Blog post

Japanese economy: Déjà vu – but worse

It is difficult to imagine how Japan can undertake any major economic reform if it has taken five years to increase the consumption tax and has needed

Publishing date
12 December 2019
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This opinion piece was originally published in El País and Asia Times.

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Since Prime Minister Shinzo Abe came to power in 2012, Japan’s economic recovery has been hinging on his three key economic policies (the so-called three “arrows” of Abenomics) bearing fruit. The first, and best known, arrow is monetary policy, which has been used massively through quantitative easing as well as the introduction of negative rates, but to no avail. In fact, the Bank of Japan’s ultimate objective – pushing up inflation toward a 2% target – is far from being reached.

On the second “arrow,” namely fiscal consolidation for a country with one of the highest levels of public debt in the world, the objective is even further away. The increase in sales tax from 5% to 10% was an integral part of this second arrow but took seven years to be realized and had to be broken down into two phases. The first tax hike was carried out in 2014, after a serious of delays, and the second a couple of months ago.

Back in April 2014 the government decided to increase the consumption tax from 5% to 8%, but this was finally followed by a stimulus package of 1.1% of gross domestic product. Already then, the rush to avoid pain for consumers was obvious. In October, the government finally raised the tax from 8% to 10%, which was followed, only a few weeks later, by a fiscal stimulus package of more than double the amount of the previous one (2.6% of GDP).

Some argue that the stimulus is more necessary than ever because the Japanese export sector has been under pressure due to the trade war. However, the reality is that the growth rate of the Japanese economy in 2014 was lower than it is today and the fiscal and monetary space was wider. In other words, there is very little effect from the second fiscal consolidation arrow of Abenomics, except for the cosmetic effect of having kept the promise of increasing the consumption tax. In other words, the consolidation of the very high Japanese public debt has remained an illusive objective for Abenomics.

As if this were not enough, the third – and certainly the most important – “arrow” of Abenomics, an ambitious structural reform plan, is far from been executed. The labor market has become increasingly dual: lifetime employment on one side and a precarious part-time or short-term labor market dominated by young people and women on the other.

All in all, it is difficult to imagine how Japan can undertake any in-depth reform if it has taken five years to increase the consumption tax by only 5 percentage points with two strong fiscal stimulus packages. Following this logic, for a relevant labor-market reform, I cannot imagine what kind of fiscal anesthesia would be necessary.

About the authors

  • Alicia García-Herrero

    Alicia García Herrero is a Senior fellow at Bruegel.

    She is the Chief Economist for Asia Pacific at French investment bank Natixis, based in Hong Kong and is an independent Board Member of AGEAS insurance group. Alicia also serves as a non-resident Senior fellow at the East Asian Institute (EAI) of the National University Singapore (NUS). Alicia is also Adjunct Professor at the Hong Kong University of Science and Technology (HKUST). Finally, Alicia is a Member of the Council of the Focused Ultrasound Foundation (FUF), a Member of the Board of the Center for Asia-Pacific Resilience and Innovation (CAPRI), a member of the Council of Advisors on Economic Affairs to the Spanish Government, a member of the Advisory Board of the Berlin-based Mercator Institute for China Studies (MERICS) and an advisor to the Hong Kong Monetary Authority’s research arm (HKIMR).

    In previous years, Alicia held the following positions: Chief Economist for Emerging Markets at Banco Bilbao Vizcaya Argentaria (BBVA), Member of the Asian Research Program at the Bank of International Settlements (BIS), Head of the International Economy Division of the Bank of Spain, Member of the Counsel to the Executive Board of the European Central Bank, Head of Emerging Economies at the Research Department at Banco Santander, and Economist at the International Monetary Fund. As regards her academic career, Alicia has served as visiting Professor at John Hopkins University (SAIS program), China Europe International Business School (CEIBS) and Carlos III University. 

    Alicia holds a PhD in Economics from George Washington University and has published extensively in refereed journals and books (see her publications in ResearchGate, Google Scholar, SSRN or REPEC). Alicia is very active in international media (such as BBC, Bloomberg, CNBC  and CNN) as well as social media (LinkedIn and Twitter). As a recognition of her thought leadership, Alicia was included in the TOP Voices in Economy and Finance by LinkedIn in 2017 and #6 Top Social Media leader by Refinitiv in 2020.

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Alessia Amighini, Alicia García-Herrero, Michal Krystyanczuk, Robin Schindowski and Jianwei Xu