Foreign Affairs’ Richard Katz: Why Abenomics is Voodoo Economics

I have written extensively about the Japanese government’s Hail Mary Pass in the form of Friday’s QE 2.0 last weekend, now this article from the Richard Katz at the Foreign Affairs entitled ‘Voodoo Abenomics: Japan's Failed Comeback Plan’ provides helpful insights of some of the micro-defects of Abenomics: particularly the focus on short term superficial gains at the expense of instituting real reforms 

1 Abenomics fails to ease rigid labor laws (all bold emphasis mine)

Japan’s rigid labor laws make it nearly impossible to lay off permanent employees in downtimes, companies now tend to fill open slots with part-time or temporary workers, and they typically pay them a third less. Today, 17 percent of Japanese men aged 25 to 34 hold such second-class jobs, up from four percent in 1988. Low-paid temps and part-timers now make up 38 percent of Japanese employees of all ages and both sexes -- a stunning figure for a society that once prided itself on equality.

Prime Minister Shinzo Abe promised to revive Japan when he took office in December 2012, and he often boasts of all the jobs he has added since. But all the gains have been for irregular work; regular jobs have fallen by 3.1 percent. Consequently, the average wage per worker in real terms has fallen by two percent under Abe. No wonder consumer spending is anemic…

What counts as a personal tragedy for each worker translates into an economic disaster for Japan as a whole. The country’s reliance on irregular workers eats away at its main resource: its human capital, meaning the skills that enable workers to use the most up-to-date technology and methods. Because irregular workers don’t acquire the skills employers seek, the longer they stay stuck in their dead-end jobs, the harder it becomes to ever get a regular one -- and the more human capital erodes. The low marriage rate among irregular workers accelerates Japan’s demographic decline. That, in turn, amplifies economic strains, such as the shrinking number of workers to support the growing ranks of retirees…

2 The policy of inflationism supposedly aimed at surreptitiously boosting ‘real wages’ fails due to real micro problems.

Since 1997, wages in Japan have fallen by nine percent in real terms. They are expected to continue falling, despite highly advertised wage hikes by a few hundred giant firms whose profits from overseas sales have been artificially boosted by the weaker yen. Abe claims that wages will rise once workers and firms come to expect inflation. In reality, deflation is not the cause of Japan’s problems but a symptom. Trying to cure Japan’s malaise by generating inflation is like trying to cure a fever by putting ice on the thermometer

3. Once again, invisible confiscations—arbitrary confiscation for the benefit of the few (here the external transfers)…

Unfortunately, most of that increase stems from a 25 percent drop in the value of the Japanese yen, which raised prices on imports of everything from electronic gadgets to food to raw materials such as oil, as well as on products made from those imports. The devaluation effectively transfers income from Japanese consumers and firms to foreign oil sheiks, farmers, and manufacturers. Besides, since the yen has more or less stabilized, the inflationary effect of the depreciation is likely to ebb…

The primary beneficiary has been no more than the government. Boosting the stock market and real estate represents hidden transfers to these domestic vested interest groups at the expense of the yen holders.

4. Abenomics is an example of the explosion of the populist myth of where cheap currency equals strong exports

Currency depreciation can cheapen the price of exports in overseas markets, helping a country export more. But the flip side is that imports become more costly, and in Japan’s case, the harm suffered by consumers and companies has vastly outweighed the benefits enjoyed by exporters. The real volume of exports -- tons of steel, number of cars, and so on -- has barely risen since the start of Abe’s term.

It’s really more than this: it’s about distortion of the pricing mechanism that leads to the skewing of economic calculation by commercial participants and its attendant discoordination of the market process, as well as, the loss of purchasing power by the consumers.

4. Pork Barrel aspect of Abenomics does not stimulate consumers.

The second arrow, fiscal stimulus, was supposed to give people the money they needed to spend more. Either tax cuts or the right kind of spending could do the trick. Yet while Abe has put one foot on the gas pedal, he has put a heavier foot on the brake. His new spending measures, mostly of the pork-barrel variety, have been more than offset by his raising of the consumption tax from five percent to eight percent this past April. Another hike, to ten percent, is scheduled for October 2015. How can people spend more when Abe leaves them with less money to spend?

5 Abenomics has been more of the same: resist introducing competition by adapting protectionist policies that favors entrenched crony interests…

But the lion’s share of the economy is domestically oriented, and much of it is shielded from both international and domestic competition by domestic regulations and cartel-like business practices. In these sectors, Japan lags far behind its peers. To take one tiny but characteristic example, regulations currently restrict online sales of nonprescription drugs because if unrestricted, such sales would hurt brick-and-mortar pharmacies; one corporate member of an Abe advisory panel on reform quit when bureaucrats emasculated his proposal to lift this regulation.

Or look at Japan’s inefficient dairy industry, which the government has refused to open up to foreign competition -- holding up negotiations for the Trans-Pacific Partnership, a proposed free-trade deal among 12 countries, in the process. Japan’s milk market isn’t even open to domestic competition. The powerful farm cooperative known as Japan Agriculture uses its stranglehold on distribution to protect inefficient farmers in the main part of Japan by hindering shipments of milk from the larger, more efficient farms in the northern island of Hokkaido. Tokyo turns a blind eye because Japan Agriculture is a powerful electoral ally of Abe’s political party and because rural voters are disproportionately represented in the Diet. A real reformer would scrap Japan Agriculture’s exemption from the Antimonopoly Act, a law passed in 1947 designed to encourage competition, and use the act to crack down on such practices.

6 Abe’s proposed reforms are as good as media hype. In substance these proposals protects the status quo and amplifies the doling out of political favors to some groups at the expense of the rest…

His proposed agricultural reform, for example, would merely replace a subsidy focused on production levels with one focused on income, while giving no incentives for tiny inefficient farms to consolidate or for agribusiness to expand sufficiently. His talk of increasing career opportunities for women omits any mention of the main obstacle: that most of them get taken off the promotion track once they become pregnant. And while Abe has raised taxes on consumers, he is talking about cutting taxes on corporations. His claim that this would promote investment is false, as even the Ministry of Finance acknowledges. Japan’s corporate giants already have far more cash than they choose to invest at home. But a corporate tax cut might raise stock prices and gain Abe more corporate support.

His plans for the electricity sector, meanwhile, would ostensibly allow room for newcomers by separating generation from transmission. In reality, the existing regional electric monopolies will be allowed to form a holding company that controls both parts. He has done nothing to force rectification in the nuclear utilities, some of which falsified their safety records with the connivance of the regulators in the lead-up to the 2011 Fukushima nuclear accident. As a result, a justifiably distrustful population has so far blocked a restart of the reactors that previously supplied a third of the country’s electricity. The resulting electricity shortfall and higher energy costs are propelling automakers and other efficient exporters to shift even more of their capacity overseas. All told, the third arrow has turned out to be nothing more than a bunch of nice-sounding goals for growth, job creation, and investment -- without a plan for achieving any of them.

The most obvious litmus test of the third arrow is Abe’s handling of the negotiations for the Trans-Pacific Partnership. In recent months, these talks have stalled largely because Abe’s team has insisted on keeping tariffs and other barriers high in a few agricultural sectors (such as beef, dairy, and pork) that employ less than 100,000 households but where high prices boost Japan Agriculture’s income. As of mid-May, an agreement had not been reached. Even if a deal is eventually signed, Abe’s capitulation to small interest groups means that it won’t be used as a catalyst for domestic reform, unlike the way South Korea used its trade agreements with the United States and Europe, and as reformist officials in the Ministry of Economy, Trade, and Industry have urged Japan to do as well. 

The bigger the imbalances from political interventions, the greater the scale of collapse