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Abenomics: Skepticism and Hope -Columbia Business School “Zadankai” in November 2015-

Akinari Horii, a former assistant governor of the Bank of Japan, gave a spirited and interesting “zadankai” lecture on the current state of ‘Abenomics’. Mr. Horii is a special advisor and a member of the board of directors at the Canon Institute for Global Studies in Tokyo. He has had a long career as a central banker, with the Bank of Japan and the Ministry of Finance. He has been extensively involved in international matters at the Bank, spending some time at the Bank for International Settlements in Basel, Switzerland. A graduate of the University of Tokyo, he received an MBA, with distinction, from the Wharton School at the University of Pennsylvania.


Mr. Horii began by explaining that it is now three years since Prime Minister Abe introduced his plans for economic revival in Japan. It is, also, two and a half years since Mr. Kuroda became the Governor of the Bank of Japan. He also noted that much of the criticism of Abenomics comes from the academic world and much of the hope for it comes from the business world. Before he discussed those points of view, he wanted to show the current status of the economy in Japan. Based on data provided by the Ministry of Finance, the Ministry of Internal Affairs and Communications and the Ministry of Health, Labour and Welfare, unemployment stands at the lowest level since 1997. Also, the ratio of job openings to the number of applications is the highest since 1992. So, he said, the labour market is very tight at the moment. Corporate profits are showing their highest margin in three decades. Inflation has remained almost non-existent. So, on face value, the Japanese economy appears to be on solid ground. He did say that in terms of Gross Domestic Product (GDP) growth appears to be quite lacklustre. He wanted to show that the increase in the consumption tax would not have a deleterious effect on the trend of GDP and produced slides that indicate an increase in the consumption tax had a temporary negative effect on GDP but after a few quarters growth depended on more fundamental elements of the economy. So much for facts and figures.

Then, Mr. Horii turned to the argument about Abenomics. The critics do not like the monetary policy of the Bank of Japan, arguing that Japan’s deflation is more a result of an aging society and declining population. Also, they are concerned that the policy is artificially propping up asset prices that will create another bubble that will burst at some point. He said that he understood the critics’ concern but disagreed with their analysis.

The way he explained what has been happening was insightful. Changes in liquidity in the economic system have changed what he called the ‘general equilibrium’ of the system. So, before Abenomics, this ‘general equilibrium’ was determined by tight monetary control that allowed deflation to continue and real interest rates to stay high. Everyone had a deflation mentality. As a result, people invested in cash and cash-like Japan Government Bonds because their value increased people’s ability to buy things. Stocks and other capital assets and borrowing were discouraged by this ‘general equilibrium’. From an individual’s point of view it made sense to sit on cash and minimise risk-taking. (Incidentally, Dr. Shuji Nakamura made the same point in his talk at the Japan Society.) But that has the effect of lowering economic growth.

Also, arguing that declining population is the cause of slow growth is wrong. Population growth has been very weak from the 1960s onwards and yet growth was in the 4 to5 per cent range until the bubble burst in the early 1990s. It was mainly a drop in productivity gains that has led to lower growth. The same could be seen in Germany and Italy. Mr. Horii emphasised that it was risk-taking that leads to economic growth.

What did Abenomics do? From a fiscal point of view, there was stepped up fiscal spending in 2013 to put some energy into the economy. Then, the second increase in the consumption tax was delayed until April 2017. But revenues have increased from the first increase in the consumption tax and economic growth from the stimulus spending in 2013. There is more to do and that involves the primary balance deficit goal of closing the gap by 2020. Increasing interest rates would make it very difficult to achieve so it has to be by restraining spending. That, however, is a matter of politics.

Mr. Horii said he did not have time to discuss in detail Abenomics 2.0 which includes “a Robust Economy with GDP toward 600 trillion Yen”; “Desirable Birthrate of 1.8” (compared to the current fertility rate of 1.42 in 2014); and “No One Forced to Leave Their Jobs for Nursing Care”. Also, he mentioned that he did not talk about the third arrow of the original Abenomics; growth-oriented structural reform. Some of the reforms have taken place and, added to them, is the Trans Pacific Partnership (TPP) all of which will have a positive effect on economic performance in Japan.

In the question and answer period, Mr. Horii discussed two really important aspects of the economic scene in Japan. The first was the question of deflation. His main worry was the problem of a persistent deflation. If that were to be the case it would sap the vigour of society. As a result, the youth would see very little future to be excited about and the venture spirit would vanish. He said, there is an opinion in Japan that young Japanese students lack the enthusiasm to study abroad – particularly in America. But, he argued, that was more a factor of the high cost of education in the United States. The other major topic he addressed was the question of labour, particularly the labour participation rate. There his solution was that in order to improve the productivity of the economy the zombie companies had to be killed off. As a minor point about spending he gave an example of medical expenses, especially out of pocket expenditures. Presently, those over 75 years of age only face a 10 per cent co-payment on medical costs. Those over 60 must make a 30 per cent co-payment. If it were to be one rate across all ages that would save the taxpayer some ¥6 trillion in a year.

Once again, this was a most satisfying talk, giving the American layman a valuable insight into the economic issues facing Japan.

[Photo courtesy of Columbia University Graduate School of Business, Center on Japanese Economy and Business]