Abenomics may not have failed, but it is increasingly hard to say that it has succeeded.
Abenomics owes its name to the current Japanese Prime Minister, Shinzo Abe, who came to power in 2012 on the strength of a promise to break Japan out of the economic doldrums in which it has languished over the past several decades. His predecessors had presided over years of lacklustre growth, repeated recessions and deflation that sapped the country's economic dynamism and helped to entrench a culture of decline and pessimism.
Mr. Abe promised a break with this sorry narrative through a series of measures intended to shock the Japanese out of their funk. Deflation was to be defeated through printing money, whoops, sorry, "quantitative easing." The economy was to be given a jolt through massive infrastructure spending while hidebound traditional Japanese industries such as agriculture and services were to be shaken up through deregulation and trade liberalization. The burgeoning public debt (the highest in the industrialized world) was to be combatted by a three-percentage-point rise in the sales tax, with more tax rises later.
This was bold stuff and Mr. Abe's rise to power was greeted with the closest thing the Japanese can muster to enthusiasm. Japan in the 1970s and 80s played the role of economic juggernaut that we associate today with China. When the Japanese became the second-largest economy in the world, America started looking nervously over its shoulder and we all began to wonder if Japan was destined to be Top Nation.
Then things started to go wrong – not disastrously so, but enough to rob Japan of the air of inevitability that it had once enjoyed. Even after years of stagnation, Japan is still the third-largest economy in the world, and its giant industrial firms such as Sony, Mitsubishi and Toyota are bywords for multinational business success. Cities such as Tokyo and the larger provincial centres are doing extremely well. But China is now in the No. 2 spot internationally and Japan is widely regarded as a once-great athlete who refused to get out at the top of his game and is now being shown up by younger, fitter and hungrier competitors.
Mr. Abe's strategy was an appeal to Japanese pride, offering to restore national greatness in exchange for a willingness to embrace painful change. So far the results have been meagre.
Take infrastructure spending. Mr. Abe has promised to splash out even more cash on roads and trains and bridges and airports than his predecessors, and they were no infrastructure wimps. In terms of territory, Japan is the 61st-largest country in the world, but it has the fifth-largest road network. In this relatively small country, there are nearly 100 airports, many of them achieving Mirabel-like levels of air traffic. Like many Canadian politicians, the Japanese think that the simple act of building infrastructure, needed or not, is enough to rescue the economy from underperformance. The truth, however, is that wasteful infrastructure is, well, wasteful and the money borrowed to build it will never be recovered through increased economic activity.
Similarly unimpressive results have been obtained by other bits of the Abenomics program. The Bank of Japan has played along with expansion of the money supply on the understanding that the government will improve the economy's long-term growth prospects through economic reform. The head of the central bank increasingly frets that he has delivered his part of the bargain but the government's promised reforms are too often slow and tentative. The sales tax rise tipped the country back into recession.
The theory now heard increasingly around Tokyo is that every government for the past 20 years has been underestimating the degree to which demographic decline may be driving economic stagnation, and therefore Abenomics is treating the symptoms rather than fundamental causes of Japan's ailment.
Because of low birth rates and the consequent aging of its citizens, the Japanese population falls by a quarter of a million people annually. That's like losing a city the size of Windsor or Victoria every year. And the loss of working-age population in Japan happens at double that rate.
Unlike Canada, Japan has essentially no immigration to fill the gap and no prospect of that changing. By 2060 the government thinks the population will have fallen by a third. It seems increasingly likely that the stimulative ship Abenomics can pick up no speed dragging such a demographic anchor. This is not to suggest some of Abenomics isn't helping – trade liberalization and agricultural reform, for example, will certainly pay long-term dividends. But old-style Keynesianism, a dubious proposition at the best of times, is clearly not the cure for Japan's profound malaise.
Brian Lee Crowley (twitter.com/brianleecrowley) is the managing director of the Macdonald-Laurier Institute, an independent non-partisan public policy think tank in Ottawa: www.macdonaldlaurier.ca.
Brian Lee Crowley