Shinzo Abe’s policies did not succeed in pushing up real wages, as deflation gave way to rising prices.GIAN EHRENZELLER/The Associated Press
Shinzo Abe often framed his economic vision as a policy bundle of “three arrows”: an integration of fiscal stimulus, loose money and structural reform that together would snap Japan out of its prolonged stagnation.
In doing so, the former prime minister drew on the Japanese folk story of three brothers, each given an arrow. Separately, their arrows could be easily snapped; together, the arrows – and the brothers – were unbreakable.
Mr. Abe, who was assassinated on Friday, meant the three-arrows reference as an illustration of the irrefutable logic of what came to be known as Abenomics. That parable did turn out to be strikingly relevant, but not in the way he would have hoped.
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Two of his arrows, launched in 2013, struck home. Massive fiscal stimulus did boost Japan’s growth. Negative interest rates and quantitative easing finally vanquished the persistent deflation brought on by the real estate collapse of the 1990s. But the third arrow fell short, with the Abe government failing to fully counteract the productivity-sapping effects of an aging population. And, as the parable implies, two out of three arrows are not enough – a lesson other countries, including Canada, should heed.
According to David Edgington, a professor emeritus at the University of British Columbia and former director of the school’s Centre for Japanese Research, Mr. Abe’s policies did not succeed in pushing up real wages, as deflation gave way to rising prices.
“While inflation ticked up a bit, most of the extra cash put into government bonds by the Bank of Japan went into the stock market,” he said, adding that the country became a much more unequal society under Abenomics.
Still, there’s no doubt that Mr. Abe faced a monumental economic challenge when he returned to office in 2012. Japan’s economy was at a standstill in 2011. Prices were falling, with a deflation rate of 0.27 per cent. And GDP growth had flat-lined at 0 per cent.
Against that backdrop, Mr. Abe sought to shock Japan’s economy back to life.
In the same way that he marketed his economic policy to the Japanese people by tapping the country’s folklore, Mr. Abe embraced Western-style showmanship to pitch the revival of Japan to the world: “Buy my Abenomics,” he exhorted during a speech at the New York Stock Exchange in 2013.
As a mix of economic-policy measures, Abenomics was in fact quite conventional. The idea of using monetary and fiscal policy levers to avoid deflation, while pursuing a promise of supply-side reforms aimed at shifting labour and capital into more productive areas of the economy, is hardly radical thinking in most developed countries.
Yet the policies marked an abrupt break from the Japanese economic orthodoxy that prevailed during the previous two decades before Mr. Abe began his second term. Most crucially, the Bank of Japan had long argued deflation was largely beyond its control, a by-product of an aging population, and that the best it could do was provide a supportive interest-rate environment while the government did the heavy lifting of boosting Japan’s real potential growth.
Under Abenomics and the Bank of Japan’s new governor, Haruhiko Kuroda, the central bank instead unleashed an era of unprecedented easing. It adopted, for the first time, an inflation target of 2 per cent. And it injected liquidity into the economy through quantitative easing, introduced negative interest rates and declared its willingness to let inflation overshoot its target. (All measures, incidentally, that many of the world’s large central banks eventually came to adopt.)
“For years you had reflationists in Japan banging on the walls and pointing to things that American and European economists were saying, with no success,” said Tobias Harris, a Washington-based Japan analyst and author of The Iconoclast, a biography of Mr. Abe published in 2020.
“Abe ended up being a vehicle for these outsiders who had been looking for someone who could carry their ideas about fighting deflation.”
By the time Mr. Abe stepped down in 2020, citing health issues, Abenomics had delivered decidedly mixed results to Japan’s economy.
Prices initially responded well to the Bank of Japan’s aggressive policies, with inflation reaching 3.7 per cent in 2014 as the country enjoyed record employment. However, a hike in Japan’s consumption tax that year caused spending to drop and tipped the country into recession. It also cost the government and central bank credibility in their fight against deflation. While inflation largely stayed positive prior to the pandemic, it never again hit the bank’s target, rarely lifting above 1 per cent.
Nor did the supply-side reforms promised by Abenomics amount to much. He did liberalize the country’s electricity market and resurrected the Trans-Pacific Partnership trade deal, but stopped short of deeper changes.
“Abe was able to offer lots of carrots to corporate Japan, but he was always reluctant to use sticks to try to encourage them to change their behaviour in ways that furthered his policy goals,” Mr. Harris said.
That said, Mr. Harris believes Abenomics brought about a lasting philosophical shift on the part of the Japanese government. On the global trade front, the country is willing to play a role as a leader in integration that it was not willing to before.
But Japan’s structural problems are hardly unique. Worries about deflation countered by massive fiscal and monetary stimulus. Persistently flaccid productivity growth, and mounting pressure from an aging population. That describes not only Japan, but Canada less than two years ago.
Deflation, at least, proved to be a fleeting concern, as inflation has surged in 2021 and this year. But productivity remains a central challenge for Canada, particularly as the baby boomers move fully into their retirement.
Trevor Kennedy, vice-president of trade and international policy at the Business Council of Canada, said every economy in the world, including our own, can learn from Japan’s experience with Abenomics.
“We actually should all be paying attention to Japan, including how it manages an aging population,” he said. “We all could be facing a similar future, certainly on the demographic side.”
In the most recent federal budget, the Canadian government painted a comforting picture of a long-term decline in the country’s debt burden. But that scenario is predicated on a sharp and enduring increase in productivity that, so far, is not buttressed by any major policy shift.
In an echo of Abenomics, the federal Liberals have run significant deficits since coming to office, continuing in 2022 and beyond, even though the economy is clearly overheating. For the moment, however, there’s no hint of the kind of broad-based tax increases that Japan brought in to tamp down its national debt.
Ottawa has boosted immigration goals and laid the foundation for national subsidized child care. Both of those measures should help to buoy the labour force, although their effect on productivity is less clear. On those two fronts, Canada has outpaced Japan.
But there is one arrow, at least, that is in flight in Japan, but still stuck in Canada’s quiver: a concerted push to keep older workers in the labour pool.
One of the first moves the federal Liberals made when entering office in 2015 was to cancel the planned gradual increase in the eligibility for federal old-age benefits to 67 from 65, starting in 2023. That policy would have both reduced fiscal pressures on Ottawa and encouraged older Canadians to remain in the workplace.
Japan, belatedly, is moving in the opposite direction. The official retirement age for government employees will start to gradually rise to 65 from 60 by 2031, starting next year. The retirement age for private-sector workers is effectively being moved up to 70, and there are plans to pare back benefits for those aged 60 to 64.
All of those changes are happening relatively quickly. Workers in their 50s and 60s, not just those at the start of their working life, are seeing the terms of their retirement rewritten. That could be the most fundamental lesson from Abenomics: The longer the delay, the greater the pain.
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Patrick Brethour
Jason Kirby