Japanese Polity Weighs on Abenomics
Lalit Joshi

The next round of elections to the Upper House of Parliament, the Diet in Japan will be held on 10 July. The Diet, divided into an Upper House or the House of Councilors and a Lower House, the House of Representatives, has a varying schedule of elections. The House of Councilors has 242 members, who are elected for six-year terms. Elections are held for half of all upper house seats every three years and will now be held for 121 seats.The members of the House of Representatives are elected for a four-year term.

The four main political parties in the fray have revealed their campaign pledges but Abenomics, the economic policy package championed by Prime Minister Shinzo Abe seems to be the main topic of poll campaigns. The ruling party seeks a mandate for its economic policies amid opposition criticism that the lives of the ordinary people are not improving. Mr Abe has opened the campaign with a pledge to proceed with his "Abenomics" plan to revive the economy and pull the country out of the slump. Katsuya Okada, head of the main opposition Democratic Party (DP) in a speech has said "We will stop the reckless Abe politics and change its course and bring in a new wind into Japanese politics".

The ruling Liberal Democratic Party (LDP) claims success of Abenomics in the increase in number of job-holders by 1.1 million and keeping average wage hikes at 2 per cent level for three consecutive years1, whereas the DP has pointed to the fact that hiring of more non-regular workers by companies and the decline in real wages, actually signifies failure of the policy adopted by Prime Minister Abe. In their pledges, both the LDP and the DP have promised to implement “equal pay for equal work” system to eliminate or reduce wage disparities between regular and non regular workers.

The 10 July polls are also the first nationwide elections since voting age was lowered to 18 years from 20, a step aimed at encouraging younger generation to vote. The impact of addition of 2 million young voters, that is about 2 per cent of the total voter population will be closely watched.

Japan today with 127 million population, third largest GDP in the world at 4.1 Trillion USD, per capita income of USD 32500 (GDP terms) and annual GDP growth at 0.5 percent in 2015 is a world power to reckon with. However, having fought deflation for more than two decades, it remains mired in weak growth despite repeated attempts to revitalize the economy. Abe’s three-pronged approach, dubbed "Abenomics," combines fiscal expansion, monetary easing and structural reforms and aims at boosting domestic demand and gross domestic product (GDP).

Just before the elections, the government has postponed a consumption tax hike until October 2019 in contravention to the major economic policy reform measures announced in December 2012. A careful thought and planning seems to have gone into the decision making which aims at minimizing the negative impact of tax raise on the House of Councilors election due in July. Incidentally, the extended time limit also coincides with the completion of the current government’s term in 2018. However, the amendment has raised concerns in the market about the government’s inability to undertake fiscal reconstruction and makes Mr Abe’s task even more difficult.

The previous consumption tax hike was imposed by the present government in 2014. A second tax hike by the same government is always a very difficult proposition however strong the reasons may be since the common man hates any increase in taxes. Some economists also believe that raising taxes earlier has worked at cross purposes with Abenomics. The increase in the national consumption tax from 5 to 8 per cent depressed consumer spending.

The fiscal stimulus began in 2013 with direct government spending focused on building infrastructure projects, such as bridges, tunnels, and earthquake-resistant structures. The Bank of Japan (BoJ) has injected massive liquidity into the economy. The government also introduced negative interest rates to spur lending and investment in January 2016 but that too has caused opposite effect so far. The banks are having a hard time finding low-risk businesses willing to borrow money and the blue-chip companies have retained such huge internal reserves that they don’t need bank loans for capital investments. Moreover, with exports stagnating and domestic consumption sluggish, the private sector is far from eager to make capital investments.

The International Monetary Fund (IMF) has weighed in saying that while the BoJ’s policies have helped to revitalize the economy, more needs to be done. The yen is trading at a two-year high against the US dollar. The IMF has recommended additional reforms for Japan to overcome deflation. The Western leaders are concerned about growing government debt but may be leaving Japan to test a fiscal stimulus. The outcome of Japan's experiment also holds implications for other economies that are struggling with deflation and low growth.

Truly speaking, Abenomics has not delivered the desired results. Since Abe took power in 2012, the economy has grown just 2.4 per cent, barely returning to its 2008 size. Despite massive government stimulus, growth is tepid and inflation has continued to fall on the back of low global oil prices. The household consumer spending in real terms, which grew by more than 2 percent in fiscal 2013, helped by a last-minute buying binge in anticipation of the consumption tax hike, contracted by about 2.5 percent in fiscal 2014. The consumer price index growth rate for fiscal 2015 came down to around zero2. This was in stark contrast with the period of high economic growth in the 1960s when public investments stimulated household consumer spending, private housing investments and corporate capital investments in the private sector raising GDP.

One of the causes could be Japan’s demographics that pose a difficult future. With an alarmingly low birth rate, Japan could lose more than a third of its population over the next 50 years and the working population has contracted by 6 per cent over the past decade3. As part of Abenomics, Abe has focused on raising the birth rate and expanding social security. He has also created a new cabinet post devoted to reversing Japan's demographic decline. Columnist Martin Wolf in the Financial Times has said, “Japan's labor force performs well, with growing productivity and just 3.1 percent unemployment, but the country will find it difficult to sustain any sort of growth with its rapidly shrinking population”.

Japan is an economically mature country and any strategy of making the economy grow will take time. The implementation of structural reforms that include, slashing business regulations, liberalizing the labor market and agricultural sector, cutting corporate taxes, and increasing workforce diversity is not an easy task for any government.

The Japanese manufacturing industry is lagging behind its European and American counterparts in the on-going Industry revolution aimed at developing unmanned production processes with full utilization of the Internet and artificial intelligence4. In January 2013, the government created the Council for Industrial Competitiveness, handing it the heavy responsibility of drawing up a prescription to restore the competitiveness of Japanese industry, which has of late lost steam. Particularly conspicuous is a decline of the Japanese electronics industry.

If the government invests in infrastructure development preparing for great earthquakes, human resources development and basic research for aerospace, biotechnology, information and communications, and other industrial sectors with great growth potential, companies will be encouraged to invest their cash reserves of $3.6 trillion. A package of the tax hike postponement and smart fiscal spending programs will revive Abenomics, paving the way for Japan’s full revitalization5. Japan is also looking up to the positive effects of conclusion of the Trans-Pacific Partnership (TPP) treaty with the United States and eleven other Pacific Rim countries. Japan's agricultural industry though has lobbied against the deal, objecting to the removal of high tariffs and other protective measures. Health-care providers and other sectors have also complained of the deal's potentially adverse affects.

In the July elections, the opposition wants to keep the ruling bloc from gaining ground in the upper house, where they are short of the two-thirds mark though the ruling coalition holds a two-thirds majority in the more powerful lower house. Besides floundering Abenomics, the Tokyo Governor’s resignation over the misuse of political funds may also cast a shadow on the performance of LDP in the House of Councilors election. Earlier, in January the economy minister Akira Amari had resigned over money for favors revelations.

In the current scenario, winning maximum seats in the House of Councilors election in July is very important for Abe. The result will convey the extent of support Abenomics has among the Japanese. It will also define the roadmap for the future governance and LDP’s action plan for the next elections to the House of Representatives. If Mr Abe fails to break away from deflation by September 2018, when his term as president of the ruling LDP expires, his administration may come to an end. The opposition has also declared its intention to block any attempt by Abe to amend Article 9 dealing with the security law of the Constitution. Amendment of the security law is an important objective of this government. By postponing the tax hike by 2½ years, Japan can expect to see an economic upturn ahead of the 2020 Tokyo Olympic Games, which in turn will help the nation exit deflation. In the worst case, Japan may plunge into political turmoil, with constitutional amendment proposals losing momentum.


  1. The Yomiuri Shimbun, 17 June 2016
  2. Takamitsu Sawa, President Shiga University, Japan, 13 Mar 2016
  3. Article Is Abenomics dead? dated 15 April 2016, , British Chambers of Commerce, Japan report
  4. Takamitsu Sawa, President Shiga University, Japan, 13 Mar 2016
  5. Kevin Rafferty, Abenomics RIP, 14 Mar 2016

Published Date: 28th June 2016, Image Source: http://www.thetimes.co.uk
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of the Vivekananda International Foundation)

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