Kenneth Rogoff writes: Japanese Prime Minister Shinzo Abe’s recent policy decisions – to increase monetary stimulus dramatically, to postpone a consumption-tax increase, and to call a snap election in mid-December – have returned his country to the forefront of an intense policy debate. The problem is simple: How can aging advanced economies revive growth after a financial crisis?
It is now clear that the first round of Abe’s reforms – known as “Abenomics” – has failed to generate sustained inflation.Rogoff aargues that the “three arrows” of Abenomics 1.0 basically had it right: “whatever it takes” monetary policy to restore inflation, supportive fiscal policy, and structural reforms to boost long-run growth.
The central bank, under Governor Haruhiko Kuroda, has been delivering on its side of the bargain, the other two “arrows” of Abenomics have fallen far short.
There has been no significant progress on supply-side reforms, especially on the core issue of how to expand the labor force. With an aging and shrinking population, Japan’s government must find ways to encourage more women to work, entice older Japanese to remain in the labor force, and develop more family-friendly labor policies. Above all, Japan needs to create a more welcoming environment for immigrant workers. Germany is doing this. Japan begaan with emphasis on the SUmmer Olympics in Tokyo in 2020.
Overall progress has been slow. Japan desperately needs more nurses and hospice workers to care for its aging population, but bureaucratic and political resistance to immigration is deeply entrenched.. Without structural reforms, especially of the labor market, Abenomics cannot succeed in the long run.
The timing of the April 2014 consumption-tax hike (from 5% to 8%) was also unfortunate. It would not have been easy for Abe to postpone the move, given that it had been locked in place by broad-based political agreement before he took office. But the government could have engaged in more aggressive fiscal stimulus to counteract the hike’s short-term effects. Instead, two successive quarters of negative growth have had a dispiriting psychological impact.
True, the slump is partly an illusion: the earlier boom was fueled by Japanese households’ effort to beat the tax by front-loading purchases of consumer durables – a nuance that seems to have been lost in the public debate. But the big picture remains: Abenomics so far has failed to turn around a deflationary mindset.
Mind you, Japan’s outsize government debt and undersize pension assets are a huge problem, and only the most reckless and crude Keynesian would advise the authorities to ignore it.
Fiscal sustainability requires an eventual rise in the consumption tax, and of course Japan should not wait until international investors start doubting its willpower. The problem is in the timing and tactics. Postponing the second consumption-tax increase seems like a good compromise between pushing Abenomics to escape velocity and maintaining long-run credibility.
Demand policies alone will not alone prevent two more lost decades, much less guarantee two golden ones.
Japan’s experience holds important lessons for Europe, the main one being that stimulus policies, though necessary in the short run to support demand, cannot address long-term structural deficiencies. If Abenomics 2.0 fails to embrace deep structural reform, it will fare no better than the original.
