Anatomizing Abenomics

  By the time Prime Minister Shinzo Abe took office in December 2012, Japan was suffering from lackluster economic performance. As recently reported by CPR columnist Asha Banerjee, growth in Japan was the big story of the 1980s, but by the 1990s, the Asia bubble had burst and Japan’s GDP fell by nearly USD$1 trillion. The country was also plagued by a series of other problems, such as deflation and high youth unemployment. Morale was at an all time low.

Cue PM Abe and Bank of Japan governor, Haruhiko Kuroda. Kuroda, with substantial support from Mr. Abe, orchestrated a suite of reforms falling into three categories, or “arrows”: monetary, fiscal, and structural. Formally known as the “Japanese Revitalization Strategy,” the plan took on the name of its champion shortly after it launched in June 2013. “Abenomics” was born.

Although Abenomics is geared toward stimulating domestic growth, it is important to understand it in terms of regional significance. Despite limited progress in the last two decades, Japan remains the world’s third largest economy, so even national-oriented developments are bound to have regional implications…right?

Over the past fifteen months, Japan has enjoyed rather significant economic gains that are largely attributable to Abenomic reforms: The yen is at a six-year high, unemployment is down, and by the end of 2013, growth was 0.6 percent higher than expected. Today, however, journalists and experts have cooled on Abenomics and criticize the lack of progress on the “third arrow,” structural reform.

Here, interestingly enough, is where Japan and its neighbors might gain from interdependence. Disaster, crisis, implosion, “death spiral”—call it what you will, but Japan’s demography is starting to pose some serious challenges. The government estimates that by 2060, Japan’s population will be 87 million, some 32 percent less than what it is now. What’s more, 50 percent will be over 65 years of age. Prime Minister Abe has already figured out a way to cope with funding social security, but his strategies for increasing the labor force, namely by encouraging women and the elderly to join it, likely won’t be enough.

To address this insufficiency, the Abe administration wants to “attract talent from overseas.” In part, this means relaxing visa restrictions for skilled laborers to work in areas like nursing, manufacturing, and construction, a sector growing rapidly in anticipation of the 2020 Olympics.

This is one Abenomic policy that could benefit Japan's southern neighbors, as Southeast Asia has an abundance of relatively low-cost, skilled labor. While multinationals have traditionally capitalized on this labor pool by investing directly in a country, posting a hiring notice in the immigration office would draw thousands of applications, especially from the Philippines, where the unemployment rate is high. Remittances from migrant workers would help drive domestic consumption in their home countries, resulting in a boost to GDP.

Also in terms of pursuing structural reforms is Japan’s participation in negotiating the Trans-Pacific Partnership (TPP) Agreement. The agreement brings in all major Asian countries except China, but is centered on Association of Southeast Asian Nations (ASEAN) members, most prominently Malaysia, Vietnam, and Singapore. The TPP, which is highly controversial and presently stalled, promises to eliminate tariffs and non-tariff barriers, support the creation of jobs, and promote innovation across the Asia-Pacific region.

More importantly, the TPP would liberalize several sectors of Japan’s economy, primarily health care, finance, and agriculture. PM Abe sees the agreement as a way to complete his “third arrow” reforms by improving the international competitiveness of those sectors. Japanese workers—farmers especially—are worried, though, about effects on their livelihoods, which could see a contraction as Japan adjusts to an influx of cheaper goods and services from abroad.

While Japan can expect a 2.5 percent increase in its GDP by 2025 if it pursues the TPP course, Malaysia stands to add 4.7 percent to its GDP and Vietnam nearly 13 percent. Granted, it’s difficult to tell how much of these gains depend on Japan’s participation in the agreement, but as the second largest economy party to it, it’s safe to assume the nation’s contribution is significant.

Mr. Abe’s monetary policies also provide room for regional benefit, albeit temporary and possibly insignificant. Some have argued a weaker yen would benefit neighboring countries that import production inputs from Japan. These countries include Thailand, Malaysia, and Indonesia, which purchase manufacturing parts and components to assemble and sell in local markets.

However, as others point out, a weak yen means diminished Japanese purchasing power, which means diminished demand for neighbors’ exports. In fact, for a time—as a result of Mr. Abe increasing the consumption tax—import volume grew. With another consumption tax raise planned for 2015, countries that export consumer products to Japan, like Thailand and Singapore, might see a bump in growth.

Still, a weak yen would theoretically cause a short-run slowing of Japanese investment in other countries. Curiously, in at least the first few months of the Abe administration’s tenure, Japanese investment in other parts of Asia accelerated. Pundits argued this was due to manufacturers “forsaking” Japan’s aging population, stringent regulations, and high-costs for younger, looser, and cheaper economies. For instance, Thailand, where there’s a rapidly expanding middle-class population and manufacturing wages are one-tenth of those in Japan, received USD$10 billion of Japanese investment in 2013, up from USD$5 billion in 2012. According to Kenneth S. Courtis, a former Goldman Sachs Asia vice-chairman, “The incentives [for Japanese companies] to invest domestically are underwhelming.”

In his September 2014 article for the Wall Street Journal, Prime Minister Abe admits the Japanese Revitalization Strategy is a work in progress and several major steps still have to be taken towards its realization. Therefore, any discussion of its “impacts” require substantial speculation. Those outlined in this article—regional benefits from immigration, the TPP, a weak yen—are contingent on big “if’s”: If PM Abe can promote laxer immigration policies to a homogenous (read: xenophobic) electorate and, if successful, the resulting brain drain doesn’t cripple southern economies. If temporary jumps in Japanese consumption of imports balance longer-term slumps. If the TPP Agreement is ever reached. And, if anything, it seems like the largest gains to ASEAN economies brought by Japanese firms are collectively a wrinkle Abenomics seeks to smooth.