Abenomics: 2 sides to the coin

Abenomics is the political neologism for the economic policies of Japan’s PM, Shinzo Abe. To get a general idea of what it’s about, read https://thespectrum20.wordpress.com/2016/01/10/abenomics-a-red-bull-stimulus-for-the-japanese-economy/ which describes what the ‘3 arrows’ of monetary stimulus, fiscal stimulus and structural reforms attempt to achieve for a nation ridden with problems of stagnant GDP and a greying population.

Abenomics is often cited as a failed and over ambitious policy to reflate the Japanese economy. However, the article http://www.economist.com/news/leaders/21702751-what-japans-economic-experiment-can-teach-rest-world-overhyped-underappreciated adopts a supportive tone for Mr. Abe’s progress. It begins with refuting the criticism of BoJ (Bank of Japan) for failing to meet the 2% inflation target despite the monetary easing. It justifies that most countries exclude energy prices (due to high short term volatility) from core inflation. But Japan doesn’t. Hence, it masks the progress in inflation (consumer prices without energy prices) due to falling energy prices. At the same time, there is enough room for improvement for BoJ to stimulate consumer spending and corporate investments. This is because household savings reached an all-time high in 2015 and corporate profits are also booming. Corporates have become conservative in raising the base pay (basic salary without any bonuses) but are enthusiastically engaging in price hikes. This is reverse to the norm during reflation: price hikes preceded by wage increases.

The 1st link highlights the problem of massive public debt due to which it was decided to raise revenue through a sales tax hike in order to control public financing. But the tax hike was an unpopular measure pulling the economy into a recession by slapping the purchasing power. If the consumers are not spending and the corporates are refusing to increase the pay, the government has to replace them hence, ‘Someone must spend’. We studied in the IS-LM framework, fiscal expansion leads to crowding out private investment through higher interest rates. But Japan does not even face this danger of ‘crowding out private borrowers’ despite all the fiscal stimulus. The Economist therefore advocates the use of fiscal stimulus over ‘fiscal austerity’ which Japan had engaged in. This post comes in light of yesterday’s announcement to give another fiscal push worth $265 billion.

Moving to the structural reforms, Japan requires a higher proportion of working age population. The Economist articles in general argue for opening Japan’s doors to immigrant workers (now might be good time to save EU from fragmenting further!) While dealing with its fundamental problems, Mr. Abe’s policies had some positive fallouts with increase in female labour force participation rate and decline in workplace discrimination against pregnant employees. Interestingly, another article by the same magazine http://www.economist.com/news/finance-and-economics/21702756-abenomics-may-have-failed-live-up-hype-it-has-not-failed-and points out that women face ‘financial disincentive to rise’. There are policies which allow ‘married couple’ to claim free healthcare, pension, exemption from income taxes & social security taxes, provided they fall in a lower bracket of earnings per annum. In such cases, it is women who take the heat by turning down jobs! The 3rd link is quite exhaustive and puts all elements in picture at once.

*This was originally posted on FISCUL, Lady Shri Ram college facebook page. These posts use a different format by supplementing them with links which have been used for the research and are hence kept short and crisp.

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