Will Abe lead on the consumption tax?

On Friday, Prime Minister Abe Shinzō headed off (jp) to the mountains in Yamanashi prefecture for an eleven-day summer holiday. He leaves behind a growing debate in Tokyo about the wisdom of proceeding as planned with the consumption tax hike scheduled to be phased in from 2014-2015 (5% to 8% in April 2014, 8% to 10% in October 2015). Abe has said he will make his decision about the tax sometime over the next two months, leaving proponents and opponents of the hike to make their cases once again.

Arguably the supporters of the tax hike won several victories this week.

First, at the start of the week the IMF advised the Japanese government to stick to the plan as concluded in 2012, arguing that the tax hike will signal the government's commitment to fiscal restructuring and will therefore bolster investor confidence. The IMF has been saying that the consumption tax rate should rise to 15% for years now, so its advice for Japan is not new. But the fund's intervention gives proponents an important international backer as they make their case to the prime minister.

The next victory for proponents of the hike came on Thursday. Bank of Japan President Kuroda Haruhiko, speaking to the press after the BOJ policy board's regular meeting, voiced his support for raising the consumption tax and said (jp) that the BOJ's radical monetary policies and the planned hike were not incompatible. Like the IMF, Kuroda stressed the importance of reassuring investors that the Japanese government is serious about getting its financial house in order.

Finally, on Friday the Nikkei Shimbun ran a major article (jp; registration required) — basically an editorial — addressed to senior government officials who are "nervous" about the consumption tax increase that sought to reassure them that raising the consumption tax next year would not be like raising the consumption tax from 3% to 5% in 1997. The article opens by explaining that the 1997 hike came in the midst of a regional financial crisis and at a time when the balance sheets of Japanese banks and corporations were loaded with bad debts. Having established that 1997 was a particularly bad time to raise the consumption tax, Nikkei pivots to say that since banks and businesses have more "stamina" today, it's appropriate to take on the challenge of the national debt in order to reassure global financial markets, which, Nikkei reminds us, are roughly three times larger than they were in 1995. With that in mind, the article warns that at the first sign that the government is not serious about raising the tax, investors will short Japan in a heartbeat.

As arguments on behalf of austerity go, there is nothing earth shattering in the Nikkei article, in fact it contains pretty much the same arguments that Paul Krugman has critiqued for years, including in this 2010 column: the "confidence fairy" and the "bond vigilantes." But the arguments are less important than the reality that Japan's powers that be are lined up behind raising on the consumption tax on schedule in April 2014. The tax hike not only has the support of the BOJ president and Japan's leading business daily, but also the head of Keidanren (jp) its most powerful business lobby; Amari Akira, Abe's own minister for economic and fiscal policy; and leading members of the LDP, which has, after all, campaigned on raising the consumption tax for the last several elections. Of course, it almost goes without saying that the ministry of finance wants to see the tax hike proceed as scheduled.

The forces arrayed against the tax, at least at the elite level, are thinner. Hamada Kōichi and Honda Etsuro, Abe's leading economic advisers, have both voiced skepticism about the current tax hike plan, with Professor Honda's arguing (jp) that the tax should be phased in at 1% a year rather than in two phases. Saitō Tetsuo, the chair of LDP coalition partner Komeitō's taxation committee, has stressed the need to take economic conditions into consideration when deciding whether to go forward with the hike. Beyond elite circles, perhaps most significant fact is that the public is overwhelmingly opposed to the tax hike: Asahi's post-election opinion poll found (jp) 58% opposed and only 30% in favor.

Given that sustainable, robust growth is still far from assured — and that wages have yet to rise, suggesting that consumers would really feel the sting of the tax hike — the facts are probably on the side of the skeptics. The proponents still have to explain (1) why the confidence of global markets is so important when, as Michael Cucek reminds us, Japan is largely invulnerable to "bond vigilantes" and (2) why confidence would evaporate now as opposed to anytime over the past decade of swollen deficits. If anything, delaying the consumption tax hike should signal to financial markets that the Japanese government is serious about reviving Japan's economy.

But this week shows that the facts have an uphill battle against a good portion of the Japanese establishment (with the support of international actors like the IMF). After finally securing a plan in 2012 to raise the consumption tax, they are not about to let the Abe government back out of its commitment. With the final decision resting on Abe's shoulders, this issue is as good a chance as any for Abe to show that he can be the strong, decisive leader he claims to be.

The Japanese public's ingrained distrust of investor capitalism

In the last part of this series of posts reviewing Japanese public opinion about economic policy during the "lost decades," I will explore public opinion polls regarding attitudes towards savings and investment and financial reform. Years of public opinion polls support what the Bank of Japan's data on  Japan's Flow of Funds shows: since the bursting of the asset bubble, Japanese households do not show much interest in owning equities, to say nothing of more complex financial instruments. (The BOJ explains the components of each category of asset here; flow of funds data can be found here.)

Households are by no means the only actors whose investment decisions are worth examining — for example, markets are closely watching whether and how much Japanese pension funds will shift from bond holdings to equities or other assets — but the decisions made by households and the attitudes expressed by Japanese citizens in opinion polls are revealing when it comes to understanding how Japanese think about Japanese capitalism, the role of investing and shareholding, and the degree to which they have embraced (and will embrace) reforms to encourage more risk taking and competition in the Japanese economy.

By and large, Japanese households have been reluctant to embrace shareholder capitalism. Equities made up nearly a fifth of household assets at the peak of the asset bubble, but since then household shareholding has fallen dramatically, notwithstanding Japan's "Big Bang" financial reforms and other government efforts to encourage investment. Despite low interest rates on bank deposits, low yields on government bonds, and, as I have documented previously, persistent fears about the reliability of the public pension system, Japanese households have been extremely reluctant to move into higher-yielding assets. It is important to keep this reality in mind as one assesses the Abe government's likelihood of success in triggering sustainable growth; Abenomics has to change ingrained attitudes about saving and investment that have heretofore proved resistant to policy change and macroeconomic change.

Pollsters began taking more of an interest in Japanese attitudes regarding the financial sector in the late 1990s as the Hashimoto government implemented the "Big Bang" reforms, which deregulated foreign exchange and securities markets, the insurance industry, and the banking sector. The reforms were, among other things, supposed to make it easier for households to diversify their investments. However, a poll conducted by Asahi in March 1998 found respondents unsure of financial reform. Asked whether they were hopeful about the Japanese-style "Big Bang," only 32% said they were hopeful, while 43% said they felt great anxiety and other 21% said they didn't know. When asked whether they would try to purchase higher-risk, higher-return financial instruments if it became possible to do so, only 16% said they would — 80% said they would not. The same poll found that the public mostly wanted banks to pay higher interest rates on deposits: the poll found 26% of respondents were fine with low interest rates as they were, while 66% wanted interest rates raised.

Another Asahi poll in May 1998 found respondents more favorably disposed to the "Big Bang," but not by much. Asked whether they welcomed having the responsibility to choose from a variety of financial products and being forced to decide which are profitable and which are safe, 41% said they welcomed the responsibility, 38% did not, and 14% said they did not know yet. Respondents were slightly more open to purchasing assets that would yield more than bank deposits but would also be more riskier: 21% said they would like to purchase them, 72% said they would not.

Respondents appeared somewhat more open to having greater control over retirement funds through the introduction of a Japanese-style 401(k) system. A July 1999 Asahi poll asked whether respondents would accept the greater responsibility that would come with the introduction of a defined contribution pension program: respondents favored the notion 44% to 43%. Respondents also proved more favorably disposed to participating in a 401(k)-style program than to other forms of investment. 29% said they would like to participate, with 58% opposed.

The problem, however, is that over the following decade Japanese households have not become any more favorably disposed to investing than they were when financial reforms were first introduced. Asahi polls — one from March 1997 and the other from February 2006 — illustrate the inertia of Japanese households. When asked how their households were responding to low interest rates, in both polls at least 60% of respondents said "nothing in particular." In 1997, only 7% said they were moving deposits to more profitable investments like stocks and other financial instruments. In 2006, that figure rose only to 12%.

The February 2006 poll found scant interest in investing more in equities, let alone more complex instruments. When asked whether they wanted to invest in stocks, 11% said they already did, another 15% said they would like to, and an overwhelming 65% said they would not like to purchase stocks. On the one hand, 65% is better than the March and May 1998 polls that found 80% and 72% of respondents uninterested in purchasing higher-yielding assets. On the other hand, when one considers that nearly two-thirds of respondents in February 2006 — in the midst of low interest rates, concerns about the security of public pensions, and a stock market that would make five-year highs in 2006 — expressed no interest whatsoever in stock ownership, one gets a good picture of inertia in Japanese household assets.

The poll did ask respondents to explain their answers to that question. Among the 26% who said they either already invested or wanted to invest in stocks, 11% cited higher returns, 8% said they bought stocks because it had become easier to do so, 4% said because they thought it was interesting, and 1% said they did it in order to prepare for bank failures. Among the 65% who expressed no interest, 25% said they did not have enough money available, 17% said they feared losses, 12% said they felt it was difficult, and 5% said it was because stock investing "does not have a good image." The cautiousness of Japanese households was reinforced in the next question, which found that, if respondents were to invest, they would prefer financial instruments with relatively lower returns but with low risk of loss to higher risk, higher return instruments by a margin of 54% to 5%.

Finally, the poll asked an interesting question to gauge general attitudes about stocks and investing. Asked whether they thought it would be good to learn about stocks and investing from elementary and middle school onward, 29% said yes, 61% said no. Another question asked whether respondents felt opposition to making large profits by speculatively investing great sums of money in the stock market and elsewhere: 48% said they were opposed, 40% said they were not. Arguably these responses are clear indicators of the degree to which investing was still considered abnormal, perhaps even unseemly. Not only did a sizable majority of respondents not want to own stock, they did not want their children learning about the stock market and they felt there to be something illegitimate about fortunes made through speculative investments. And this poll was conducted several years before Japan would be dragged back into recession by the global financial crisis, which, as then-Prime Minister Asō Tarō repeatedly reminded his fellow Japanese, "originated from America" (i.e., home of Wall Street's casino capitalism).

A Cabinet Office poll conducted (jp) in December 2005 confirms this aversion to financial investing. 71.9% of respondents said they owned no securities whatsoever. Among those who owned securities, the most commonly held security was stocks (15.9%), followed by investment trusts and mutual funds (9.1%), national or local government bonds (7.7%), foreign securities (3.4%), bank and financial bonds (2.0%), industrial bonds (1.3%), and derivatives (.2%). The survey also asked whether respondents owned, wanted to own, did not want to own stocks, or own stocks but want to stop. These figures are similar to the February 2006 Asahi poll: 13.3% owned stocks and wanted to continue, 8.6% wanted to start investing, 2.7% wanted to quit, and 68.5% had no interest at all. Respondents' reasons were similar too. Among investors or would-be investors, 48.3% said they invested because they hoped for higher returns, 45.6% said they hoped for dividends, and 31.2% said they wanted to invest their money beyond bank deposits. Among non-investors, 39% said they lacked the knowledge, 36.9% said they feared the risk of losses from falling prices, and 34.5% said they lacked the assets and income with which to invest.

Another Cabinet Office poll, conducted in May 2007 (jp), asked questions about investing in regard to the first Abe government's "From savings to investment" program. Eighteen months after the previous Cabinet Office poll respondents were if anything even less favorably disposed to investing. After asking whether respondents had heard of the program (most knew nothing about it), the survey asked respondents why people preferred savings deposits over other investments: 

• 52.3% said it was because they felt secure entrusting their money to banks and post offices.
• 43.3% said it was because of the possibility of losing one's investment despite the possibility of profit.
• 40.2% said it was because they did not know enough about stocks and other investments.
• 32.2% said they did not know which stocks are good to purchase. 
• 28.4% said it was because they felt a great lack of confidence in securities firms and securities markets. 

Asked how the government could promote investment, respondents were less clear:

• 41.4% said to prepare a system to protect individual investors, strengthen explanations of the contents of financial products and their risks.
• 38.1% said strengthen market supervision.
• 26.9% said to reduce the tax burden for holding and trading stocks.
• 25.5% said to simplify tax payment procedures.
• 17.4% said to make it possible to buy stocks and other financial vehicles in various places.
• 11.5% said to promote financial education.

By May 2007, a marginally greater number of respondents said they owned no securities whatsoever and ownership rates fell in every category except investment trusts and mutual funds and foreign securities, which were held by the same share of respondents.

Respondents were, if anything, even less inclined to invest than before. 77.1% of respondents said they either did not plan to invest in stocks (74.1%) or owned stocks but planned to quit (3%). Only 18.6% said they owned stocks and wanted to continue (11.3%) or didn't own but wanted to (7.3%). Not surprisingly, respondents were even less favorably disposed to investment trusts: 78.8% said they either had no plans to invest (76.9%) or wanted to stop (1.9%), while only 14.9% said they owned trusts (8%) or wanted to (6.9%). Interestingly, when the respondents who said they wanted to or wanted to continue to own stocks were asked why, the reasoning changed a bit from the December 2005 poll. Now 46.9% said they wanted to because of the promise of dividend payments, followed by 39.8% who said they wanted to hold stock because of the promise of gains from rising prices and 33.9% who said they wanted to diversify beyond bank deposits. Fewer said they wanted to prepare for retirement (20.2%) or to invest retirement money more effectively (10.9%). Only 3.1% said they did so because they belonged to a defined-contribution pension plan (which had been passed into law by the Koizumi government in 2001).

In short, on the eve of the global financial crisis, only approximately one in ten Japanese households owned stocks, and nearly eight out of ten households had no plans to purchase stocks. Knowledge about and desire to own other financial instruments was considerably lower. Unfortunately, I have thus far been unable to find opinion polls regarding attitudes towards investing conducted after the global financial crisis. However, as the BOJ data cited above shows, since 2008 stocks as a share of total household assets have remained consistently below 10% after a brief spike during the latter part of the Koizumi era. Considering the reasons given by Japanese for not wanting to invest, it is hard to believe that their attitudes towards financial markets have changed dramatically. It is similarly hard to believe that recent volatility in the markets will lead more Japanese households to invest.

It is therefore important to remember, in the midst of enthusiasm about Abenomics, that the Japanese public has repeatedly showed itself to be risk averse in its investments and deeply reluctant to shift from virtually risk-free bank deposits to other financial assets. Despite — or because of — their fears about the pension system, Japanese households have not sought higher yields. As a result, Japanese households by and large have not directly benefited from stock market gains under the second Abe government (and, as I've discussed before, they have probably not been the direct beneficiaries of the weak yen). This is not to declare Abenomics a failure, but rather to provide a fuller accounting of the obstacles the Abe government must overcome to succeed in its bid to trigger sustainable growth. Maybe this time will be different than in the past, but for now Japanese households do not seem poised to become more active (or activist) investors.

The Japanese public's enduring anxiety about social security

Even as the Japanese people confronted slow growth and considered whether the longstanding institutions of Japanese capitalism would be able to guarantee prosperity in the future, they faced the prospect of an aging, shrinking population and worried about the stability of Japan's social security system. As baby boomers retire, Japanese society, like other developed societies, has become increasingly worried about whether the government would be able to meet its obligations to provide social insurance, pensions, welfare and poverty relief, and eldercare.

One has to wonder about the extent to which anxiety about Japan's social safety net has influenced household decisions about consumption, savings, and investment and their appetite for higher risk, higher yield assets during the "lost decades." The question is whether public anxiety about Japan's social safety net has depressed aggregate demand beyond the basic effects of too few Japanese chasing too many goods as argued by Edward Hugh. Arguably, the DPJ's program while in government (at least for the first year or two) was implicitly based on the notion that reducing insecurity about the safety net could yield macroeconomic benefits.

In this post, I will document the persistence of public fears about the social security system during the lost decades. Since at least the late 1990s, anxiety about the stability of the future of social security has regularly ranked at or near the top of the public's priorities in economic policy, which remains the case today. Any discussion of the impact of Abenomics on the economic behavior of Japanese households has to weigh Japanese attitudes about the social safety net. If Abe is unable to ease fears about the government's ability to provide for retirees, any gains to Japan's economic performance could prove short lived.

We can see these fears about the safety net as early as 1997. A March 1997 Asahi poll asked respondents whether they felt some anxiety about their future livelihoods. 69% said they said, versus 29% who said they did not. When those 69% were asked to explain what they were anxious about, the most common response was pensions and social security (30%). Only one other reply — "my personal health" — was in the double digits (11%). The same poll asked respondents to state the degree to which they felt confident in the future of public pensions systems. 42% expressed either great (5%) or some (37%) confidence, while 55% expressed either little (44%) or no (11%) confidence.

The next year an Asahi poll found that more respondents were most uneasy about pensions and social security (30%) than about Japan's economic outlook (28%), their incomes (20%), or their jobs (13%). 

Perhaps the clearest picture of public insecurity in the late 1990s can be found in an extensive July 1999 poll on questions related to Japan's aging society. The poll was based on face-to-face interviews with 2122 respondents nationwide, marginally more than Asahi's monthly telephone polls, which usually have between 1500 and 2000 respondents.

The survey paints a portrait of wide and growing anxiety among the Japanese public about life after retirement. Asked if there is anything in particular they feel uneasy about for their retirement, 28% of respondents said they were most uneasy about living expenses and other economic concerns, the most popular choice and an increase of six points over a 1994 poll on aging issues. Even more dramatic was the finding that 85% of respondents did not believe that contemporary Japan provided for a secure retirement. The survey found the public was concerned about the "fairness" of the social security system (23% thought it fair, 68% did not); was nearly evenly divided over who should bear the burden of higher medical costs as a result of aging (25% said to make the generations currently working pay more in premiums, 32% said the elderly should pay more in premiums and fees, and 28% said that all should pay more through a consumption tax hike); and believed that most attention should be paid to pensions as opposed to health insurance or nursing care insurance. The same poll found that when asked whether they expect the state pension system to provide for them, roughly two out of three respondents either greatly (33%) or to some extent (32%) said they counted on their state pensions. 

As Japan's stagnation deepened, the public focused more on economic policy than on the safety net, and public opinion polls reflected shifting priorities. Polls during the Koizumi years simply did not ask questions about welfare, social security, or pensions. It was almost as if through his frenetic activity in other policy areas Koizumi Junichirō made the Japanese public (and the Japanese media) forget about Japan's aging society and safety net anxieties.

However, when polls did ask the public to assess the Koizumi government's social security policies, the response was not favorable. For example, in an April 2004 poll concerning Koizumi's first three years in office, 67% of respondents said they did not approve of Koizumi's pension reforms. 

By fall 2004, anxiety about the social safety net had returned to the top of the public's concerns. Asked in September what they would like the recently reshuffled Koizumi cabinet to make its top priority, 52% said pensions and welfare, topping all other choices by a considerable margin, including jobs and growth (28%). By December, dissatisfaction with the Koizumi government's handling of pensions grew, with 76% disapproval (and only 13% approval).

Of course, postal privatization dominated public discourse for the bulk of 2005, but public concerns about the pension system did not vanish: a poll taken in November 2005, after Koizumi's landslide victory in September and another cabinet reshuffle, found that 56% wanted the government to make pensions and welfare its top priority, with jobs and growth policy in second place with only 17%.

Koizumi effectively bequeathed to his successors a public hungry for the government to fix the social safety net. Polling in advance of the 2006 LDP leadership election repeatedly showed that voters wanted the election to focus on social security. For example, in January 2006, 45% of respondents said the campaign should center on "how pensions and health care ought to be," followed by 28% of respondents who wanted it to center on fiscal reconstruction and taxation. In September, after Abe Shinzō became prime minister for the first time, 43% of respondents said Abe should make pensions and welfare reform his top priority, with growth and jobs in second place with 17%. (And only 2% wanted Abe to focus on revising the constitution.) Abe, of course, suffered a crippling blow with the emergence of the "vanishing pension records" scandal, in which it was discovered that due to carelessness on the part of the Social Insurance Agency the pensions records of up to 50 million people may have been missing data. The scandal served only to heighten preexisting public fears that the social security system was not in fact secure, and ensured that it would remain a critical issue for the government to address.

The global financial crisis changed the public's priorities — but not as much as one might expect. A poll published on September 12, 2008, three days before Lehman Brothers went bankrupt, found that 40% of respondents wanted the government to focus on the economy and government finances, while 37% wanted the government to make pensions and social security its top priority. Despite the latest downturn, reforming the social security system remained high on the public agenda, especially after the DPJ took power in 2009 and appointed Nagatsuma Akira, the parliamentarian who challenged Abe on the missing pensions scandal, minister of health, labor, and welfare. Under the Kan government, social security reform became tied up with the consumption tax issue, as Kan Naoto fought to tie consumption tax revenue to social security funding, which Noda Yoshihiko ultimately succeeded at doing in 2012. A February 2011 poll actually found public support for this version of the consumption tax increase: 53% agreed with a consumption tax increase in order to secure social security funding, with only 35% opposed. (The same poll found that if asked if they support a consumption tax increase with no tie to social security, 46% were in favor and 45% opposed.)

Noda obviously struggled to make his case to the Japanese people but it was not for a lack of concern on the part of the public. In late August 2012, after the tax increase had passed both houses of the Diet, an Asahi poll found when asked how confident they were in the social security system, 64% of respondents expressed not much (47%) or no (17%) confidence in the system, compared with 35% who had full (3%) or some (32%) confidence in the system. The same poll found the public evenly divided (43% in favor versus 43% opposed) over the idea of shifting resources from spending on the elderly to spending on child care and strongly opposed (60% opposed versus 31% in favor) to charging citizens over 70 more in fees for health care.

For the moment the social safety net is once again second to economic policy in the priorities of the Japanese public. But if the Japanese people have had a constant concern over the past fifteen-twenty years, that concern is the viability of Japan's social safety net. As Koizumi discovered, if and when the economy improves, concerns over social security are bound to grow — and as Abe learned during his first government, those fears can prove fatal to a government. It is not entirely clear what the Japanese public expects their government to do to strengthen the social safety net, since support for tax increases to bolster social spending has proven so fragile. There may ultimately be nothing the government can do to reduce anxiety about the strength of the social security system. In an aging society public anxiety about the soundness of the safety net — particularly in an age of high budget deficits — may simply be an enduring fact of politics. Abe may have bought himself a temporary reprieve, but sooner or later public attention will turn back to the social security question.

The next post and the last in this series will look at public opinion polling on attitudes towards saving and investment, an important indicator of 1) how much risk Japanese households will tolerate, 2) how eager Japanese households are to participate in new-style shareholder capitalism, 3) how much households are benefiting from the Abenomics boom, and 4) the degree to which Japanese depend on the social safety net for their retirement living expenses.

The Japanese public weighs structural reform

In my last post I discussed public opinion regarding fiscal stimulus, fiscal reconstruction, and the role of the state. In this post, I'll look at public opinion concerning the behavior of Japanese companies, labor market practices, and the role of the government in promoting microeconomic or supply-side changes in the Japanese economy as a means of promoting growth (i.e. structural reform).

Policymakers and the media were already discussing structural reform before Japan's asset bubble burst in 1991, most notably in the Maekawa Report, produced by an advisory council to Prime Minister Nakasone Yasuhiro headed by Maekawa Haruo, former president of the Bank of Japan, in 1986. But it was only after the bubble burst that the idea of significant reforms to the Japanese economy gained political traction, especially under the leadership of Prime Minister Hashimoto Ryutarō.

At a basic level, the Japanese public appeared to accept the idea that some type of structural reform is necessary if Japan is to remain prosperous in the future. In March 1997, before the wave of bankruptcies that would rock Japan's financial sector later that year, 72% of respondents said they thought "bold reform" was necessary, with only 19% disagreeing (and 9% not responding).

The public had largely embraced the arguments being made by Hashimoto and other political leaders: the Japanese economy needed to change. Japanese citizens did not just embrace the need for reform, they accepted that the government should take the lead in promoting reform. When asked by Asahi in May 1998 whether structural reform should be a government effort or a private-sector effort, 54% said government, with only 25% opting for the private sector (and another 21% not answering).

However, once the details of structural reform became apparent the Japanese public was more ambivalent. On the one hand, survey respondents accepted that structural reform should make Japan more liberal. Asked in a May 1998 poll which direction they thought Japan should head, 51% said it should aim for a "free competition" society that encourages ambition and talent, compared with 37% who said it should aim for an equal society with few disparities of wealth. When asked in the same poll whether decisions about pay should emphasize age and time of service or abilities and achievements, 70% said abilities and achievements and only 19% said seniority. On the other hand, the same poll find the public was divided over significant reforms to Japan's labor practices. Asked whether they supported hastening the pace of structural reform even if it meant job losses through corporate restructuring, respondents were evenly divided with 42% in favor and 41% opposed. Similarly, when asked whether they favored a society with lifetime employment or a society in which people change jobs, 53% favored lifetime employment, compared to 33% who favored job switching. In short, it seems as if the idea of a society in which individuals succeed or fail based on merit appealed to the Japanese public but not the steps the Japanese state would have to take in order to create such a society.

The public was no less divided when Koizumi Junichirō became prime minister in 2001, declaring there would be "no growth without structural reform" and that he would pursue "structural reform without sanctuary." As before, the public accepted the idea of structural reform in the abstract, with support over 70% throughout Koizumi's first year in office. (Although at the outset of the Koizumi government, the public was unclear what exactly Koizumi meant by reform: in late May 2001, only 23% were clear about what reforms Koizumi intended to implement, with 68% were unclear.)

However, from August 2001 the Japanese public soured on Koizumi's version of structural reform. Asked whether they were confident in structural reform, 52% felt uneasy about it, compared with 37% who felt confident. Asked whether they felt structural reform should continue, 44% favored it compared with 40% opposed, but when asked whether structural reform should take precedence over policies aimed at bolstering the economy, 56% said economic policies should take precedence compared with only 35% who felt structural reform should be the first priority. Similarly, for the first time a plurality (44% over 40%) opposed the Koizumi government’s program for disposing of bad loans.

At no point during the Koizumi government did the public support structural reform’s taking precedence over policies to revitalize the Japanese economy and create jobs. At the same time, when asked to name what was good and bad about the Koizumi government, the government’s economic policies were consistently rated as its worst feature. By late 2002, 50% of respondents cited macroeconomic policies as the worst feature of the Koizumi government for three straight months. It was not until April 2006, during Koizumi’s victory lap, that another policy area (foreign and security policy) passed macroeconomic policies as the least favored feature of the Koizumi government.

As noted in my previous post, the Japanese public was favorably disposed to structural reform directed at the public sector, since public-sector reforms were aimed at wasteful spending and corrupt practices. But during the Koizumi era, the Japanese public did not appear to have much appetite for labor market reforms or other reforms to promote more flexibility or competition in the private sector.

One can in fact argue that Koizumi exhausted public support for reforms that would create a more liberal Japanese economy. By the end of his tenure, the public began to express fears of growing inequality, and a majority believed, as a February 2006 Asahi poll found, that Japanese society was dividing into winners and losers based on whether or not one had money. At first, Japanese citizens did not hold Koizumi responsible for growing inequality, but by August 2006, Koizumi's last full month in office, 62% believed his policies were responsible, with only 30% saying that they were not.

Accordingly, as voters looked to the post-Koizumi period they hoped Koizumi’s successors would act differently. A June 2006 poll asked respondents whether they thought structural reform should continue: only 17% said it should continue unchanged, while 54% said it should continue but with different methods and 23% said the government should change directions entirely, a sentiment confirmed by a July 2006 poll that found that voters wanted the next prime minister to be a leader who listens to the opinions of others (67%) instead of making decisions based on his own thinking alone (28%). The same poll said the top priorities for the next prime minister should be addressing Japan’s aging, shrinking population problem (24%) and economic inequality (23%), followed by economic policy (18%) and fiscal reconstruction (16%).

One gets the distinct sense that by the end of the Koizumi period the Japanese people wanted a kinder, gentler politics and a more equitable, caring society. However much they supported Koizumi personally, they were not won over to his brand of Anglo-American neo-liberalism.

Polls in the post-Koizumi era show a reluctance on the part of the Japanese public to support significant changes to the surviving institutions of postwar capitalism. At the same time, the public was not eager to reverse changes wrought by Koizumi and his predecessors. For example, perhaps the biggest change in the Japanese labor market during the late 1990s and 2000s was the growing dependence of Japanese industry on non-regular and temporary workers who enjoyed little to no job security and few benefits. Many of these employees are women: at least half of women in the workforce are in non-regular positions, as suggested by this report (jp).

However, the Japanese public did not express a desire to change the laws that made the rise of non-regular employment possible. For example, when asked in January 2009 whether the use of temporary workers in manufacturing should be banned — a proposal that was included in the DPJ's manifesto later that year — only 30% of respondents supported such a ban, while 46% opposed one. Instead, the Japanese public wanted to protect the status of core workers, even if it meant the seemingly irreversible rise of non-regular employment, especially among Japan's young. A poll in February 2009 found that when asked whether the status of regular workers should be lowered in order to close the gap between regular and non-regular workers, only 32% agreed, 51% opposed. As in other industrial democracies that have seen the emergence of a dual labor force, privileged workers would prefer to retain their privileges (and jobs) even at the expense of non-regular workers. Protecting the status of secure jobs took precedence over other factors. For instance, when asked in a February 2009 poll whether firms should focus on protecting profits versus protecting employment, 69% said employment and only 20% said profits. The same poll found respondents willing to embrace work sharing — working fewer hours (with reduced pay), so that their employers could retain workers — by a margin of 68% to 19%.

Perhaps we should not be surprised that the Abe government's structural reforms — the third arrow of Abenomics — announced earlier this month proved to be so timid, especially when it comes to Japan's labor market. Whatever desire the Japanese people once had for structural reform appears to have dissipated. The prevailing sentiment now seems to be protecting the privileged status of regular workers, even if it means a growing population of non-regular workers with poor career prospects. If Prime Minister Abe were to propose bolder labor market reforms, one should expect considerable public opposition.

The next post will shift to attitudes about Japan's social safety net, looking especially at public dissatisfaction with the stability of the social security system.

Fiscal policy in the eyes of the Japanese public

It increasingly seems that if Abe Shinzō is going to remain in office, he will need to retain the approval of the Japanese public, and that if he is going to retain the approval of the Japanese public, the Japanese public will need to reap some of the benefits from the purported revival of economic activity. But beyond the basic question of whether or not Japan is growing and whether the benefits of growth there are larger questions about the future of Japanese capitalism. Will Japanese companies focus more on shareholder value and profit maximization instead of protecting jobs, preserving relationships with contractors, and prioritizing bank financing over equity financing? Will individuals embrace unconventional career paths, less on-the-job training, more mid-career job changes, more control over pensions and personal investments, with the risks that all of these changes entail? Does the Japanese public believe that the pillars of Japanese capitalism should change?

Of course, opinion polls can only reveal so much and suffer from flaws that undermine their validity — and public officials are free to ignore the preferences of the Japanese public in pursuit of their goals. But polls can provide hints as to how the Japanese public will respond to government policies or market developments.

In a series of posts over the coming days, I will review public opinion polls dating as far back as 1993 to assess Japanese attitudes to government spending, deficits, and fiscal retrenchment; structural reform; the social security system; and saving, investment, and the financial sector.

Fiscal stimulus, fiscal retrenchment, and the state: If there is one fundamental fact concerning Japanese public opinion about economic policy during the "lost decades," it's that, while recognizing the need for fiscal stimulus the Japanese people are ambivalent when it comes to how the government should pay for it. For example, in September 1993, early in the first lost decade, 80% of respondents in an Asahi poll said they wanted the government to cut income taxes as soon as possible, with only 11% in disagreement. However, when asked whether the government should issue deficit bonds to pay for tax cuts, only 23% agreed, with 55% opposed.

The same ambivalence has appeared repeatedly over the past twenty years.

• In March 2000, an Asahi poll asked whether issuing new bonds to pay for economic stimulus was “unavoidable” or whether the time was coming to reduce borrowing and fix the country’s finances: only 17% of respondents supported the former proposition, while 77% supported the latter.





• The percentages were roughly the same in response to that question in December 2000 and February 2001 — despite a July poll finding that 47% felt the Mori government should focus first on economic stimulus, compared to only 18% who felt it should put fiscal reconstruction first. 
• The public was often dubious about structural reform under the Koizumi government (more on this in a bit), but was overwhelmingly supportive of structural reform when it came in the form of public spending cuts or restructuring (or privatizing) public corporations. For example, the public favored a 10% cut in public works spending in the 2002 budget, with 52% in support and only 37% opposed. When asked in December 2002 whether the government should build more roads, 64% opposed the notion with only 24% in favor. The public also went from neatly divided on postal reform to decidedly in favor of the reform that was Koizumi’s pet project.
• As the Aso government coped with the global financial crisis in 2008-2009, the public signalled that it favored focusing on economic growth instead of fiscal reconstruction. However, as before, the public was overwhelmingly opposed to financing stimulus through deficit bonds. An October 2008 Asahi poll found only 24% of respondents in favor of paying for stimulus with deficit bonds, compared to 56% opposed.
• The DPJ encountered the same ambivalence. The public once again wanted the government to focus on stimulus, but when asked in January 2010 whether they approved of the Hatoyama government's having to undertake the largest deficit bond issuance to date to cover its budget, 69% of respondents were largely or completely opposed, with only 1% giving their full approval and 35% giving partial approval.
• While commentators usually attribute the persistent campaign for a consumption tax increase to the ministry of finance, the public has at various times signalled its willingness to support a higher tax rate, perhaps because of long-term uneasiness about the state of the government's finances. The Japanese public may be open to the idea, but whether it supports a particular plan depends entirely on the details (the timing, the size of the increase, the state of the economy, how new revenue will be used, etc.). There is, of course, a lesson for the Abe government as it decides whether to proceed with the plan to raise the consumption tax to 8% next April and 10% in October 2015.





• The Japanese people remain ambivalent about government finances. In August 2012, Asahi found that 62% of respondents felt that Japan's fiscal situation is very serious, with another 32% who said it is somewhat serious. At the same time, however, 90% of respondents said that growth and jobs would be very important (53%) or somewhat important (37%) for deciding how to vote in the next general election, making it the most important issue for voters.
• Abe has not been exempt from the public's ambivalence. A poll in January found 49% approval for fiscal stimulus based on public works projects, but when asked whether they thought it was good that stimulus spending would be funded by deficit bonds, only 22% agreed while 65% did not.

As the above data suggest, the Japanese people have indicated that they want the Japanese government to focus on economic growth and jobs, but they have consistently opposed the use of deficit spending to pay for economic stimulus. The Japanese public is not, however, opposed to the state's providing social security, economic stimulus, or support for business using public funds. Public support for the former policies is consistently strong, and regarding the last point, during Abe's first government, Asahi found 49% support for Abe's emphasis on support for businesses as part of his growth policies, with only 33% opposed. In theory, the public may also be willing to support higher taxes. A March 2010 Asahi poll asked respondents about the kind of society they wanted Japan to be. Most preferred a high tax, high welfare society: only 10% were absolutely in favor, but 55% opted for "if I had to say, high tax, high welfare." Only 23% said "if I had to say, low tax, low welfare" and only 6% were absolutely in favor of low taxes and low welfare. Similarly, when asked whether it was better to strengthen or weaken progressive taxation, 38% said it should be strengthened, with another 45% opting for "if I had to say, strengthen it." Only 13% said it should be weakened.

Given that Japan's central government has consistently been at or near the bottom of the G7 countries in terms of tax revenues, there's certainly room for the government to collect more, but as with the consumption tax, whether the public will support higher taxes depends entirely on the details: which taxes are being raised, how much they're being raised by, and, most importantly, how the new revenue will be used. Perhaps the public's opposition to public works for most of the 2000s and its longstanding opposition to deficit bonds ultimately stem from skepticism about what the government promises to do resulting from seeing government after government fail to end Japan's economic stagnation. In that sense, the public's enthusiasm for Abenomics looks that much more remarkable.

The next post will shift from thinking about how the Japanese public wants the government to tax and spend to thinking about what the public wants the Japanese private sector to look like, how they think companies should act, and what they think of structural reforms to change the face of Japanese capitalism. 

Waiting for trickle down

Another day, another round of statistics to parse in an attempt to determine whether or not Abenomics is working. The latest are Japan's trade figures, which found that Japanese exports in May yielded 10% more than in May 2012, although the volume of exports fell for the twelfth straight month. The spike in export earnings, however, was matched by a $10 billion trade deficit for May.

What does this all mean for the average Japanese household? Unfortunately, for now, it seems not much.

As Jonathan Soble concludes in the Financial Times:

The prime minister is counting on exporters to divert at least part of their expanded earnings to wage increases and investment in factories and equipment.

But the continued decline in the physical volume of exports has given companies little reason to bulk up their domestic operations, since they do not need new factories if they are exporting fewer goods, even if those goods are earning more yen.

 Thus far, Japanese corporations are still hoarding their profits, holding record amounts of liquid assets according to a Bloomberg report by Toru Fujioka and Mio Coxon. Hence the periodic exhortations by Abe and other government officials encouraging companies to invest more and pay more.

The flip side of higher-than-expected export earnings is higher costs for domestic producers and households dependent upon imported energy, raw materials, and foodstuffs, as Bloomberg's Jacob Adelman and Ichiro Suzuki reported recently. The Finance Ministry's trade report for May (jp) shows just what Japanese are paying more to import. May's 10% increase in the value of exports was matched by a 10% increase in the value of imports. The report breaks down both figures by the contribution of different categories of product to the total figure. In May, Japanese importers paid:

• 12.3% more for foodstuffs than in May 2012 (including 37.2% more for grains).
• 20% more for raw materials including timber (59% more), non-ferrous metal ores, iron ore, and soybeans (38.7%).
• 2.7% more for fuels, although that may reflect the fact that imports of coal, liquified natural gas, and liquefied petroleum all dropped by significant margins, and despite importing 9.8% less LNG than in May 2012, Japan paid 8.2% more for what it imported. Japan also spent 6.4% more on crude oil imports even though it only imported .7% more.
• 8.7% more for chemical products.
• 6.7% more for intermediary goods like steel and other metal products.
• 10.7% more for general machinery.
• 23.7% more for electronics and electrical equipment, including 35.6% more for semiconductors and 58.6% more for communications devices.
• 14.3% more for transportation equipment.
• 12.2% more for miscellaneous products, including scientific instruments, clothes, furniture, and the like.

Of the 10% increase in the cost of imports, MOF's report suggests that at least 40% comes from costlier food, raw materials, and intermediate goods like steel, and fuel. If we assume that "communications devices" refers mostly to mobile phones and other personal electronics, consumer goods may account for 25% of the increase in import costs, with the remaining third going largely to capital equipment. Although we won't know for sure until we see the May industrial production data, it does seem that Japanese producers are paying more for imported inputs but not producing or exporting more goods. And if imported inputs cost more, it seems unlikely that Japanese producers will at the same time pay their workers more. In particular, if small producers find their production costs rise without a corresponding increase in profits, it is hard to see how their workers and therefore Japan's consumers will benefit from a weaker yen.

Because, after all, the firms that employ the majority of Japanese workers earn less from exports  than the large corporations. According to the government's 2012 economic census (jp) roughly 50% of workers are employed by companies employing fewer than thirty people, and 70% of workers are employed by companies employing fewer than 100 people. Only 15% of the workforce are employed by the large corporations that benefit most from the weaker yen. According to data provided (jp) by the Small- and Medium-Sized Enterprises Agency at the Ministry of Economy, Trade, and Industry (METI), in 2012, those large corporations earned just shy of 40% of export earnings, compared to the 15% earned by small- and medium-sized enterprises (SMEs) employing fewer than 300 workers. The remainder and largest share went to corporations composed of small and large firms.

Not only are Japanese workers unlikely to reap the benefits of greater earnings from exports, but they are in all likelihood paying more for food, since, after all, Japan only produces around 40% of its food supply, and is almost completely dependent on imports for wheat and beans (hence the sharp increase in outlays for grain and soybean imports). Perhaps the Japanese diet will change over time to include more foods in which Japan is relatively self-sufficient — especially rice — but in the meantime, Japan's low rate of self-sufficiency in food production will not just contribute to trade deficits but, more importantly, will pinch household finances.

In short, the latest trade data confirms what the latest public opinion data suggests, namely that most Japanese have not personally experienced the Abe recovery. Until the big companies invest more, employ more, and pay more, Abenomics cannot be said to be working for the average Japanese household, whatever the headline figures say.

How long will the Japanese people support Abe (and Abenomics)?

The most remarkable contrast between Abe Shinzō's tumultuous first term as prime minister in 2006-2007 and his current term is the degree to which Abe has been able to rely on significant public support. By this time in his first government — approximately five-and-a-half months after his inauguration — Abe's disapproval rating had surpassed his approval rating and would remain that way en route to defeat in the upper house election in July and resignation in September.

This time around his support has remained buoyant: in the latest round of poll his approval rating is 67% in Yomiuri (jp), 62% in NHK (jp), and 59% in Asahi (jp). The reason for Abe's popularity is apparent. The Japanese public has embraced Abenomics.

As the data from Asahi's monthly polls shows, Abe's popularity overwhelmingly rests on the popularity of his policy program. The Japanese people did not suddenly fall in love with Abe or the LDP in December 2012, but rather responded with enthusiasm when presented with a government that appeared to be serious about overcoming Japan's prolonged economic stagnation. Arguably, Abe has also benefited from lowered expectations, thanks to the poor performance of his DPJ and LDP predecessors, who struggled both to articulate and to execute policies to revitalize and reform Japan's economy. Support for Abe and Abenomics seems to be based less on calculations about the virtues of the "three arrows" when it comes to improving economic conditions and making life better for Japanese households than a kind of naive optimism that the government is working. As Asahi's monthly poll has shown, respondents have wavered when it comes to their belief that Abenomics will result in higher wages and more hiring.

Simply put, the Japanese public seems willing to give Abe the benefit of the doubt.

It bears asking, however, how patient the Japanese people will be. Asahi's June poll contained some hints that the public is beginning to lose faith in Abe's program. When asked whether they believed that Abe's economic policies "hold promise for growth in the Japanese economy," only 51% of respondents said they did, which, while still a majority, is the lowest number since January, when the Japanese people were still figuring out what the Abe government planned to do. In the same poll, when asked whether they've personally felt economic recovery since the outset of the Abe cabinet, only 18% said they had, as opposed to 78% who said they had not. Obviously a sizable portion of the latter are still optimistic that Abenomics will result in recovery, but there does seem to be growing doubts about the efficacy of the Abe government's policies.

The next month may be particularly challenging for Abe. Abe and the LDP are kicking off campaigns for Tokyo assembly elections and next month's upper house elections in the wake of volatile market activity that has raised questions about the efficacy of Abe's policies. But more importantly, during the campaign the Japanese public will probably hear more criticism of Abenomics than during the first six months of the second Abe government. The DPJ may be unable to prevent the LDP from winning a majority in the upper house, but if they hammer Abenomics every day, across the country from now until the election they may sow more doubt among the Japanese people, which, if combined with more market volatility, could seriously undermine Abe's public support. Abe could win the election and still see his approval rating erode. For this reason, perhaps the LDP is right to be worried, as this Asahi article (jp) suggests some members are. Because as Abe's support erodes, the likelihood of intra-LDP turmoil and jockeying for position by potential rivals increases, which could force Abe to change course in the fall as he tries to get pieces of his growth strategy through the Diet.

Everything, in short, depends on retaining strong public support, which in turn depends on Abe's policies delivering tangible results. And if tangible results aren't possible, as some skeptics suggest? Then the Abe government may be shorter lived than seems possible now.

Japan the model?

Joseph Stiglitz has a piece at the New York Times praising Abenomics as "a huge step in the right direction." At the same time, however, he also argues that Japan's malaise was never as bad as the popular narrative suggested. In fact, Japan, Stiglitz writes, should be viewed as a model for the United States as it struggles with its own sluggish economy and mounting inequality.

However, there are a few problems with Stiglitz's account of Japan's recent history and the extent to which it can serve as a model for the US.

First, Stiglitz uses static measurements of inequality in Japan and the US, both in terms of the Gini coefficient after taxes and redistribution and in terms of the average income of the top 10% of earners relative to the average income of the bottom 10% of earners. However, the OECD's data shows that while Japan is more equal than the US, it is significantly less equal than it was in the 1980s. The trend looks the same even if one looks at working age population instead of total population.

When one looks at Japan compared with countries other than the US or with the OECD average, Japan looks considerably less impressive. Here's Japan compared with the G7 countries in terms of its Gini coefficient after taxes and transfers:

Japan's performance is not quite as bad as the US and the UK, but it's not substantially better either.

In short, it's a bit puzzling for Stiglitz to praise Japan as a model for the US on equality grounds, especially since concerns over inequality have been strong over the past decade in Japanese politics.

That brings me to the second question I have about this article. Stiglitz wants to reexamine the "popular narrative" of Japan's stagnation but he doesn't indicate with whom exactly he is arguing. By now, the idea that in per-capita terms Japan's "lost decades" haven't been quite so gloomy seems to have at least made inroads in non-Western discourse about Japan. However, as noted above, arguably the Japanese people themselves still believe that the "lost decades" were in fact lost. How else can one explain the broad public support for the Abe government's economic program? Without a popular narrative of stagnation in Japan there is no Abenomics.

Third, Stiglitz is too quick to praise the Abe government for taking on structural reform. The "third arrow" of structural reform remains nothing more than rhetoric — and will continue to be nothing more than rhetoric at least until the fall's special session of the Diet. Given that Japanese governments have been seeking to promote the "structural transformation" of the Japanese economy since at least the 1980s and given the LDP's historical ambivalence towards structural reform, one has reason to be skeptical, at least for now.

So is Stiglitz right to present Japan as a model for the US to follow? Both in terms of Japan's past performance and the current performance of the Abe government there are reasons to refrain from putting Japan on a pedestal. Even if Japan's economy is not quite as bad as is sometimes argued, it is far from being a shining example of coping with stagnation. The quality of life for many Japanese has worsened, particularly for those living outside of Tokyo. Young Japanese still enter a workforce in which they have limited career opportunities if they fail to secure regular employment upon graduation. As Stiglitz himself acknowledges, poverty among the elderly is not inconsiderable. The US shares many of these problems, of course, but given how much Japan has struggled, not entirely successfully, to preserve the quality of life its citizens once enjoyed Japan is still more a cautionary tale than a model. For now, coming after years of halfway measures or inactivity by the Japanese government Abenomics is perhaps best described as a last-ditch effort to revitalize the Japanese economy rather than as a decisive program to overcome stagnation. 

The power of positive thinking?

Prime Minister Abe Shinzō Abe spoke with Jonathan Tepperman, managing editor of Foreign Affairs this month in an interview published under the heading "Japan Is Back."

The interview is fairly comprehensive, discussing Abenomics and Japan's economic problems, history issues, territorial disputes, the constitution, and security policy. Tepperman was not shy about confronting Abe, especially when it comes to Japan's imperial past.

The interview provides another glimpse at how foreign policy narratives coalesce. Reflecting on his first term as prime minister and discussing what he is doing differently this time, Abe said, "I have...started to use social media networks like Facebook. Oftentimes, the legacy media only partially quote what politicians say. This has prevented the public from understanding my true intentions. So I am now sending messages through Facebook and other networks directly to the public."

In other words, Abe is sensitive to the need to control the narrative at home and abroad. The narrative that Abe is trying to establish is that no problem is so daunting that Japan cannot overcome it. While he does not  say that "Japan is back" in this interview, that was the title of the speech he gave at CSIS in Washington, DC in February. As in that speech, the challenge for Abe is to acknowledge that his country faces serious difficulties — how else could he justify his program? — but then to show that Japan is more than capable of overcoming them. As Abe says, "I know that the current situation is difficult, and the world economy will have ups and downs. But that is the mandate I was given, and we are elbowing our way through."

Of course, in propagating this narrative, Abe has help from the "legacy media" around the world. For example, the cover of The Economist this week features a soaring Abe — garbed in Superman's tights — flanked by fighter jets.

Abe is determined to project an air of inevitability about his policies. Of course, in monetary policy, projecting an air of certainty may signal the credibility of the Bank of Japan's commitment to a higher rate of inflation, so perhaps there's something to Abe's positive thinking. As The Economist writes in its briefing, "Promoters of Abenomics say that changing perceptions will create a virtuous circle. Bigger company profits will engender wage rises, which will boost consumption, which will lead to renewed business investment, which will lead to profits."

But one must be sensitive to the fact that this is all an exercise in narrative formation. Though Abe has promised to "elbow through," he has not in fact done so yet. As Michael Cucek shows, there are competing narratives even for the first quarter GDP figures that are being hailed as early indicators of the government's success. There are still blanks the government must fill in when it comes to its growth strategy. The demographic challenge continues to loom, and will not be elbowed through so easily, unless Abe is sitting on a plan for mass immigration. The point is not that there aren't encouraging signs or that Abe isn't in a favorable position to make progress, but rather that the "Japan is back" narrative requires minimizing or ignoring the challenges.

There is a bigger question of what exactly it means that Japan is "back." Will it be more assertive diplomatically or militarily? Will it spend more on its military? Will it remove the remaining restraints on its use of force at home and abroad? Abe gave some hints in his CSIS speech — "A rules-promoter, a commons' guardian, and an effective ally and partner to the U.S. and other democracies, MUST Japan be" — but it is still unclear what Abe's restored Japan would do differently, especially given that the Obama administration, "pivot" notwithstanding, has been exceedingly cautious in Asia. In other words, no matter how successful Abe's economic program, Japan will still be hemmed in by an ally that seems primarily interested in regional stability, by neighbors that distrust an assertive Japan, and not least by the Japanese public, which is not entirely keen on lifting all restraints on Japanese security policy.

These concerns, taken together with lingering questions about Japan's economy and whether Abenomics can produce sustainable growth, suggest caution is still in order.

Don't declare victory for Abenomics yet

With the yen's falling to below ¥100/$1 for the first time since 2009 and the Nikkei’s posting five-year highs, analysts have begun declaring victory for the Abe administration’s campaign against deflation and slow growth. Paul Krugman, the intellectual godfather of Abenomics, has not quite begun his victory dance yet, but he is optimistic that under President Kuroda Haruhiko the Bank of Japan has credibly signaled that it will continue monetary expansion until it reaches its 2% inflation target.

But it is far too early to draw conclusions about the success of Abenomics — given that deflation continues — and there remain a number of unanswered questions surrounding the Abe government’s economic program.

Ultimately, the success of an economic program must be measured not just in terms of corporate balance sheets, but also in the economic wellbeing of average citizens. If wages remain stagnant or if Japan experiences a jobless recovery, can Abenomics be declared a success? What will Abenomics mean for the Japanese worker? As a New York Times article by Hiroko Tabuchi and Graham Bowley suggests, it remains to be seen whether monetary stimulus will translate into wage hikes or higher employment — though the government is trying to encourage corporations to hire more workers and raise wages. It may also depend on whether the government is able to reverse the rise of Japan’s non-regular workforce, the short-term contract workers who enjoy few benefits, little to no job security, and virtually no opportunities for advancement. Non-regular workers comprise between a third and a half of the labor force, and as the government acknowledges, the non-regular sector constitutes a tremendous waste of human capital.

However, without a plan to overhaul the Japanese labor market, the danger exists that exhortations to raise wages will result in corporations’ raising wages for regular workers but maintaining or cutting low wages for non-regular workers, thereby deepening the inequality that exists between regular and non-regular workers. The Abe government and the LDP are not blind to this problem — last month, for example, LDP Vice President Komura Masahiko said (jp) that more had to be done to improve the status of non-regular workers and provide equal pay for equal work — but thus far it is not clear how the government plans to resolve it. (For more discussion of the problems in Japan's labor market, see here.)

The same goes for gender balance in the labor force. Noah Smith (a onetime guest blogger here) has identified how underutilized women are in the Japanese labor force, and expressed his hopes that the Abe government will act to increase female participation in the workforce. Abe has, to his credit, said the right things about gender equality.In his 19 April speech at the Japanese National Press Club (jp), Abe spoke of gender equality as not a social policy issue, but as a central piece of his growth strategy. The reality is, however, that we just don’t know what he will be able to do to change the role of women in the economy. Pretty much the only specific proposal Abe mentioned in his speech was the proposal to increase the number of women in corporate management positions, but that proposal affects a fairly small number of women. Abe is not the first politician to pledge to do something about gender inequality — for the past decade Japan has had a cabinet-level minister of state for gender equality — but we still don’t know what Abe will do to succeed where previous governments have failed.

Reforming the labor market is part of the so-called “third arrow” of the Abe program, the Abe government’s growth strategy. Once again, Abe’s rhetoric is at least encouraging — talk about public-private partnerships to move Japan from inefficient to high-value-added sectors — but until the government’s detailed plans are released in June, it is difficult to say anything conclusive about whether the Abe government will succeed at transforming Japan’s economy. It is worth noting that the Abe government is not the Koizumi government redux: whereas Koizumi talked of moving from the public sector to the private sector, in his speech last month Abe stressed the role of government in promoting growth in new sectors, industrial policy for the new century, with all the risks that come with efforts by government to pick winners. 

Abenomics (and the latest round of quantitative easing in the US) has raised fears of currency wars breaking out between Japan and its competitors. The effects of the BOJ’s stimulus program are already being felt outside of Japan. South Korea’s central bank has already moved to cut rates in light of the ongoing decline of the yen against the won, as did Australia’s central bank earlier this week. European exporters — especially Germany’s — are feeling the pain from the yen’s decline against the euro. Of course, no government will admit that a currency war is afoot, but if other governments engage in competitive devaluation with Japan the benefits to Japanese exporters from a weaker yen will be muted (if they aren’t already muted). Though the G7 finance ministers' meeting in the UK this weekend did not necessarily single out Japan for criticism, the fact that the meeting was held does suggest that Japan's policies are under close scrutiny abroad. 

There are also lingering questions about Japan’s fiscal situation. With the BOJ stepping in to buy government bonds, the Japanese government will continue to be able to borrow without having to worry about rising interest rates. But the risks of Japan’s ever-growing debt remain — and if the BOJ has in fact succeeded at convincing market actors that it is committed to raise inflation, there is the risk that it will be unable to control inflation once it has met its target, hastening the day when interest payments will rise and break the government’s budget. The government is in a race against time. It needs to trigger sustainable long-term growth that can raise tax revenue before interest rates rise. The Abe government has indicated if economic conditions are still sluggish, it will delay the consumption tax increase passed under the Noda government, thereby postponing a useful means of closing the government’s annual deficit of 10% of GDP.

Finally, the question of Japan’s demographics looms over the debate about Abenomics. Edward Hugh offers a sobering account of how demographics may forestall the Abe government’s program. Hugh basically asks whether Japan has experienced a prolonged balance-sheet recession and is in a liquidity trap, as argued by Krugman, Richard Koo, and others, or whether Japan’s persistent demand shortfall is the result of a “shrinking population trap.” Hugh is skeptical that either fiscal or monetary policy will fix Japan’s economy and that the government’s monetary policy experiment risks triggering capital flight as elderly Japanese investors seek higher returns elsewhere. Hugh’s post is lengthy and I cannot do it justice with a short summary, but it should be taken into account when deciding whether Abenomics has succeeded.

The point is that it is impossible to know whether Abenomics has succeeded until we actually see the whole program put into action. Generating inflation is, as the Abe government says, just one arrow in a comprehensive plan to rejuvenate Japan’s economy. Stock market gains and a weaker yen may be helpful indicators but they should not be mistaken for signs for change in the real economy. Similarly, promising rhetoric about reform is encouraging, but after decades during which many Japanese politicians have talked a lot about reform but failed to follow through, it seems that a “wait-and-see” attitude is still appropriate. 

Abe probably has about as favorable a political environment as a Japanese prime minister could ask for — dysfunctional opposition parties, few challengers within the LDP, and high public approval ratings — suggesting that he may well be able to follow through on his ambitious agenda. That being said, if Abe cannot reverse Japan's economic woes even with all of these factors working in his favor, I have to wonder if anyone can.