by Michael Roberts
The recent signing of the TransPacificPartnership (TPP) will
benefit American imperialism considerably. But the media has latched
onto TPP as the saving grace for Japanese prime minister Abe’s
‘Abenomics’, which has so dismally failed up to now in getting the
Japanese economy going. In return for opening-up Japan’s highly
protected rice producing and agriculture sector to competition, Japanese
industry will see tariffs and other restrictions on its manufacturing
exports and investments in Asia and the US reduced.
But I doubt that this will be enough to save Abenomics and an economy
that is heading yet again back into stagnation at best, or a slump at
worst. Abenomics is supposed to have three arrows: monetary easing;
fiscal stimulation and ‘structural reforms’. The first meant that the
Bank of Japan would print money like there was no tomorrow and buy up
all the government and corporate bonds held by the banks and pension
funds, loading them with cash to lend on to businesses to invest and
households to spend. This would take the economy out of its
deflationary stagnation into an inflationary boom. This was the cry of many Keynesians like Paul Krugman.
Well, the printing presses have certainly worked overtime and the
Bank of Japan has expanded its assets to 75% of GDP and still rising,
more than double that of Bernanke’s Fed QE program. But it has not
delivered. Inflation has not returned and the 2% target looks further
away than ever. Even Janet Yellen, US Federal Reserve chair, implicitly criticised the BoJ’s policy, noting in a speech: “I
am somewhat sceptical about the actual effectiveness of any monetary
policy that relies primarily on the central bank’s theoretical ability
to influence the public’s inflation expectations.”
The second arrow was fiscal stimulation i.e. government spending and
tax reductions. Well, government spending was curtailed because of
worries about a rising public sector debt level of around 250% of GDP,
way above anywhere else in the world. Taxes for corporations were
sharply cut, but the sales tax on goods purchased by households was
sharply increased. This did two things: Japanese capital saw a
significant rise in profits and Japanese people saw a sharp drop in real
wages and consumption dropped back.
And here’s the rub. Although Japan’s big companies are now rolling
in profits, they are not investing in new technology or plant. Japanese
corporate profits have soared about 50 per cent since Abe took power
and are now significantly above the 2008 peak.
But Japanese corporations are holding onto their cash.
or investing it abroad or buying financial assets.
A rebound in capital expenditure in Japan has proved elusive, with
machine orders slumping at their fastest pace in 10 months. Machine
orders – a proxy for private capital expenditures – fell 3.5 per cent in
August from a year earlier. It was the biggest drop since a 14.6 per
cent fall in November 2014. So consumption is weak and investment is
poor. And unemployment is persistently higher than the 1970-90 average.
Abenomics has failed. Japan is now on the verge of a ‘technical
recession’ – two consecutive quarters of contraction in GDP. Industrial
production for August — a crucial input into gross domestic product —
unexpectedly fell by 0.5 per cent on
the previous month after a 0.6 per cent fall in July. An overall
contraction for the third quarter is almost certain, prompting a number
of economists to predict a fall in GDP. This would be a second Japanese
recession in the space of two years – a double-dip.
Now Abe is trying again with a new policy of targeting nominal not
real GDP growth. So this would mean aiming to raise inflation just as
much as real growth. Abe says his government will aim at 20% rise in
nominal GDP (ie before inflation) by 2020. This is actually a very
modest aim, in effect under 4% nominal growth (2% inflation and 2% real
GDP?) a year.
But this target is something that Abenomics-1 failed to achieve and
there is nothing in Abenomics-2 to suggest that it will succeed. Real
GDP growth comes from rising employment plus rising productivity per
employed worker. With employment flat or falling and productivity
growth less than 1% a year, then to meet the new target, inflation would
have to rise to over 3% a year. Under Abenomics-1, real GDP has
averaged 0.58% year-on-year growth every quarter since 2013:Q1 and
inflation has averaged 0.93% growth.
Keynesians like Paul Krugman now appear to recognise the failure of
monetary easing under Abenomics and instead now advocate a big fiscal
stimulus even if it sends government debt to GDP ratios up further. Now
the Keynesians argue that we need to convince the Japanese that these
debts will never be paid and then they will start to spend as they
expect a sharp rise in inflation, which is what is needed! This
tortuous logic is the sum total of the Keynesian answer to Japan’s
The Keynesians and Abe do not address the real issue: why is Japanese
corporate investment so sluggish despite high profits. It’s true that
the profitability of Japanese firms has improved. And that was the real
agenda behind Abenomics. Abenomics did that by squeezing the living
standards of Japanese households. This was the outcome of Keynesian-style policies!
However, the recovery in corporate investment remains subdued, in
particular for large firms whose investment has been largely flat over
the last few years. Considering how closely corporate investment
shadowed profitability during previous cycles, the recent slow recovery
in corporate investment is exceptional. Business investment is still
below the pre-global crash peak and not much higher than in 2012.
One notable feature of Japanese firms over the past decades has been
the increase in offshore production, briefly interrupted by the global
financial crisis. Over the last two decades, Japanese firms have
expanded abroad to exploit cheaper labour, and rising demand in host
countries. Overseas investment grew at a rate of 7 percent in the
mid-1990s and 12 percent in the mid-2000s before the global financial
crisis. The IMF finds that for large firms, in particular those which
have expanded production abroad, domestic profitability is less
important as a factor driving their investment.
Japanese capital increasingly looks to invest overseas where it
expects higher profitability. Thus the economic growth, employment and
incomes for Japanese labour remains in the doldrums. And recession
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