So I’ve written quite a fair amount about Japan and Abenomics. Here are the big five:
- Abenomics 101: Let’s Talk About Japan – where Japan gets plenty of credit, has an asset bubble, and then collapses.
- Abenomics 102: Japan’s Liquidity Trap – where I get to describe a liquidity trap(ped) economy in terms of food (still proud of this one).
- Abenomics 103: Japan’s Lost Decades – where Japan loses two decades, and what the Japanese authorities did to get out of them, and why it still hasn’t worked.
- Abenomics 104: Abenomics, finally – where Japan plans aggressive monetary stuff, aggressive fiscal stuff, aggressive reforms, and adds in a sales tax hike.
- Abenomics 105: Nationalise the Bond Market? – where the Bank of Japan redoubles its QE efforts in response to Japan’s slip back into recession.
The first four were written back when Abenomics was being first implemented. The most recent I wrote after it became clear that Abenomics isn’t working. Unless you’re one of the camp that declares “Oh – but think of how bad it could have been without all that quantitative easing!” Which I think is a bit optimistic.
From what I’ve been reading/hearing, there are two main reasons for the failure:
- Shinzo Abe’s decision to increase the sales tax
- The curiousness of Japanese employment (thanks Slate Money!)
But before I get there, here’s an infographic summary of what Abenomics was meant to be (thanks Zerohedge):
And here are the problems that we’ve seen since:
Sales Taxes Do The Opposite Of Stimulate Spending
If you’re trying to get people to spend, then this should be obvious. Rather tax wealth directly. Even if that type of tax system is harder to administer – at least it aligns with the overall goal.
I mean – just look at what happened in Kansas (read “The Laffer Curve: invented on a napkin – should have stayed there“). Governor Sam Brownback dropped direct taxes on businesses and individuals, and compensated for the lost revenue by increasing the sales tax. This was meant to be stimulative.
Most of the consuming class were able to consume less.
But in some ways, this is perhaps less of an issue compared to:
The Prevalent Impermanence of Japanese Labour
The statistics on this seem to vary – but this research article suggested that only a third of the Japanese labour force are permanently employed, due to extraordinarily protective labour laws.
This implies two things:
- In an economic downturn, firms are more likely to cut the wages of permanent labour than they are to lay people off.
- Two thirds of the labour force have fixed terms contracts and no job security.
In that type of labour environment, does it not make sense that there is a general obsession with saving up money?
Those with (too much) job security have no wage security.
And everyone else has no job security. With almost no hope of ever having it.
It’s just not productive.
For more, here’s an article from the Economist.