japanese side and seen together with president obama’s success in securing ‘trade promotion authority’ from congress a successful conclusion of the negotiations has become much likelier. taken together, japan and the u.s. constitute over three quarters of the tpp’s total gdp and whether tpp succeeds is thus mostly a matter of successful u.s.-japan negotiations (see chart below).
the final headings of ‘boosting healthcare’ and ‘stimulating innovation’ move the focus to the tokku, japan’s latest go at special economic zones. the tokku were advertised as laboratories for prying open japan’s more closed sectors and experimenting with contentious policies (easier entry for foreigners; more flexible labour markets). but as japan macro advisors point out (link), there have been over 1000 tokku proposals since prime minister koizumi first transplanted the idea to japan – to little effect. tokyo, for instance, has had special economic zone privileges for years already, without much coming of it: its plans to become a centre for regional company headquarters failed miserably (the target was to attract 500 firms and at least 50 regional hq: so far, only two firms answered the call).
prime minister abe’s foray into the tokku idea has stirred up a lot of interest in the beginning as well, but little has been heard of since as regards path-breaking ideas making their way from the zones to the national level. it is true that such smaller zones are a good instrument to test reform ideas in a ‘safe’ environment. but in the japanese case, bureaucrats remark off-record, the tokku are also seen by opposed ministries as a good way to quietly bury proposals. without a clearer roadmap and a stronger commitment by the government to utilise them, the tokku are bound to end up as burial grounds for policy papers yet again.
beyond that, even after two years and into yet another legislative session of the diet, abenomics remains woefully short of clear and actionable proposals. just this week the prime minister has fleshed out some more reform proposals for the coming diet session as to what the still ominous third arrow actually means. all of them were rather underwhelming: making japan’s universities more international and competitive (outlook for success: very low, as long as japan does not overhaul the entire idea of what ‘university’ stands for); loosening immigration roles (doubtful, see discussion above; japan immensely overrates its popularity as a destination for global high-flyers; and ski instructors – singled out as particularly welcome – will not turn around the economy, either); and bringing up the share of generics in prescriptions to 80% by 2020 (a clear goal that will invite heavy resistance, but imaginable given japan’s strong institutional framework in the field of controlling the healthcare sector).
deregulation, the third component of abenomics is thus yet another tale of buts and maybes: looking at the befuddling number of ambiguous policy proposals, abe's hope, it seems, is to fire as many arrows as it takes until enough stick to make a difference. in truth, abenomics is a flak rather than a bow with just three arrows. the issue is that so far so few arrows seem to stick. to really start moving expectations, the administration will need to come up with clearer aims and proposals for fleshing out his third arrow – and start to prioritise. too many focal points just mean no focus at all, and this is why so many ideas are allowed to get stuck in an ambiguous state.
a tale not told
naturally, reforming an entire economy is a messy task, as much becomes clear looking at the most important indicators. but abenomics can not be simply dismissed as a clever marketing tool with little substance to it. despite many pushbacks and ambiguities, shinzo abe has reached some impressive progress, from tackling the agricultural sector and turning around japan inc.’s wage policy, to pushing tpp forward at record speed, and to bringing more women in to the labour force - and not the least: firmly placing japan on the global map again, where for twenty years it was renegaded to a grey spot of polite disinterest.
2015 could be a turning point, in which domestic mood is catching up with that in the international sectors of the economy, and real wage growth and retail spending have the potential to emerge from negative numbers – if abe spends his considerable political capital wisely. the biggest problem, however, is that while it is crucial that he continues to push through the full implementation of the policies he started (particularly those that look promising but are standing on knife’s edge), his focus is actually elsewhere, on his nationalist pet projects: unpopular constitutional reform, collective self-defence, and shilly-shallying about history issues. they gobble up more and more of his time, and with things being as shaky as they are now, less attention bodes ill for the next rounds of data.