Why you should care
If Japan’s economic experiment is a success, it will lift the global economy and provide some important lessons. And flush friends make for flush friendships.
When Shinzo Abe, head of Japan’s Liberal Democratic Party, decided to mount a political campaign premised on the radical restructuring of Japan’s economy, he placed a call to Yale professor emeritus Koichi Hamada.
Japanese investors are cheering the Tokyo Stock Exchange’s best year since 1972. What’s behind the stunning turnaround?
One of the deans of the Japanese economics community, Hamada had been trying to persuade Abe and other Japanese politicians for years that only bold steps will help pull the country’s economy out of its two-decade malaise.
The 77-year-old professor finally found someone who was willing to listen.
That call took place in the fall of 2012. Barely a year later, the Japanese government has dropped the term “deflation” — the bête noir of its economy — from its monthly reporting, and Japanese investors are cheering the Tokyo Stock Exchange’s best year since 1972.
What’s behind the stunning turnaround? An aggressive set of monetary and fiscal policies that Hamada and other senior economists have been pushing to reset expectations about the Japanese economy and encourage companies and individuals to invest and spend more. The key element has been the effort to increase inflation by committing to the monetary policy of “quantitative easing” — increasing a country’s money supply by buying up government bonds.
These policies aren’t exactly new, but the scope is exponentially larger than anything Japan has tried before.
It’s the same sort of tactic Federal Reserve Chairman Ben Bernanke has used over the last few years to propel America’s gradual recovery. The Bank of Japan is hoping to drive up inflation to 2 percent by 2015, an ambitious goal that it insists is within reach. A happy side effect has been the devaluation of the Japanese yen, making the country’s goods cheaper abroad and boosting exports. On the fiscal side, the Abe government passed a massive $200 billion stimulus package.
Source: Tomohiro Ohsumi/Getty
These policies aren’t exactly new, but the scope is exponentially larger than anything Japan has tried before, says Peter A. Petri, professor of international finance at Brandeis University and an expert on Asia. Through his bold rhetoric and personnel moves, Abe has signalled “the beginning of a comprehensive and sustained effort to build a new economic model,” Petri says. “A lot of this is about expectations, and they managed expectations marvelously in the last year.”
Hamada counseled Abe as he was crafting the policies, but he demurs when asked if he’s the “brains” behind the approach, as many have called him.
Hamada cannot help the prime minister when it comes to the tricky politics of the next and, experts say, most crucial, phase of Abenomics — structural reforms.
“That is an honor, but there are at least two or three or more who could be called the same way,” says Hamada, who started out studying law before turning to economics. He’s since amassed an impressive array of academic degrees — a bachelor’s and master’s as well as a law degree from the University of Tokyo plus a master’s and Ph.D. in economics from Yale. Hamada returned to New Haven from Tokyo in 1986 and has been teaching at Yale ever since. But he maintains his Japanese citizenship and still speaks English with a heavy accent.
Hamada first met Abe while serving as a senior adviser for the Japanese government’s Economic Planning Agency from 1998 to 2001. Abe was a deputy cabinet secretary, first under Prime Minister Yoshiro Mori and then for Mori’s successor, Junichiro Koizumi, and he was responsible for coordinating meetings with Hamada’s agency.
The two kept in touch and when Abe made a bid for prime minister in the fall of 2012, “our paths suddenly joined together” again, Hamada says.
Hamada has since become one of Abe’s most trusted economic advisers, even from his base thousands of miles away in Connecticut.
Abe is not an economics expert, says Petri, but he was “sufficiently knowledgeable to listen to economists” like Hamada, who collectively have “played an important role in convincing him that fairly extraordinary steps had to be taken” to right the Japanese economy.
That’s not to say that the prime minister always heeds his advisers. For example, Abe announced in October that he would allow an increase Japan’s sales tax this coming spring, despite strong warnings from Hamada that the move could jeopardize the economy’s nascent recovery. Hamada now says that the Bank of Japan should be able to mitigate the impact through monetary policy, but it will have be proactive. “The bank of Japan should be watching all the time,” he says.
And Hamada cannot help the prime minister when it comes to the tricky politics of the next and, experts say, most crucial, phase of Abenomics — structural reforms. The Yale economist says that without a restructuring of the Japanese economy — through government deregulation, lowering corporate tax rates, opening up the labor market and freer trade — it will not be able to sustain the growth of the first year of Abenomics.
“Abenomics is at this kind of critical stage where the first part of it, which is to build up confidence that Japan can do better than it has … has been tremendously successful,” says Petri. Now ”people’s confidence has to be justifed by real reform.”
Those efforts, however, face stiff opposition from entrenched bureaucrats and some of Japan’s most powerful industries. Any one of the reforms is a heavy political lift; achieving them all will likely take decades. And external factors — like rising tensions with China and South Korea — could also upset the recovery.
Hamada does not underestimate the challenges. Some of the reforms he and others are calling for — like new immigration policies — could fundamentally reshape Japanese society. Says Hamada, ”The Japanese may have to sacrifice their tradition, ethnic homogeneity, sometimes a very safe way of life.”
Without such steps, however, there’s a good chance that Japan’s gains from year one of Abenomics may dissolve into another lost decade.
This OZY encore was originally published Jan. 8, 2014.