Japan’s Abenomics failure is 30 years in the making

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Japan Prime Minister Shinzo Abe had three so-called arrows in his Abenomics reform policy. Reuters/Thomas Peter

Japan’s Shinzo Abe has a bad case of Yasuhiro Nakasone on the brain.

It’s not that the current prime minister constantly evokes the name of the one who served from 1982 to 1987. But in word, deed and worldview, Abe has read from the playbook of a fabled leader his dad, Shintaro Abe, served as foreign affairs minister.

Nakasone stood shoulder-to-shoulder with Ronald Reagan, Margaret Thatcher and Helmut Kohl back when big, bold things got done economically and geopolitically.

It was also a moment when Japan’s economy wasn’t just on the ascendency, but a feared juggernaut in boardrooms and government offices from New York to London.

And it’s one Abe, in two stints as leader, has tried to reclaim. Unfortunately, he’s toying with policies from the mid-1980s in ways that ignore how much the global economy changed since Nakasone’s day.

There are many reasons why Abenomics flopped, including timid implementation and a basic lack of audacity.

There are many reasons why Abenomics flopped, including timid implementation and a basic lack of audacity.

There’s nothing creative or unique about a list of upgrades Tokyo should’ve made 10 or 15 years earlier. The real flaw is trying to revive an industrial system that died even before Abe’s earlier 2006-2007 stint as premier.

The service sector is now a far more important growth engine than exports. What is Abenomics, with its monetary easing, yen depreciation and corporate welfare other than a futile ploy to reanimate an economy that existed in 1985?

Steeped in lively tales from his father’s day, when Abe the elder held court with the Reaganites and Thatcherites of the day, Prime Minister Abe may have figured exchange rates would still do the trick.

US President Ronald Reagan with British Prime Minister Margaret Thatcher, in the Rose Garden, White House, Washington DC 1988

US President Ronald Reagan with British Prime Minister Margaret Thatcher, in the Rose Garden, White House, Washington DC 1988

In 2013, Abe prodded the Bank of Japan to unleash monetary shock-and-awe on global markets. As the yen plunged 30%, the Nikkei 225 Stock Average got a bit of that 1985 spring back in its step. In 2013 alone, it rallied 57%.

That same year, Abe brought his Abenomics roadshow to New York, the city where the governments of Reagan, Thatcher and Nakasone agreed to one of modern history’s great economic deals: the 1985 Plaza Accord.

Abe’s charge was to help sell his revival scheme to the world’s most important capitalists — Wall Street.

He visited the New York Stock Exchange 28 years to the month since the Plaza Accord, imploring traders to “buy my Abenomics” with pop-culture references to Gordon Gekko, Metallica and the New York Yankees.

Left unsaid, though, was how little Tokyo’s bag of reform tricks had grown since the Plaza days.

Japan is generally growing. In fact, it recently enjoyed five straight quarters of growth, the best run in 11 years.

But if Abe wonders why his approval ratings are worse than Donald Trump’s, this figure offers clarity: 0.8. That’s how much, in percentage points, real cash wages fell in June year-on-year.

Try as bulls may to pretend Abenomics remains a going concern, Japan’s goal of 2% inflation is perhaps even more distant today than in 2012, when Abe’s revival plan got rolling.

That’s because consumers, companies and, increasingly, investors concluded that efforts to date won’t change the “deflation mindset.” Face it: when the minds you need to change see through you, it’s all over.

Abe’s people are already buzzing about replacing Bank of Japan Governor Haruhiko Kuroda. He’s not the problem, though.

Abe’s people are already buzzing about replacing Bank of Japan Governor Haruhiko Kuroda. He’s not the problem, though.

Replace Kuroda with an even more radical BOJ leader, and Abe is still left with too many yen chasing too little confidence in Japan’s outlook.

Stagnant wages are resulting in weak retail sales and household sentiment. It’s also important to remember that even when Japan is eking out modest growth, it’s only thanks to the world’s easiest monetary policy and biggest debt burden. That’s growth fueled by steroids, not organic demand.

What’s needed is a bit of the Reagan/Thatcher big bag Abenomics promised.

We’re not talking about trickle-down economics or killing millions of jobs. But Tokyo needs to act boldly to loosen labor markets, use tax tweaks to empower startups, reduce red tape, rein in a change-averse bureaucracy, tighten corporate-governance and transparency norms, open protected markets, empower an underutilized female workforce and import more foreign talent to augment an aging, shrinking population.

Instead, Abe’s team has relied on old-school monetary largess, public-works construction and a weaker yen. It thinks that Tokyo hosting the 2020 Olympics will morph Japan Inc. into the cutting-edge competitor it was 30 years ago.

Getting there requires looking ahead to, say, where Japan wants to be in 2025 –- not back to 1985.

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