Japan is making a big comeback with the “Three New Arrows of People First”!
New Year's Day 2024
Happy New Year.
I would like to express my sincere congratulations on the new year.
Thank you very much for all your help over the last year. Thank you for your continued support this year.
Year to Go and Year to Come
Now, it is well known that in the past year of 2023, especially from December onwards, the “politics and money scandal'' surrounding the Abe faction, the largest faction of the Liberal Democratic Party, suddenly emerged, and Japanese politics under the Kishida administration have been in great turmoil. Fortunately or unfortunately, it appears that drastic political reform is clearly becoming inevitable.
On the other hand, speaking of the Japanese economy, the inflation problem known as the trending rise in prices has been accelerating since around April 2022, and the 2% price stability target, that the government and the Bank of Japan have been promising to the people for the past 10 years, has been met. It has already been 20 months since the core CPI excluding fresh food, which is an indicator of this price stability, began to exceed this price stability benchmark.
The most recent data, the CPI statistics for November last year, shows that the core-core CPI, excluding energy and fresh food, which is said to be little affected by temporary factors, continues to record a significant increase of +3.8% year-on-year.
In particular, low-income people, whose Engel's coefficient is said to be high, are being hit directly by the “cost of living crisis,'' which is centered on foodstuffs. Although food prices have somewhat retreated from the ferociously high inflation rate that once approached double digits rate of increase, they still rose by 7.1% year-on-year on a nationwide basis in November last year.
As the population decline due to the lowering birthrate and aging population, which has become chronic since around 2000, is worsening, the burden of high inflation taxes has become a new burden, and the suffering of many consumers is only deepening. In addition, as the political and financial scandals mentioned above are spreading and becoming more serious, the general public's support rate for the Kishida administration and the ruling Liberal Democratic Party has plunged significantly. Distrust in the country's political and economic systems continues to grow. Unfortunately, we cannot help but see that Japan is now facing its greatest political and economic crisis since the end of the war.
The Reiwa bubble will surpass the Heisei bubble! ?
However, Japan's financial markets appear to be in the midst of a frenzy, as if they are indifferent to the extremely severe developments in our country's political and economic system. For example, a Nikkei editorial titled “A market where stock prices continue to increase and benefit households'' that was published in the morning edition of last year's Eve, the day after the Dai-no-kai ended, stated, “The Nikkei average stock price is 33,464 yen, and the annual stock price rise is 7,369 yen. The yen rose by 28% vis-a-vie the dollar, marking the highest rate of increase in 10 years.''
In general, it is often said that stock prices reflect the economy, as the saying goes, but is this always true? Is it correct to think that Japanese stock prices at the end of last year were at a fair value level, as they were at their highest level since the bursting of the bubble economy for the first time in about 33 years? Or, as the great financial crisis of 2008 so amply demonstrated, the Japanese financial market towards the end of 2023 will simply be fueled by baseless enthusiasm, similar to the so-called "Lehman Shock."
In any case, excesses are common in international financial markets. For example, according to the adaptive market hypothesis, financial markets merely learn from past experience, and the current “temporary heuristic'' of positive feedback will be reevaluated to negative feedback in the future.
First, let's focus on the monetary policy of the Federal Reserve, the US central bank, which is the focal point for the world economy and international financial markets. At the beginning of 2022, the Fed was far behind in responding to the then accelerating inflation, but since the summer of the same year, they have graciously acknowledged the mistakes of their monetary policy up to that time and have begun a series of large interest rate hikes.
The current US policy interest rate is approximately 5.5% compared to the US inflation rate of approximately 4%, and the US real policy interest rate after inflation adjustment is approximately +1.5%, clearly staying in positive territory, has already met the necessary conditions for a decline in the inflation rate (disinflation) by sufficiently tightening the economy.
International financial markets appears to be becoming too complacent, with U.S. long-term interest rates falling sharply since November last year, and the possibility of a resurgence of inflation cannot necessarily be ruled out. However, depending on economic indicators, the future of U.S. rules-based monetary policy is relatively reliable and probably requires only minor adjustments.
On the other hand, the Bank of Japan is still reluctant to lift its policy interest rate from negative territory, even though the country is facing inflation of about 4% just like the United States. As a result, Japan's real policy interest rate, approximately -4%, cannot help but be seen as too stimulative of the economy, which could also dangerously amplify asset bubbles in stocks, real estate and exchange rates. It is very difficult to say that the Bank of Japan's monetary policy has already met the necessary conditions for a future disinflation.
In any case, although it cannot be denied that it is overvalued, the U.S. financial market has shown movements that are generally consistent with the fundamentals of the U.S. economy, because the U.S. economy has more or less achieved price stability and sustained economic growth already.
During the July-September period of 2023, the U.S. economy continued to post positive approximately 5% quarter-on-quarter growth in real terms after adjusting for inflation, and the virtuous cycle of consumption and investment, which are twin engines of sustainable economic growth, continued to expand.
In contrast, the Japanese economy has not achieved price stability or sustained economic growth, and it is difficult to say that it has shown movements that are consistent with economic fundamentals.
In the same July-September period of 2023, Japan's GDP fell into negative growth for the first time in three quarters in real terms after adjusting for inflation. Particularly problematic is the fact that personal consumption and corporate capital investment, which are the twin engines of sustainable economic growth led by the private sector, have fallen into negative growth quarter-on-quarter for two consecutive quarters.
In nutshell, there is actually a marked asymmetry between the Japanese and American economies, despite of similarities between the both financial markets.
The combination of Kishida and Uedanomics, which is just the third infusion of Abenomics.
By the way, Kishidanomics that started in October 2021 and Uedanomics that began in April 2023 are essentially just a third incarnation of Abenomics, which has been going on for over the past 10 years. It is extremely important to reconfirm this.
First of all, there is (1) the continuation of bold monetary easing, which primarily favors large exporting companies through low interest rates and a weak yen, and (2) the so-called flexible fiscal policy, which seems wasteful and inefficient expansion of government spendings, ant (3) an arbitrary industrial policy called a growth strategy, which can be easily called preferential treatment to Abe’s political allies.
In this way, at the beginning of 2024, when we reconsider the combination of Kishidanomics and Uedanomics, it should be clear that they are the exact same version of the original Abenomics that came under the last Suga administration.
However, if this is the case, as I mentioned at the outset, it is necessary to pay particular attention to the fact that the three arrows of Abenomics are now rapidly becoming questionable, particularly since the last December.
Once again, the issue of scandals involving "politics and money" led by the Abe faction, the largest faction in the Liberal Democratic Party, has resurfaced under the Kishida administration. At the same time, the new Bank of Japan structure under Governor Ueda, in the midst of rising inflation, Uedanomics is still continuing to fire the first arrow of Abenomics, bold monetary easing, and we cannot help but think that we are unnecessarily prolonging and amplifying the phenomenon of Japan's “excess money'' in the economy.
The ultimate result of these bad political and economic policies is that it has fostered the current social tendency in our country of “just for now, just for money, and just for me'', and its excesses have led to scandals surrounding “politics and money'' and high inflation. I believe that this has led to the current serious economic imbalances and extreme financial instability due to the excessive expansion of asset prices and the amplification of asset bubbles.
Why is Japan declining?
In other words, in addition to the high consumption tax rate of 10%, the "upper-class " made up of Liberal Democratic Party members typically represented by the Abe faction, which is becoming increasingly inherited and privileged, are now putting an additional high inflation tax (rate) onto the public in general. The further extortion and exploitation of the general public should be seen as the greatest feature of the Kishida Liberal Democratic Party administration, which is nothing more than the third incarnation of Abenomics.
The most famous aspect of Abenomics is the "three arrows" mentioned above. However, one must also remember the permanent increases in the consumption tax rate. The consumption tax rate was permanently raised to 8% from 5% in April 2014, and then was again increased to 10% permanently in October 2019. However, these may be called the "two fetters" as opposed to the three arrows of Abenomics.
In any case, as economists Acimoglu and Robinson argue in “Why Nations Fail?'', there has been a serious failure to establish a democratic and inclusive political and economic system due to political and financial scandals. I have no choice but to admit that our country could perish if things continue as they are.
Now is the time to confront head-on the shackles and corruption that have hindered the establishment of a democratic and inclusive political and economic system, to completely eliminate them, and to aim for Japan's revitalization. In the end, it is self-evident that there is no future for Japan without an immediate and complete liquidation of “money-filled and corrupt Japanese politics.''
In order to stop the expropriation, or exploitation, of the general public by the "upper class citizens," which is becoming increasingly inherited and privileged, it is necessary to abolish the double heavy taxation of the currently accelerating inflation tax and the conventional 10% consumption tax rate. A permanent reduction to 5% consumption tax rate would be a key first step.
Needless to say, if price control measures are to be taken in the first place, normalization of the Bank of Japan's monetary policy must be the first priority.
However, in order to normalize monetary policy, which includes a series of interest rate hikes, starting from the lifting of the negative policy rate, it will be difficult to avoid the risk of an economic recession due to a sharp rise in series of interest rates as a side effect. For this reason as well, it is essential to permanently reduce the consumption tax rate to 5% in order to eliminate the consumption tax to offset the negative effect of the normalization of monetary policy.
In this way, a permanent reduction in the consumption tax rate to 5%, aimed at stabilizing prices and abolishing the consumption tax, will create a virtuous cycle of consumption and investment, which will lead to sustainable economic growth for Japan.
It may be needless to say, in the face of the greatest political and economic crisis in the post-war era, repeating petty debates will bring no benefit. Rather, it is a waste of time and can unnecessarily confuse and mislead the public.
Now is the time to release the “Three New Arrows of People First” toward the revival of Japan!
Either way, the greatest crisis can be the greatest opportunity. I believe that now is a once-in-a-lifetime opportunity for the revival of Japan.
Last but not least, in my book “Scenarios for Japan's Revival'', if Japan had a “people-first economic policy'' that valued the lives, property, and livelihoods of “ordinary citizens'' rather than “upper classes,'' the author claims that resurrection is entirely possible.
Abenomics, which has now clearly become outdated, and its old three arrows, will be replaced by a new economic policy that puts the people first, consisting of (1) abolition of consumption tax, (2) normalization of interest rates, and (3) abolition of arbitrary industrial policy. Now, as we now embark in to the new year of 2024, it appears that the possibility of Japan's great revival in the form of the Reiwa Revolution through non-violence is about to unfold before our eyes.
Whether our dreams come true in the new year, which is perhaps our country's last chance, depends solely on the self-awareness and strong will of each and every one of us.
Tomo Nakamaru
Former World Bank Economist