The Japanese government yesterday announced a fiscal stimulus for the economy of 28 trillion yen, or $275bn. Although much of this money is not new, it has been hailed as leading the way against austerity and towards expanding demand. This is part of the three-pronged package of policies known as Abenomics, named after the Prime Minister Shinzo Abe. This includes monetary stimulus in the form of quantitative easing, fiscal stimulus (tax cuts and public spending increases) and structural reforms to labour and product markets.
The Economist magazine claimed recently that Abenomics has been a partial success. In a country with an ageing and shrinking population, labour force participation is slowly growing as more women find work. Inflation is now positive as the price level slowly rises, although this may be largely due to the yen’s depreciation. The yen has strengthened recently and price rises have for the moment stalled.
But stimuli to demand, whether monetary or fiscal, have their limits if the productive side of the economy does not expand its output and productivity. The real structural problem is the huge accumulation of savings by firms. Corporate savings exceed investment by a substantial margin. This imposes a deflationary impulse to the economy. Arguably, these savings need to fall, and the funds flow to households for them to spend on consumption. It could also redistribute the funds available for investment towards more efficient firms looking to invest in profitable new areas, so raising the productivity of capital spending. As Michael Pettis has argued, the key structural policy change is for corporate savings to be redistributed to households, and it is this process which will ensure the more rapid growth of private demand necessary for a reasonable growth rate.
This redistribution of wealth could come about if firms hand back surplus earnings that they don’t want to invest to shareholders, or in higher wages to workers. To his credit, Prime Minister Abe has enacted various reforms to try to achieve these goals. Whether this involves regulation or deregulation, the aim should be the same. If this happens, demand growth will be sustained without the need for periodic fiscal expansions which will add to a national debt already at 250% of GDP. This has proved sustainable as most of the debt is held by Japanese, so that the nation is mainly indebted to itself! The cost of issuing new public debt is kept low by the central bank’s monetary policy, but it is the private sector which needs to drive growth if this debt is not to keep rising.
The idea that changes to corporate governance and product and labour markets, usually termed ‘microeconomic’ policy, have macroeconomic effects, and interact with macroeconomic policy, shows that the division between the two in economics is misplaced. The two only became distinct fields of study with the advent of the Keynesian revolution in the 1930s following the mass unemployment of the Great Depression across the rich world. It is more useful to examine the dynamic interplay between the two, as above, which is a hallmark of dialectical reasoning. I am currently reading on this kind of philosophy and am finding it a helpful way of thinking about economic and social processes. This was the goal of Marx, and although I am unconvinced by the socialisms tried across the world to date, materialist dialectics remains a powerful tool for analysis in political economy.
Japan’s economy has stagnated for over twenty years, which in many ways represents attempts to change its growth model from one of ‘catching-up’ with the technological leaders, which it did very effectively for much of the post-war period, to matching the leaders and even ‘forging ahead’ technologically. The two require different sets of policies, although given the long stagnation there is actually plenty of room for productivity to catch up once again. But to repeat, in the absence of a more rapid growth in consumption, and a more efficient allocation of investment towards new growth opportunities, economic outcomes are likely to continue to disappoint.