Priorities for the Japanese Economy in 2014 (January 2014)
The Year 2014 in the Japanese Economy's Medium-Term Management Plan
Senior Fellow, RIETI
In 2013, everyone felt a change in the economic mood of Japan. The economic climate was consistent in its recovery: share prices rose sharply and the yen traded at much lower rates. Driven by these macroeconomic conditions, many businesses reported record profits. The following is a discussion of the Japanese economy and policy in 2014 as part of medium-term trends, taking into account the events described above.
Businesses large enough to be listed on a stock exchange always have a medium-term management plan, which is an action plan for a period of about three to five years. To manage the economy, likewise, it is important to take a perspective that includes the medium-term flow of events, not just the immediate economic trends. For the Japanese economy, 2013 was the first actual year of "Abenomics," the economic policies of the Shinzo Abe administration. In principle, it was the first year in what a business would call its medium-term management plan. Abenomics is widely considered to have performed very well in 2013. However, we should not make a final judgment of it based on its first year. The final judgment will depend on the degree to which the government can carry out its medium-term management plan.
Interplay of policy and macroeconomy key to success of economic policies
The interplay between policy and the macroeconomy ultimately determines whether economic policies are successful. Policy significantly affects the macroeconomy. On the other hand, macroeconomic trends influence the direction of policy. When macroeconomic conditions are challenging, it is difficult in practice to carry out painful policies, no matter how much we know they are needed.
In that sense, the medium-term management plan of Abenomics had a favorable year in which to begin. Certainly, Abenomics contributed more than a little to the upturn in the economy and market conditions in 2013. However, when we look back with a medium-term perspective, what we see is a series of force majeure negative shocks to the Japanese economy. In the autumn of 2008, it was the unprecedented "once-in-a-century" economic shock caused by the collapse of Lehman Brothers. In 2009 and the years since, the European debt crisis has continued to weigh down on the world economy. And, in 2011, the nation experienced the "once-in-a-millennium" Great East Japan Earthquake. The impacts of those events were starting to fade away in 2013, so, in a sense, the economy was already starting to right itself last year. The same could be said of the foreign exchange market and share prices.
Looking at it over the long term, moreover, 2013 was a good time for the economy to get back on the rising tide. Japan's economic bubble collapsed around 1990, leading to "two lost decades" for the nation's economy. However, the negatives from the bubble, such as the problem of bad debt, have largely been cleared away. Certainly, Abenomics, launched in such a favorable environment, boosted the economy. There are no "ifs" in history, but it seems likely that if the same policies had been carried out against a strong headwind, our impression of the results would be very different.
2014: Time to get serious about the Japanese economy's medium-term management plan
I am not saying this to throw cold water on Abenomics. This is a once-in-a-lifetime chance for the economy to boost policy. 2014 is the second year of the medium-term management plan, and is a very significant time to be debating and promoting important economic policies. Laying the groundwork for fiscal reconstruction should lead the list of critical economic policies. One of the greatest focal points should be the debate on raising the consumption tax. It is already decided that the tax rate will rise in April. The issue is whether to raise it again in 2015. In light of the schedule by which policy is made, this decision will probably have to be made by the end of the year.
Many Japanese feel traumatized by the idea that raising the consumption tax rate will put the economy in a deep chill. This idea, however, only took shape after the tax rate was last raised in April 1997. The first increase in the rate, in April 1989, happened late in the bubble era, and the economy continued to expand until early 1991. Consumption tax increases in other countries, particularly in Europe, did not necessarily cool their economies.
Looking back on the macroeconomic environment of 1997, that year was just the opposite of 2013. In 1997, the economy was in a downward trend. The bad debt problem could not be delayed any longer, and uneasiness over the financial system was about to break out. The Asian currency crisis also burst on the scene, putting immense downward pressure on exports. Fiscal reconstruction efforts, especially raising of the consumption tax, also held down the economy in some ways, but I doubt that these were the main cause. However, that image became imprinted on people's minds, creating a more or less permanent impression about consumption tax increases. This is a good example of the economy changing policy. The new tax increase is of great significance, in that it will determine whether that impression and trauma can be erased.
Considered in terms of fiscal reconstruction, social security reform is also a critical issue facing a now-or-never moment. Introducing mechanisms such as more closely tying social security to the macroeconomy is an extremely difficult issue politically, but certainly it is an easier discussion to have when the economy is improving.
There are also a host of economic policy issues besides fiscal reconstruction. Japan inevitably will have to deal with how to accelerate industry's metabolism in order to boost competitiveness and growth in the national economy. However, the process of metabolism always causes pain to those players that leave the market. But it is easier to implement measures to ease that pain when the economy is on the upswing.
Unless the House of Representatives is dissolved, there will not be another national election until 2016. The three years until then could be a golden era for the present government. However, if we see 2014 as the year to go all out in pursuing a medium-term management plan for the Japanese economy, then this is a time for the legislative and administrative branches not to lose focus, but to engage in the real fight.
February 17, 2014
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