This past week Japan re-elected its prime minister, Shinzo Abe, for an additional four years despite his previous policies having precipitated a deep recession in Japan that began this past April 2014—Japan’s 4th recession since 2008.
The central elements of Abe’s policies during his first two years in office, 2012-2014, included massive central bank money liquidity injections, first introduced in 2013, and a major sales tax hike for consumers that followed in 2014. A so-called ‘3rd arrow’ of ‘Abenomics 1.0’, proposals for structural economic reforms, was also announced in 2013 but has yet to be fully defined or implemented. That 3rd arrow of structural reforms to Japan’s economy is now at the top of the political agenda in Japan. It will be defined in the coming weeks and launched in a package of new policies in 2015—i.e. ‘Abenomics 2.0’.
‘Abenomics 2.0’ in 2015 will consist of new forms of austerity measures, contained under the cover of the softer code word of structural reforms—i.e. Abe’s former ‘3rd arrow’. Much like calls for structural reform now also occurring in Europe today in France, Italy, Spain and elsewhere, ‘structural’ refers mostly to further capitalist reordering of labor markets—i.e. ‘labor market reforms’. That means changes to how workers are paid, new ways to compress wages, limits on benefits workers will be allowed to receive, and new restrictions on unions and collective bargaining.
As Abenomics 2.0 is defined in the coming weeks and months, Japan wage earning households will therefore soon face even more austerity and even more wage and income compression. While another sales tax hike and still more QE money injections by Japan’s central bank—i.e. ‘arrows’ one and two—are still possible in 2015-16, the primary focus for 2.0 will be on structural, and especially labor market, reforms and related austerity measures.
Abenomics 1.0
Abe’s 1st arrow of liquidity injection—introduced in 2013 in the form of a ‘quantitative easing’ (QE) program—consisted of Bank of Japan direct buying of $530 billion of bonds held by private investors and bankers. Abe’s ‘2nd arrow’, a major increase in the national sales tax, raised Japan’s sales tax from 5% to a new 8% level this past April 2014.
Like all QE programs introduced to date in the USA, UK and elsewhere, Abe’s $530 billion QE produced a doubling of Japan stock prices-in the case of Japan in just one year—and a corresponding consequent surge in banks and investors’ profits and capital incomes. Japanese multinational companies also benefited as their foreign currency earnings rose in value, as a result of QE’s reducing Japan’s currency (Yen) exchange rate. The lower Yen also boosted Japan export sales for Japanese non-financial companies. The currency earnings and export sales in turn drove up stock prices and returns on financial assets still further.
In contrast, the 3% additional sales tax hike—Abe’s ‘2nd arrow’—directly reduced the real incomes of Japan wage earning households. The sales tax hike was not the only factor reducing wage earners’ real incomes. The QE money injection, by reducing Japan’s currency exchange rate, also raised the price of imports and therefore inflation for Japanese households. That inflation in turn reduced real wages and real household incomes even further, in addition to the sales tax hike. Another negative effect of QE was to divert the massive$530 billion monetary injection into mostly financial asset investment. Japanese investors, now flush with $530 billion extra in cash, invested the money injection largely in stocks, bonds, derivatives, and other financial instruments, instead of into real production in the Japan homeland economy that might otherwise have led to real investment, real jobs, and real incomes for Japanese workers. Or, alternatively, they invested a good part of the $530 billion abroad, thus also denying Japan wage earning households of any sharing of the benefits of QE.
According to the business press, Japan businesses reportedly are now sitting on $2.65 trillion in uncommitted cash. That’s equal to more than 60% of Japan’s annual GDP. In other words, Japan companies, shareholders, and investors benefited nicely from Abe’s ‘1st arrow’ of QE injections. On the other hand, they have been especially reluctant to share it in the form of wages with their workers. Real wages of Japan workers declined by 3% in 2013, in the first year of QE. They are projected for a further fall of 2%-3% this year, 2014, as well.
Given the downward pressure on wage earner incomes, consumption in Japan fell steadily throughout 2013 as QE was being introduced, except for the last three months as consumers stocked up on goods in anticipation of a coming 2014 sales tax hike. But once the sales tax was raised in April 2014, the floor collapsed on Japanese consumption spending, falling by almost 20% in just one quarter, April-June 2014.
And with that consumption collapse came the deep contraction of Japan GDP in the spring 2014 quarter, during which it fell by -7.3%. That was followed in the July-September 2014 period by another -1.9% GDP decline. Japan today finds itself mired in yet another deep recession, with no recovery light in sight at the end of the latest recession tunnel.
Abenomics 2.0: The ‘3rd Arrow’
Abenomics 2.0 promises even more of the same trends. The outlines of Abenomics 2.0 and new forms of austerity are now just beginning to emerge in Japan. Measures reportedly being considered include: major changes to Japan’s social security retirement system that will reduce benefits. That means a cut in what amounts to ‘deferred’ wages. Japan’s joining the USA led negotiations to establish a trans-pacific free trade zone, called the Transpacific Partnership (TPP), which will mean downward compression on wages as a result of free trade arrangements. Still undefined measures to increase business productivity, which almost always means jobs displaced by technology and workers working harder and longer for little or no more pay.
Following ‘labor market reform’ initiatives now emerging in Europe, Abe will also reportedly propose changes to make it easier for businesses to hire and fire full time workers. That will likely lead to an even greater shift to contingent employment, i.e. more part time and temporary job hiring as businesses lay off full time and replace with part time and temp workers. That too will also result in downward wage compression. Meanwhile, as a cover to all these real measures, Abe will continue to ‘talk’ to businesses, urging them to raise wages for their employees, even when both understand such talk is only for public consumption.
Wage compression forms of austerity will most likely also be accompanied by more traditional austerity forms as Abenomics 2.0 is rolled out. Despite having raised sales taxes to 8% on wage earning households, and still considering raising them further to 10%, Abe has called for further cuts in corporate taxes from the current tax rate of 36% to 30% or less to help boost business earnings, adding further to their $2.65 trillion still un-invested cash hoard. And government spending will likely also be cut further. With government spending essentially flat over the past two years in Japan despite its recession, and with the current recession reducing government tax revenues further, Japan’s government debt of 240% of GDP—one of the largest in the world—will likely lead to government spending decreases under Abenomics 2.0.
So Abenomics 2.0 will mean continuation of traditional forms of austerity , combined with the newer forms comprised of a new emphasis on structural and labor market reforms.
Given the clear failure of Abenomics 1.0 to generate sustained economic growth and economic recovery for all but investors, bankers and big corporations in Japan since 2012, plus the strong likelihood that Abenomics 2.0 will prove little different in that regard, why then did Japan voters this past week vote to return Abe and his Liberal Democratic Party back into office? What’s going on? And is this apparent anomaly strictly a Japanese phenomenon? Or does it represent political changes occurring in some similar fashion throughout the advanced economies of Europe-USA-Japan, as the global capitalist economy continues to slowly weaken and slide into another general recession?
Dr. Jack Rasmus
copyright 2014
The Political Bases for Continued Austerity
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Dr. Jack Rasmus @drjackrasmus
Jack Rasmus 
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