How Shinzo Abe’s ‘three arrows’ vision revived a destructive Japanese economy


Shinzo Abe’s policies failed to push up real wages as deflation gave way to rising prices.GIAN EHRENZELLER/The Associated Press

Shinzo Abe often formulated his economic vision as a policy bundle of ‘three arrows’: an integration of fiscal stimulus, ransom money and structural reforms that together would lift Japan out of its long-standing stagnation.

The former prime minister drew on the Japanese folktale of three brothers who each received an arrow. Separately, their arrows can be easily broken off; together the arrows—and the brothers—were unbreakable.

Mr Abe, who was murdered Friday, referred to the three-arrow reference as illustrating the undeniable logic of what came to be known as Abenomics. That resemblance proved strikingly relevant, but not in the way he’d hoped.

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Two of its arrows, launched in 2013, hit home. Massive fiscal stimulus has boosted Japan’s growth. Negative interest rates and quantitative easing eventually overcame the ongoing deflation caused by the real estate collapse in the 1990s. But the third arrow fell short: Abe’s government failed to fully counteract the productivity-decreasing effects of an aging population. And, as the parable indicates, two of the three arrows aren’t enough — a lesson that other countries, including Canada, should heed.

According to David Edgington, professor emeritus at the University of British Columbia and former director of the school’s Center for Japanese Research, Abe’s policies failed to push up real wages as deflation gave way to rising prices.

“While inflation picked up a bit, most of the extra money put into government bonds by the Bank of Japan went into the stock market,” he said, adding that the country became a much more unequal society under Abenomics.

Yet there is no doubt that Mr. Abe faced a huge economic challenge when he returned to office in 2012. The Japanese economy came to a standstill in 2011. Prices fell, with deflation of 0.27 percent. And GDP growth remained flat at 0 percent.

Against that background, Mr Abe tried to revive the Japanese economy.

In the same way that he marketed his economic policies to the Japanese people by taking advantage of the country’s folklore, Mr. Abe embraced Western-style showmanship to present Japan’s revival to the world: “Buy my Abenomics he admonished during a speech at the New York Stock Exchange in 2013.

As a mix of economic policies, Abenomics was in fact quite conventional. The idea of ​​using monetary and fiscal policy levers to avoid deflation, while pursuing the promise of supply-side reforms aimed at moving labor and capital to more productive parts of the economy, has not been settled in most developed countries. radical.

Yet the policy marked an abrupt break with Japanese economic orthodoxy that had prevailed for the past two decades before Mr Abe began his second term in office. Most importantly, the Bank of Japan had long argued that deflation was largely beyond its control, a byproduct of an aging population, and that the best it could do was provide a supportive interest rate environment while the government did the hard work to take measures. Japan’s real potential growth.

In contrast, under Abenomics and the new Bank of Japan governor Haruhiko Kuroda, the central bank unleashed an era of unprecedented easing. It has adopted a 2 percent inflation target for the first time. And it injected liquidity into the economy through quantitative easing, introduced negative interest rates and declared its willingness to let inflation miss its mark. (All the measures that many of the world’s major central banks eventually came to take, by the way.)

“For years in Japan you had relationists banging against the walls and pointing out things that American and European economists said: without success,” said Tobias Harris, a Washington-based Japan analyst and author of The iconoclasta biography of Mr Abe published in 2020.

“Abe eventually became a vehicle for these outsiders looking for someone to carry their ideas about fighting deflation.”

By the time Mr. Abe stepped down in 2020 due to health concerns, Abenomics had delivered decidedly mixed results for the Japanese economy.

Prices initially responded well to the Bank of Japan’s aggressive policies, with inflation at 3.7 percent in 2014 when the country enjoyed record employment. However, an increase in Japan’s consumer tax that year pushed spending down and plunged the country into recession. It also cost the government and the central bank credibility in their fight against deflation. While inflation remained largely positive before the pandemic, it never again met the bank’s target and rarely exceeded 1 percent.

The supply-side reforms promised by Abenomics weren’t much, either. He liberalized the country’s electricity market and revived the Trans-Pacific Partnership trade deal, but did not move forward with deeper changes.

“Abe was able to offer many carrots to Japan, but he was always reluctant to use sticks to encourage them to change their behavior in a way that furthered his policy goals,” Mr Harris said.

That said, Mr. Harris that Abenomics has caused a lasting philosophical shift on the part of the Japanese government. On the world trade front, the country is willing to play a role as a leader in integration that it was previously unwilling to do.

But Japan’s structural problems are not unique. Concerns about deflation are countered by massive fiscal and monetary stimulus. Continued weak productivity growth and increasing pressure from an aging population. That describes not only Japan, but Canada less than two years ago.

In any case, deflation proved to be a fleeting concern as inflation has surged in 2021 and this year. But productivity remains a central challenge for Canada, especially as the baby boomers are fully retired.

Trevor Kennedy, vice president of trade and international policy at the Business Council of Canada, said every economy in the world, including our own, could learn from Japan’s experience with Abenomics.

“We should all really pay attention to Japan, including how it is coping with an aging population,” he said. “We can all have a similar future, especially on the demographic side.”

In the most recent federal budget, the Canadian government painted a reassuring picture of a protracted decline in the country’s debt burden. But that scenario is based on a sharp and sustained increase in productivity that has so far not been supported by a major policy change.

Following Abenomics, federal liberals have run significant deficits since taking office, in 2022 and beyond, even though the economy is clearly overheated. At the moment, however, there is no sign of the kind of broad tax hikes Japan has implemented to reduce its national debt.

Ottawa has pushed immigration goals and laid the foundation for national subsidized childcare. Both measures should boost the labor force, although their effect on productivity is less clear. Canada has surpassed Japan on those two fronts.

But there’s at least one arrow flying in Japan that’s still stuck in Canada’s quiver: a concerted effort to keep older workers in the labor pool.

One of the first steps federal liberals took when they took office in 2015 was to cancel the planned phasing-in of federal old-age benefits to age 67 from age 65, starting in 2023. That policy would both ease fiscal pressure on Ottawa. as encouraged older Canadians to stay in the workplace.

Japan is moving in the opposite direction too late. The official retirement age for civil servants will gradually increase from 60 to 65 in 2031 from next year. The retirement age for private sector employees will in fact be moved to 70 and there are plans to cut benefits for 60-64 year olds .

All these changes are happening relatively quickly. Workers in their fifties and sixties, not just those at the beginning of their working life, are seeing the terms of their retirement rewritten. That could be the most fundamental lesson from Abenomics: The longer the delay, the greater the pain.

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