Japan’s Economic & Foreign Policies

In a sort of year-end look back on Prime Minister Abe’s record and on Japan’s current situation, Reuters Japan has asked for action points or policy suggestions regarding economic and foreign policy.  Here are the responses I offered.

1. Economic policy

To address the problems of the Japanese economy, all three arrows of Abenomics are necessary. The monetary arrow was shot well; but a big fiscal arrow was aimed in the wrong direction; and the structural reform arrows have hardly been taken out of the quiver.

When the new monetary policy (Quantitative and Qualitative Easing) was enacted in early 2013, the intended effects showed up immediately in the financial markets: an increase in stock market prices and an increase in the price of foreign exchange. Although both effects worked to stimulate demand for Japanese goods, the boost to GDP turned out to be short-lived.  Growth faltered after April 2014. The most obvious explanation is the increase in the consumption tax from 5% to 8%.  As many had warned, it apparently turned expansion into contraction.

It is true that the long-run debt situation in Japan is unsustainable. But a further large increase in the consumption tax before the economy has recovered is not advisable. Much better would be to enact a 20-year schedule of very small annual increases in the consumption tax. This would assure long-run fiscal sustainability and investor confidence (thus continuing to keep real interest rates low) while still helping to maintain positive expected inflation and growth in the short-term.

2. Foreign policy.

Moving beyond the “history issue” is important both for diplomatic reasons (if Japan wants a seat on the UN Security Council, for example) and for economic reasons (frictions with other Asian countries have become a serious obstacle to business).  But moving beyond the history issue requires Japan to face up to some unpleasant historical realities that it has not wished to confront.

Other countries also have dark chapters in their past, but are readier to acknowledge them. The US and European countries were guilty of subjugating native peoples in previous centuries, which took such forms as slavery and high rates of mortality, but today nobody defends that history. If Germany had not already thoroughly apologized for the historical sins of World War II, it could not today be the economic and political leader of Europe. In my view, Japan should both re-commit to the peace constitution and decide henceforth to avoid actions that are unnecessarily provocative to the Asian neighbors that suffered so much earlier in the 20^th century.

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