Japanese Prime Minister Shinzo Abe is touring Europe this week. He has so far lectured Germany on the virtues of ramping up government spending, and today warned Britian of the risks of leaving the EU. But is Mr Abe's economic advice worth taking? His main task since taking over as Japanese Prime Minister in late 2012 has been to to revive the economy, which has failed to register strong growth since a large boom-bust cycle in the early 1990s. Mr Abe has launched a three-pronged attack consisting of "three arrows": one arrow for monetary policy, one for government spending, and another for reforms of the economy. But his arrows appear to have landed wide of the mark.
Arrow 1: Fiscal Stimulus The Japanese government has a major amount of deb
Japan has racked up a fair amount of debt from its spending endeavours. While Abe has contributed to the stack of debt, the previous two decades saw numerous governments come into office and loosen the purse strings. Debt to GDP has climbed from below 100pc to well over 200pc in that period. Yet the economy has grown by an average of just 0.7pc over the last three years of so-called Abenomics, hardly better than the previous two decades. Japan can live with its giant debt thanks to ultra-cheap interest rates, but there is no guarantee its borrowing costs will stay low forever. The UK has gone the other way and tightened spending while the economy's growth rate remains one of the highest in the G7.
Arrow 2: Monetary policy Japan has yet to create rates of economic growth and inflation comparable with the US and the UK. Yet this is not for want of trying. Japan first tried quantitative easing, creating new money to buy assets, between 2002 and 2006. Despite it appearing to have little impact on either growth or inflation, Abe has ramped up the programme, increasing its size and connecting it to different targets, such as the size of the economy. Quantitative easing has appeared more effective in the US and the UK, where the central banks designed their programmes in different ways. Even more concerning was a decision at the start of the year by the Bank of Japan to cut interest rates into negative territory, which was followed by strong gains in the value of the yen, the opposite direction intended by policy makers.
Arrow 3: Structural reform The third arrow has been so-called structural reforms. In Japan's case, they have focused predominantly on the labour market. "One can only be thankful that Mr Abe’s so-called third arrow ? structural change, chiefly consisting of greater labour market flexibility, a euphemism for wage cuts ? largely missed the mark," said economists Charles Dumas and Freya Beamish from consultants Lombard Street Research. "With the massive cut in real wages that has occurred, the relapse of real household spending could have been much worse." The programme has failed to address other structural problems, such as the so-called keiretsu, which is when big companies link together by taking shareholdings in each other. The system has been blamed for preventing competition and encouraging inefficiencies in big companies. In sum, given the parlous state of the Japanese economy after three years of Abenomics, Mr Abe's intervention in the Brexit debate today may not go down as well as he would like.
Tweet