Abenomics: Less of the Same

After four months battling to pass unpopular security legislation, Shinzo Abe, Japan’s prime minister, lost no time in returning to somewhat safer ground: the economy. On September 24 he fired off what he called “three new arrows” in service of Abenomics, his program of monetary easing, fiscal stimulus, and far-reaching structural reform. Yet recent data suggest the economy may offer Abe no respite from a bruising year.

Japan’s GDP shrank by 1.2% on an annualized basis in the second quarter, after expanding in the first. Now worries about the third quarter are mounting. Industrial production continued to fall in August, suggesting that the economy may even have entered recession in the quarter. In addition, for the first time since the government embarked on Abenomics in April 2013, prices in Japan are falling again, albeit only slightly. One key gauge of inflation, core CPI (the consumer-price index excluding fresh food), fell by 0.1% in August.

It is all dire news for the Bank of Japan (BoJ), which is supposed to get prices rising by 2% a year by next autumn. The bank’s preferred measure of inflation is now “core core” CPI, which excludes energy as well as food, and which is rising. Yet broad inflation expectations may be affected by the news of deflation’s return. The BoJ will surely come under renewed pressure to expand its existing program of monetary easing at the end of October, when it is due to update its economic forecasts.

Abe’s new arrows did little to pierce the gloom. The first, a pledge to boost nominal GDP by 22% to ¥600 trillion ($5 trillion), was met with skepticism since Abe gave no time frame, nor any detail on how to reach it. Nominal GDP has been rising consistently since he returned to office — but by an average of just 2.3% a year since the start of 2013.

The new GDP target certainly underscored the government’s determination to pursue economic growth rather than focus on Japan’s huge sovereign debt, which now stands at 246% of GDP. But that does not go down well with credit-rating agencies. The latest to downgrade Japan’s debt was Standard & Poor’s on September 16. Since Japanese institutions and households hold the bulk of the outstanding debt, and the BoJ is buying almost all new issuance, yields barely budged. But the move signals skepticism that Japan can grow its way out of its problems.

Abe’s second and third new arrows were aimed at his domestic audience and merely embellished his existing program of structural reform, which has disappointed. He promised greater financial support for families in order to raise Japan’s low birth rate, as well as extra nursing facilities for the elderly. He repeated a pledge to stop the population falling below 100 million (on current trends Japan’s population of 127 million is set to fall to 87 million by 2060).

Reformers worry that the new arrows are substitutes for much sharper ones that Abe has promised to use, but left in the quiver — most notably, an assault on privileged groups, including farmers, doctors, and pharmacists, that collectively stifle the economy. Abenomics now risks veering away from its original ambition into populism and misguided policy, says Takatoshi Ito of Columbia University, a former adviser to the prime minister.

Abe was bolder in front of international investors this week in New York. He promised further steps on corporate governance, where much has already been achieved. He would speedily conclude negotiations on the Trans-Pacific Partnership, an ambitious free-trade agreement, he said. A trade deal would help liberalize the economy.

An even bolder step, and perhaps the only plausible way to deal with Japan’s demographic problem, would be to back higher levels of permanent immigration. Despite Abe’s promise to stabilize the population, he shows no willingness to go so far. At the United Nations this week, he pledged to triple aid for refugees and displaced people from Syria and Iraq, but ruled out taking any in. After three years and six arrows, Abe’s knack for archery is in growing doubt.