After Abenomics

If there’s one country that needs creative economic policy solutions, it’s Japan. With many observers saying Abenomics has stalled after a year of weak economic performance, plenty of people are asking what’s next - or has Japan run out of ideas?

The backdrop doesn’t look great. The country is experiencing an unprecedented decline in population. The national debt is mounting. Wages are falling, consumption is depressed and productivity is still stagnating. China, Japan’s biggest trading partners, is slowing.

Abenomics - the raft of policies enacted by Prime Minister Shinzo Abe - has had some good effects. Growth and inflation rose for a couple of years, probably as a result of easy monetary policy, before the China slowdown hit. Unemployment has been virtually eliminated, and women have finally entered the workforce. A consumption tax hike, along with zero interest rates, has improved the debt position. And a series of corporate governance reforms promise to make Japan Inc. more profitable.

Nevertheless, easy money has its limits, as the Bank of Japan is now discovering, and the negative interest rates it put in place haven’t had any noticeable good effect, and may have sent stock markets lower. Meanwhile, it will be years before the corporate governance reforms kick in. And debt is still rising, meaning that future consumption tax increases are looming.

So Japan needs innovative policy ideas. It also needs straight talk about the trade-offs it faces. Unfortunately, the entrenched bureaucracy, the main traditional source of policy advice, has limited ability to do this.

In the United States, independent policy advice is usually provided by academics, whose ivory-tower isolation protects them both from political pressure. In Japan, where universities are mostly government-funded, academics play less of an independent role. But that may be changing, thanks to a new generation of outspoken professors. One of these is my sometime collaborator, Aoyama Gakuin University finance professor Akiko Kamesaka.

Kamesaka and I have collaborated on two projects since 2011, in the field of behavioral finance (which puts me in the august company of top researchers like Yale’s Robert Shiller, who also works with her). But I only recently learned that she has a sort of second career as a government policy adviser. Her ideas may represent the future of Japanese economic policy thinking.

As a member of the Ministry of Finance’s Fiscal System Council, Kamesaka advised the Abe administration on the recent initial public offering of Japan Post - the world’s biggest IPO in 2015. That share sale was highly successful, netting the government a one-year fiscal boost and representing a step toward normalizing Japan’s financial system.

But her expertise extends beyond finance. She is also a visiting researcher at the Economic and Social Research Institute, which is run by the Cabinet Office. In the past, she studied the economics ofhappiness and investigated the problem of death from overwork in Japan. Now, she is studying how to reform Japan’s labor market.

I recently interviewed Kamesaka by email to get her insights into the most crucial issues facing the country.

Kamesaka is highly skeptical of the negative interest rate policy now being pursued by the Bank of Japan. Like many economists, she thinks this will do more harm than good, because rates below zero make it harder for banks to earn a spread on the money they lend. She views recent stock market declines as having been partly caused by the global shift toward negative interest rates, and worries that the policy will make it difficult for the Japanese government to sell more Japan Post stock. All in all, she hopes for a swift return to zero interest rates.

On the looming issue of Japan’s national debt, Kamesaka doubts that the problem can be solved through tax increases, such as the recent hike in the consumption tax. Instead, she suggests cutting medical expenditures on the elderly - a highly controversial stance in geriatric Japan.

Kamesaka says that wages are the key to Japan’s suicide rate, which has fallen a bit recently but is still among the highest in the developed world. Japanese real wages have been declining for a very long time, driving up inequality and poverty. One solution is policies to discourage corporate cash hoarding and provide incentives for higher wages that would boost well-being. This is a common refrain from Japanese policy advisers, though no one knows yet which incentives will be effective at raising wages.

Labor reform may be the most important issue facing Japan, and Kamesaka’s recommendation for increased flexibility and fairness is in line with the views of most economists. She wants the government to intensify its efforts to boost women’s labor force participation and equality in the workplace. She also thinks mandatory retirement ages should be abolished, as should other restrictive labor laws.

These suggestions lack a partisan political agenda. But they tell me that Japan has no easy answers. Monetary policy is played out. Curbing the debt will require sacrifices. Labor reform may be necessary to revitalize corporate Japan, but it will tear up the long-standing social contract that Japanese people have relied on. Reducing suicide and death from overwork, and boosting women’s economic status, will require more work-life balance, but this will also cut working hours and lower measured gross domestic product.

Given a shrinking population, a slowing China, entrenched sexism and the legacy of an inefficient corporate system and labor market, Japan is going to have a rocky road ahead no matter what it does. The more smart and independent academics like Kamesaka it can find to help it navigate this difficult time, the better it will do.

*The author is an assistant professor of finance at Stony Brook University.

by Noah Smith