An economist outlines four ways in which Abenomics is designed to help the Japanese economy and assesses the likelihood of long-term success.
Anne Vandenabeele: In 1990 the price of a Big Mac in Japan was 370 yen. So 370 yen is about $3 in today’s dollars. Can you guess what the price is now, 25 years later? It’s 370 yen. The exact same price. In the U.S. the price of a Big Mac went from $2.20 in 1990, and now it’s $4.80. The price has more than doubled, which is a big difference from what’s been going on in Japan. And the other thing to note is over that period of time, between 1990 and now, government debt to GDP in Japan has gone from 65% to 230%. That’s basically the crux of the problem in Japan, and that’s what Abenomics is out to fix.
How is it supposed to help? There are four ways that it’s potentially going to help the economy. The first one is it’s supposed to improve export. The Bank of Japan eased a lot. The yen depreciated 60% since late 2012, and it was supposed to boost exports. It hasn’t really happened yet, partly because global demand’s been a bit weak, but also because a lot of Japanese firms have shifted production abroad. So that’s a mechanism that’s not working as well as anticipated.
The second way Abenomics can help is by boosting asset prices. So the Bank of Japan buys assets; it lowers interest rates; it also weakens the yen. And it’s supposed to boost profits and boost share prices. Internally, authorities were hoping that that would push companies to invest more in cap ex and raise wages and improve growth. Equities are up a lot, 75% since, again, late 2012. Profits are up 30%. Last year wages grew 0.5%, so again, it’s better than 20 years or 15 years of wage deflation, but it’s not good enough, and it’s going to take time.
The third mechanism is [that] Abenomics is supposed to boost inflation — higher activity, higher inflation expectations. Japan is now seeing rising prices, which is a big difference from the last 20 years. So that mechanism is also slowly working.
And then finally, if you boost real GDP growth and you have inflation, nominal GDP is also going to be higher, and so your debt-to-GDP ratio and principal should start going down. That’s what they’re hoping, but that’s more of a long term-goal, and it’s going to take a while.
So is it going to work in the long term? My view is that probably, but it’s a gamble. And what I’m really hoping will happen is that over time, if the government remains committed to these measures, all these measures — some of them are painful reform — it’ll give companies confidence that their sales and profits will be rising over time. It’ll give them an incentive to invest domestically, to invest in cap ex, raise wages, and that starts a virtuous cycle which is sustainable. And that’s what they’re hoping. I think that they’re on the right path. It’s just going to take a long time.
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