Tuesday, September 17, 2013


For a student of Keynesian economics, it is fascinating to see how his policies are applied, almost textbook-style, by Japan's Shinzo Abe - arguably the most dynamic - and divisive - Prime Minister Japan has had in a while. The media has been quick to christen his raft of economic policies Abenomics, after Abe, with his sheer force of personality and political charisma, rammed the policies through, even bending the Bank of Japan to his will.

Abenomics is spearheaded by the so-called 'Three Arrows' - massive fiscal stimulus, aggressive monetary easing, and structural reforms to bolster Japan's competitiveness going forward.
The first two arrows are textbook Keynesian plays, which led a falling yen and a sharp rally in the Nikkei. The effects, as one would expect from pumping money into a system, are rather direct - a falling yen made Japanese exports more competitive, boosting the cash pile and stock prices of Japanese giants like Toyota, and generating inflation and more housing market activity in Japan. Good news considering that Japan has been dubbed the 'miraculous zero-growth economy' for the past  two decades.
The third arrow, focusing on the creation of sustainable growth, however, has been widely panned by critics and observers as falling way short of its mark - this critical third arrow, they allege, consists of the same tired set of ideas that have been toyed around with during Japan's 'lost decade'. Abe, despite all the hype, was not doing anything more radical than Keynesian pump priming to bring a flagging economy back to capacity, or, in economic terms, to its production possibility frontier.

What is critical, however, is pushing this economic frontier forward and outward, to ensure that growth is long-term and sustainable - this is why the Third Arrow is perhaps the most crucial, and where Abe has fallen short of his self-declared mark. The markets reacted with a sigh and sputter since June when the third arrow was notched and fired.

The lesson here, perhaps, is that there are no quick, textbook fixes for the economy. It is only in taking deep structural reforms - in essence, taking a calculated risk, a bold plunge into the unknown (the future), that genuine gains will be made. In Japan's case, this means having to revisit almost 'taboo' topics such as immigration to make up for a rapidly-ageing population, and agricultural and labour reforms in preparation for the Trans-Pacific Partnership - issues no politician would be willing to raise.

It is about swallowing the bitter pill now, rather than dither and hope the illness will go away on its own. Put flatly, it will not, but one cannot expect mere politicians, fixated in staying in office and commanding the popular vote, to make these difficult but ultimately necessary decisions. It takes a truly visionary statesman to do so - it remains to be seen if Mr. Abe is ready to step into those big shoes and take Japan out of its lost decades.