Washington, DC: International Monetary Fund, 2015. vii, 193 pp. (Figures, tables.) US$25.00, paper. ISBN 978-1-49832-468-7.
Those already well versed in both economics and Japan’s policy debates will find plenty of nuggets of information and insight in this collection of essays. However, those looking for a detailed assessment of the contributions and shortcomings of “Abenomics”—the nickname for the policies of Prime Minister Shinzo Abe—will find it wanting. It does not live up to the International Monetary Fund’s (IMF) usual standards. Most of this collection of essays reads like it could have been written five years ago or five years from now, and its title could have been “Stuff we think Japan should do to avoid a fiscal crisis.”
This volume is organized around the famous “three arrows” of Abenomics: monetary ease, “flexible” fiscal policy, and structural reforms to promote higher long-term growth. Even though the volume repeatedly stresses that success requires all three arrows, the majority of chapters seem to judge the arrows, not on their ability to raise per capita growth and living standards, but mainly by their ability to provide enough real growth and inflation and spending/taxation adjustments so as to lower the ratio of government debt to GDP. That reinforces the contention of critics that IMF stands for “It’s Mostly Fiscal.”
Each chapter starts with a solid analysis of the problems facing Japan in areas like deflation, fiscal stability, growth rates, labour markets, corporate behaviour, finance, and so forth. Surprisingly, there is no chapter devoted to the economic gains and losses caused by the large depreciation of the yen, one of the few impactful facets of Abenomics. In most chapters, this analysis is well-reasoned, even if expert readers will find themselves in agreement with some of it and in disagreement with other parts. That is to be expected; if the diagnosis were so self-evident, the cure would have come much more quickly. One helpful bit was illustrating how most of Japan’s fiscal dilemmas stem from the consequences of insufficient revenue to deal with the costs of aging rather than more easily corrected wasteful spending. Particularly illuminating was the essay on Japan’s rigid labour markets. It highlighted the adverse consequences for growth of the growing bifurcation between higher-paid, better-trained “regular” workers and the lower-paid “non-regular” workers, to whom firms do not provide the on-the-job training essential to productivity growth.
Each chapter then moves to detailed proposals on how to address these problems. Some readers will agree with the proposals; some will disagree, and that is fine. But one would think the proposals would set the yardstick by which Abe’s policy efforts would then be judged. But no chapter gives more than cursory mention of what Abe is doing in that particular policy area. There is little detailed evaluation of what is working and what is not, where there is action and where mere rhetoric.
The volume inherently limits its audience by assuming a great deal of familiarity with economic theory, the statistical methods of econometrics, and the intricacies of policy debates about Japan. It would not be suitable for most undergraduate economics students.
That is a valid editorial choice. However, even when addressing experts, one finds glaring omissions. For example, in the chapter on aging, the author tells us that, “[i]n the simulation, it is assumed that structural reforms raise potential growth [i.e., the growth rate at full employment and full of physical capacity—ed.] by 0.25 percentage point by 2015 and 0.5 percent point by 2018” (44). This would be a stupendous achievement: a doubling in just five years of the IMF’s current estimate of Japan’s annual potential growth rate of just 0.5 percent. Yet, nowhere in the entire volume is there an attempt justify, or even explain, this assertion. Nor in a book published in 2015 is there any analysis of whether Abenomics has, in fact, gone anywhere in meeting the 2015 projection, let alone the one for 2018. We get fascinating reportage on cases where other countries have raised their potential growth over a decade-long process, as well as many worthwhile proposals on how Japan could raise its long-term growth. But there is no detailed assessment on whether Abenomics has any realistic chance of attaining Abe’s promise of 2 percent long-term real growth. Nor does it try to measure what it would take to reach that goal. It just tells us that reaching 1 percent is hard, and 2 percent even harder.
This reviewer has a fundamental disagreement with the premise offered in several essays that, as stated in the chapter on growth policies, “[s]tripping out the effects of population aging, Japan’s growth was solid until the global financial crisis. During the 2000s, growth per capita was at par with the US and TFP [Total Factor Productivity growth, i.e., output per unit of labour and capital combined—ed.] was comparatively high and at similar levels to Germany” (93). If this were the case, it would imply that what Japan most needs is an increase in investment levels and labour supply, for example, more women workers, more immigrants, rather than a productivity revolution. The chapter does, in fact, make many worthwhile proposals for productivity hikes, but the overarching premise would allow those who oppose politically difficult structural reforms to downplay their necessity.
The fact is that, from 1991 to 2007, per capita GDP growth in Japan, at 0.8 percent per year, was just half the average of the Group of Seven countries. As for TFP, which is the foundation for sustainable growth in GDP per work-hour, during 1991–2007, Japan’s TFP growth at 0.6 percent per year was lower than that of any other G7 country except for Italy. It was just half of the growth rate seen in Germany. Japan’s comparatives look better in the post-2007 period, not because its performance improved, but because Europe did so much worse as a result of its devotion to fiscal austerity.
The bottom line is this: economists with expertise in Japan will be able to glean gems of information, analysis, and proposals. Others will find it disappointing and sometimes even hard to get through.
Richard Katz
The Oriental Economist, New York, USA
pp. 894-896