Third, Kuroda hopes that the threat of inflation will get Japanese spending again. But Japanese households are not exactly hoarding cash right now. While the average household does have substantial savings, the savings rate in 2012 was among the lowest in the OECD, a reflection of dissaving by aging households. The corporate sector, by contrast, is sitting on piles of cash, but will the possibility of inflation offset the lack of productive investment opportunities? Recent indicators showing weak machinery orders despite increased lending efforts underscore the problem. Expanding the monetary base is one thing, but when money velocity is at multi-decade lows, as it is in Japan, it may not have the intended effect.
Fourth, Kuroda insists he is not monetizing the national debt—the JGB buying is meant as a loan, not a gift. But the BOJ is now intending to buy the equivalent of all new JGB issues (and then some). That is important, because if bond yields were to spike with inflation, or the threat of inflation, then new bond issues will quickly become difficult for the Japanese government to service. When the BOJ is snapping up everything, though, yields need not rise. The trouble is that once you start doing that, you can’t stop. The government will either need radical fiscal reform or the debt will be monetized.
Which brings us back to structural reform, the third arrow in the Abenomics quiver. The touchstone issue here is the Trans-Pacific Partnership (TPP), a planned regional free trade zone. That’s because joining it would open some of Japan’s most hidebound sectors to overseas competition, acting as a kind of gaiatsu, or foreign pressure, on them to invest in productivity. This would have particular implications for Japan’s service sector, one of the largest in the world as a percentage of GDP but with lagging productivity. For all the Japanese government’s romancing of the nation’s manufacturers, the growth potential is in services, and would come in addition to the boon that TPP would represent for exporters. Some economists think the TPP could add 0.5 percentage points to Japanese GDP growth. But market-opening for Japan has always tripped up on staunch opposition from its economically tiny but politically powerful farm sector.Enjoying this article? Click here to subscribe for full access. Just $5 a month.
Farmers are a traditional support base for Abe’s Liberal Democratic Party, but to his enormous credit he appears willing to push the issue. (It is an irony that the LDP’s staunchest supporters—farmers and senior citizens living off savings—are the most likely losers if Abenomics works as advertised.) Particularly interesting are reports over the weekend that Japan has achieved a breakthrough in negotiations on a free trade deal with Australia, which had stalled on the same issues of agriculture. Although in Australia’s case a desire to lock in resources is at play, it suggests that Abe may feel good enough about his support levels to force at least compromise on the nation’s farmers.
Longer term, Japan either needs to increase its birthrate or rethink immigration. Abe is on the case here as well, it appears, announcing the creation of a task force (to report in May) that will consider measures such as loans to newlyweds and time off for women undergoing fertility treatment. Of course, even if Japan very quickly removes the tremendous opportunity costs that exist for Japanese women becoming mothers, the economic benefits won’t be seen for decades. In the meantime, Japan will need to encourage greater workforce participation and relax its tough immigration laws.
Without these structural reforms, Japan is on an unsustainable fiscal course, and Kuroda’s monetary policy innovation may simply mean that the dénouement is more spectacular, and exported in the form of a collapsed yen.
If Abe does manage to fire all three arrows though, then Japan may be able to navigate its way to some form of normality, with manageable pain, through sustainable growth, fiscal reconstruction, and then a paying down of the debt through a mix of taxes and inflation (and perhaps even an outright write-off by the BOJ).
Achieve that, then his unsavory nationalism and disastrous first term aside, Abe will be deservedly feted as the leader Japan has needed these past twenty years.
In short, Thursday’s announcement could herald the start of Japan’s revival or its collapse, depending on what action follows. Either way, the hard part is yet to come.
James Pach is publisher of The Diplomat.