Abenomics designer says Abe must reinforce structural reforms

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Abenomics designer says Abe must reinforce structural reforms

Japanese Prime Minister Shinzo Abe says there is no other way. But criticism has grown over his economic policies, collectively known as “Abenomics,” after the Japanese economy posted negative growth for two consecutive quarters, posting minus 7.3 percent in the second quarter and minus 1.6 percent in the third.

Abe held a snap election on Dec. 14 after dismantling the House of Representatives with a new mandate that would delay the second increase on the sales tax by 18 months. The credit rating agency Moody’s downgraded Japan’s rating from Aa3 to A1, citing rising uncertainty over the country’s ability to ease its fiscal deficit. Japan’s rating is now even lower than Korea’s.

The JoongAng Sunday interviewed three top-notch Japanese economists to assess Abenomics after two years.

The first, Heizo Takenaka, the former minister of economics and fiscal policy who was responsible for Koizumi Reform in the early 2000s, emphasized in his interview that Abenomics was the result of building fiscal consolidation without spending, and advised that Abe reinforce structural reforms.

Seki Obata, the second expert, a professor at Keio University, was more blunt in his criticism and described Abenomics as a populist show that doesn’t make economic sense.

However, opinions continue to diverge on Abenomics, which now finds itself at a crossroads.

Expert Koichi Hamada, a professor emeritus at Yale University, who designed Abenomics, is the most positive, contending that everything is running smoothly.

In an interview with the JoongAng Ilbo in May 2013, when asked whether Abenomics was failing with Japan’s stock market tumbling, he argued that it was too early to mention failure just because some stocks were doing poorly. Later, stock prices rose steadily.

Hamada’s overall philosophy is based on the principle of laissez-faire, a let-alone policy that states countries must take care of themselves and solve their own problems in a floating exchange rate. In the interview in May, he added that if the won strengthened too much, Korea could also unfold monetary-easing policies like Japan, such as cutting the interest rate.

Born in 1936, Hamada passed the bar exam in his senior year at Tokyo University. He also graduated with a bachelor’s degree in economics after re-enrolling at the same university.

In 1965, he earned his doctorate in economics at Yale University. Later, he served as an economics professor at Tokyo University, until he moved to Yale in 1986. When he was selected for the Abe Fellowship - established by Shinzo Abe’s father, Shintaro Abe - he became closer with the current prime minister. Hamada is well known as Abe’s mentor and the designer of the Abenomics.

The following is the interview with Professor Hamada.

Q. How do you evaluate Abenomics?

A. The first arrow of Abenomics, which is printing money and easing monetary policy, and the second arrow, spending money by revving up fiscal stimulus, have worked well. The reason why gross domestic product [GDP] is posting negative growth is because Abenomics went against its original directions.

The third arrow, which is about structural reform, should be planned for the long term. Structural reform is a challenge in any country. Politicians and bureaucrats oppose it, as many interests conflict in the matter. It could barely succeed, but only if the government pushes for its success.

Currently, Japan’s potential growth is less than 1 percent. It is obvious that a more drastic structural reform is needed in order to change that. Now that the first and the second arrows have worked, the Japanese government should focus on a growth strategy.

While there have been talks about fiscal reforms and monetary easing, there seems to be little you can say about structural reforms. What do you think?

That’s nonsense. The Abe cabinet has presented quite a lot of legislation regarding structural reform and passed many of them, despite political and bureaucratic opposition. Besides the open reluctance, there are also behind-the-scenes opposition and pressure.

It takes a lot of time to amend a law. But the Abe administration is at least truly working toward reformation.

Was it really necessary to dismantle the House of Representatives and call for an election?

As there were already enough lawmakers, so many wonder why Abe dissolved the House of Representatives. However, political force is required in delaying the sales tax hike.

The scandal involving ex-Industry Minister Yuko Obuchi, who stepped down as chief of the Ministry of Economy, Trade and Industry, and the possibility that she would lose a seat in the Lower House also added to the pressure. The dissolution of the Lower House was a matter of political structure and dynamics.

The Bank of Japan’s additional quantitative easing on Oct. 31 shocked the world.

But it worked. Shares also rose. It proved that the monetary policy of BOJ Gov. Haruhiko Kuroda was successful. Aggressive monetary easing is part of Abenomics. It demonstrated the effectiveness of Abenomics.

Are there any side effects?

Every policy has a side effect, we have to accept it. For the Japanese economy, relieving deflation is the most important, and quantitative easing played a key role.

Don’t you think Japan’s artificial policy is causing damage to neighboring countries?

Are you talking about Korea? Monetary authorities have a duty to create the best environment for their economy and businesses.

I have met Kim Choong-soo, an economist and the former governor of the Bank of Korea, and Jean-Claude Trichet, the former head of the European Central Bank. They both sought a moderate monetary policy. I ordered an aggressive monetary policy, but they would not listen. Korea can be critical about Japan’s weak yen policy, but Japan’s Elpida Memory was overtaken by Korea due to the strong yen.

That’s because the BOJ governor at the time, Masaaki Shirakawa, did not take on an active monetary policy to protect the Japanese economy and its companies. Kuroda, the current governor of BOJ, is trying not to repeat the same mistake - an international currency war. Central banks must keep their nations from engaging in an international currency war. The BOK should also increase the money supply or quantitative easing.

Due to the weak yen, Japan’s exports reportedly increased. Is it possible for Japan to grow while its economy is still dependent on exports?

That’s right. It is difficult. We cannot expect Japan to see a big current account surplus like in the past. World trade is a zero-sum game. In addition, Japan is an aging country where everyone is retiring. Exports cannot drive the economy. However, you can build up the economy in the medium term. We can see that companies have revived since the quantitative easing. I do not believe that growth based on exports has completely ended.

What do you think about the consumption tax increase?

It was a good decision to delay the tax increase. Even economist Paul Krugman said it is impossible not to raise sales tax at all. Some say it’s not a big deal since most Japanese government bonds are owned by Japanese people. I also don’t emphasize the debt problems too seriously, although it is a problem. Because the sale of government bonds by bondholders is not restrained by law, they could suddenly sell off the government bonds at once. Tax revenues may also be insufficient.

But I want to point out this: The Japanese Ministry of Finance, which is obsessed with fiscal balance, has exaggerated the size of the debt. It says debt accounts for 250 percent of GDP, but that is the total debt. I think that the net debt that takes into account foreign exchange reserves is around 120 to 130 percent of GDP. Greece has 170 percent and the United States holds 90 percent. Japan’s debt is not too small but not too big, either.

Will the Japanese economy come into a virtuous cycle when it achieves growth?

It is normal for Japan’s growth rate to fall, as it is in a developed country. However, if regulations are eliminated, sustainable growth can be achieved. I know that Korea has a lot of regulations as well. Without groundbreaking deregulation, it is impossible for both Korea and Japan to grow. Although increasing the birthrate is a good idea in other ways, I think that expanding female employment, as in Abenomics, is a faster and better way.

All the economists who forecast that Japan would post plus-growth in the third quarter were wrong.

The unexpected result was due to the consumption tax increase, but hiking the consumption tax is not Abenomics. Frankly, a consumption tax increase can be seen as a conflict between the Japanese and the Ministry of Finance, which sticks to fiscal balance.

Quantitative easing has succeeded in the United States, and Abenomics is also headed in the right direction. It is wrong to say that the forecasts of economists were incorrect. It is only for Europe that the quantitative easing became a problem because an individual country cannot make its own independent monetary policy.

You emphasize the Trans-Pacific Partnership (TPP) along with Abenomics. It is common sense that free trade is a good thing. Isn’t it silly to buy cheap goods at expensive prices? The TPP is also helpful in structural reforms.

Japan’s Government Pension Investment Fund announced it will increase its stock investment ratio.

I receive a retirement pension because I’ve reached retirement age at Yale. There are two options for me, which is to take three-fourths of the pension as stock or to take 50 percent as stock and the other 50 in cash. I chose 50-50, but profits from the former were actually better. Except during the Lehman Brothers shock, it was always the pension with the higher ratio of stocks that generated more profit. Although many hesitate to talk about equity investment by pension, it is worth taking the risk.

How would you grade Prime Minister Shinzo Abe?

Because it is ABE, I would say A for monetary policies, B for fiscal policies and E for growth strategy, as it is still uncertain. However, I see him in a positive light after seeing how he and Yoshihide Suga, the chief cabinet secretary, were aggressive about structural reform. Those who oppose Abenomics are those who lack knowledge in economics or who are intentionally picking on it.

BY PARK SUNG-WOO [kjy@joongang.co.kr]

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