Dialogue on Sanaenomics

Is Abenomics 2.0 the Right Policy? Is Japan “Fine”?

(Image above is just an image, to hear the dialogue, click on the hyperlink at the end of this text.)

Last Wednesday, when it was not yet clear who would become Prime Minister, Anthony Rowley of the Foreign Correspondents Club of Japan (FCCJ) sponsored a dialogue among Naomi Fink, Jesper Koll, and myself on the next Prime Minister’s economic policy.

Naomi focused on demonstrating why Sanae Takaichi’s promotion of Abenomics 2.0 was the wrong policy for today. The reason is that, on a host of fronts—from prices to unemployment, government debt, the equity markets, and the yen rate—Japan is in a very different situation from what it was when Shinzo Abe came to power at the end of 2012. The macroeconomic solutions needed in 2012—expansive fiscal and monetary policy—can be counterproductive in 2025. For what it’s worth, I agree with most of her reasoning.

Jesper argued that the Japanese people are angry about inflation. Worse yet, the tools to control prices that used to work in Japan no longer. Just cutting the gasoline tax is not going to solve the problem. Rice prices didn’t double because the yen is weak but because of an irrational agricultural policy. Abe proposed to consolidate farming to make it more efficient, but his idea as completely stalled. He argued it would take three-to-five years to overcome the inflationary effects of such bottlenecks in the economy. On the other, Jesper argued that the metabolism is working very well. This could be improved even more by creating national champions. He cited Takaichi as saying in a conversation with him: “why does Japan have seven auto firms”? He also discussed the destructive effect of Donald Trump’s trade policy on Japan in the context of the rise of China’s industrial sector. He proposed a “Tokyo Accord” where the US and Japan cooperate on raising the value of the yen, saying this would reduce inflation in Japan.

I discussed the fact that neither Takaichi nor Yuichiro Tamaki is offering solutions to the biggest problems facing the Japanese people: rising prices and falling real income. Takaichi discounts the importance of inflation and does not even address the issue of how to raise wages, saying it’s a matter for the private market. I argue that today’s macroeconomic problem is “stagflation,” i.e. the combination of rising prices and low growth. GDP today is barely higher than it was in 2018. In addition to the dialogue here, you can see last week’s blog. I did not discuss Tamaki then, but this presentation—made a time at a time when Tamaki seemed to have a chance—does discuss his (changing) proposals. He, too, does not offer any plan for either rising prices or falling wages except tax cuts. Neither offers a policy to raise longterm growth.

During the discussion period, Jesper and I went back and forth of whether or not Japan is “doing fine” as he asserted. I retorted that, while corporations are doing fine profit-wise and this is good for investors, this has not benefited the ordinary Japanese citizen. Jesper pointed to a couple examples, including Toyota. We did not have time to get into this example then. But I’d make two points here: 1) Japan has lots of superb companies but as a share of the economy, such outstanding companies are a smaller share than in other countries and much smaller share than used to be the case in Japan; and 2) While Toyota is on the top of the auto world in sales and profits, it is doing so in a way that undermines its future prospects for sales and profits, mostly by focusing too much on hybrids and resisting the advance of electric vehicles (see this post). Japanese automakers are already losing share in countries where it competes toe to toe with Chinese automakers.

At one point, Naomi celebrated the awarding of the Nobel Prize to three economists talking about how creative destruction is essential to growth in GDP and living standards. She argued that, for Japan to take advantage of this, Japan needed to continue what she saw as positive reforms in the era since Abe came to power. My view is that there has been insufficient reform to enhance creative destruction in Japan. That has been pivotal to my analysis of Japan, especially in my book, The Contest for Japan’s Economic Future.

It will take some time to figure out what the LDP-Ishin coalition will yield.

To hear the dialogue, click here.

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