Can Abenomics Succeed? Overcoming the Legacy of the Lost Decades
IMF Blog, April 1, 2015
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- Authors: providing risk capital.
- Published: April 1, 2015
The Legacy: Structural Changes During the Lost Decades
- Key statistic: in 2013, Japan’s level of nominal GDP was about 6 percent below its mid 1990s level.
- Structural headwinds identified:
- Population aging
- Started in earnest around the mid-1990s.
- Dragged on growth by reducing labor input, land prices, and aggregate demand, contributing to deflationary pressures (see chart 1).
- Eroded the traditional tax base and increased government outlays on health care and social security, adding to fiscal woes.
- Raised demand for “safe assets,” limiting the financial sector’s ability to be a catalyst for growth by providing risk capital.
- Production offshoring
- Initially aided corporate deleveraging.
- Recently occurred at the expense of domestic investment and exports from Japan (see chart 2).
- Higher corporate profits increasingly retained as cash holdings.
- Labor market fragmentation
- Shift away from the lifetime employment model toward nonregular workers, especially women and older workers.
- Excessive labor market duality impedes efforts to exit deflation by limiting aggregate nominal wage and productivity growth (see chart 3).
- Historical policy performance:
- Past efforts were largely unsuccessful due to on-off and uncoordinated implementation and large shocks (Asian financial crisis, bursting of the dot-com bubble, global financial crisis, 2011 earthquake and tsunami).
Mutual synergies from implementing all three arrows
- Three arrows of Abenomics (early 2013): aggressive monetary easing, flexible fiscal policy, ambitious structural reforms.
- Findings on the first arrow (monetary easing):
- Ending deflation would reduce the government debt ratio and restore the effectiveness of conventional monetary policy.
- Could rekindle animal spirits and stimulate productivity growth.
- Aggressive monetary easing by the Bank of Japan remains appropriate and instrumental in pushing up actual and expected inflation.
- Policy transmission appears relatively constrained:
- Investment remains sluggish despite negative real interest rates.
- Exports remain tepid despite the depreciation of the yen.
- Portfolio rebalancing towards higher-yielding assets remains limited.
- Rise in inflation expectations and tight labor market conditions are only slowly feeding through into higher basic wages.
- Structural headwinds (aging, outsourcing, labor market duality) imply structural reforms are essential to help attain the 2 percent inflation target.
- Findings on the second arrow (fiscal policy):
- Credibility of the government’s fiscal adjustment strategy is central.
- Fiscal policy must balance supporting the recovery while addressing the large and ever increasing debt overhang.
- Preferred solution: a concrete medium-term fiscal consolidation that aims to put debt on a downward trajectory through revenue measures and entitlement reforms.
- Such a plan would provide assurances that the debt will be repaid, allowing greater scope in the near term for stimulus when downside risks materialize or structural fiscal measures are taken.
- Findings on the third arrow (structural reforms):
- Ambitious structural reforms are pivotal for near-term and longer-lasting success.
- Groundbreaking structural reforms will support demand in the near term as confidence and expectations of permanent income rise.
- Bold measures that raise the employment of women, older workers, and foreign labor are most needed to directly counteract population aging.
- Financial sector role and reforms:
- Reforms should focus on jumpstarting the securitization market and stimulating venture capital to spur faster growth in funding for new business, and restructuring and exit of nonviable small and medium-sized enterprises (SMEs).
- Entry and exit rates of SMEs in Japan are on average about one-third of those in advanced countries, which impedes credit intermediation and risk taking by deterring entry of new firms, expansion of healthy firms, and by eroding risk assessment capabilities at banks.
Conclusion and implications
- Overall assessment:
- Abenomics can succeed, despite recent setbacks to growth and inflation, by making steadfast progress on all three of its arrows equally and simultaneously.
- Success is essential to avoid an undue weakening of the yen and ensure positive spillovers to Japan’s neighbors, its region, and the global economy.
- Policy priorities emphasized:
- Maintain aggressive monetary easing while addressing transmission constraints through structural reforms.
- Anchor fiscal policy with a credible medium-term consolidation based on revenue measures and entitlement reforms to put debt on a downward trajectory.
- Implement ambitious structural reforms to raise employment of women, older workers, and foreign labor, and to revitalize the financial sector (securitization, venture capital, SME entry and exit).
IMF blog post — April 1, 2015 — Can Abenomics Succeed? Overcoming the Legacy of the Lost Decades
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- アベノミクスは成功するか。日本の過去20年の遺産の克服: 李 昌鏞,iMFdirect ブログ 2015年4月1日掲載
