Can “Abenomics” Revive Japan’s Economy? Part 2

Do We Have a Liberal Alternative?

Junji Tokunaga, Guest Blogger

Junji Tokunaga is an Associate Professor in the Department of Economics, Dokkyo Univeristy, Saitama, Japan. He is the co-author, with regular contributor Gerald Epstein, of a multi-part series for Triple Crisis on “Global Dollar-Based Financial Fragility in the 2000s.” This is the second part of a two-part post on the economic policies of Japan’s prime minister, Shinzo Abe, and on alternatives to neoliberal “Abenomics.”  (Part 1 is available here.)

Many voters understood the problems of Abenomics before the December snap election. An opinion poll by the Nikkei in November reported that 51% of the public opposed Abenomics, compared with 33% who favored it. Disappointingly, there was a lack of strongly liberal alternatives from the opposition parties, which helped Abe win his landslide victory.

What kind of policy should we implement to avert a return to recession? We have to carry out not austerity policies but fiscal stimulus, which can stabilize the economy, as Richard Koo argues in The Escape from Balance Sheet Recession and the QE Trap (Wiley, 2015). Reasonably, the Abe government announced expenditures totaling 3.5 trillion yen (US$29 billion) in 2015, which is expected to increase real GDP by 0.7% (“Japan cabinet approves Y3.5tn stimulus spending,” Financial Times, December 27, 2014).

It is clear that fiscal stimulus, as well as monetary easing, could stabilize the economy. But these policies can only buy time for sowing the seeds of an economic revival in Japan. So now is time to explore a set of liberal programs for long-term recovery.

First, we need to increase real wages, which could lead to a rise in consumption spending. Abe and Haruhiko Kuroda, governor of the BOJ, are trying to encourage big companies to raise wages in 2015, which is part of their target to achieve 2% inflation. To spread the benefits of economic recovery through the economy as a whole, however, we have to extend higher wages not only to workers at big corporations, but also to those at small- and medium-sized enterprises (SMEs), which are the main engines of the Japanese economy.

Second, we need a new public program which could foster basic industry for the next generation. The Abe government has carried out pork-barrel public projects. But a pork-barrel stimulus will not revive the Japanese economy in the long term, while averting another recession. Rather, we must explore liberal programs to facilitate the development of new industries, such as renewable energy (RE), instead of the defense and nuclear power industries that the Abe cabinet favors. Notably, Japan has a dominant position in renewable energy technology. In fact, the country accounts for the largest share of global patent applications for renewable energy. Japan’s share is 55%; the United States’, 20%; Europe’s, 9% (“Patent-based Technology Analysis Report-Alternative Energy Technology,” World Intellectual Property Organization, 2009). To maintain Japan’s dominance in the field, we have to drastically redirect the energy research and development (R&D) budget away from nuclear power generation—which reached 69% of total energy R&D spending in 2010—and toward renewables (“Japan and nuclear power,” Mainichi Newspaper, January 22, 2012).

Financial Intermediation to Promote RE

The financial system in Japan has the potential to serve as a bridge between lenders and financial investors who want to finance RE projects, and borrowers who plan to start renewable energy businesses. On the lending side, Japanese retail investors are among those most interested, worldwide, in “World Bank Green Bonds,” which are designed to raise funds for green economy projects in developing countries. On the borrowing side, many firms and entrepreneurs, partly supported by local governments, have applied to start RE businesses, including solar power generation, wind turbines, geothermal power generation, and biomass power generation.

The introduction in July 2012 of a feed-in-tariff (FIT) law for renewable energy, under which private providers can sell their renewable energy to big electricity companies in each area at prices to be fixed by the central government, has fostered a boom of RE businesses, particularly solar power generation. According to Japan’s Agency for Natural Resources and Energy, renewable energy generating capacity has increased from about 567,000 kilowatts in July 2012 to nearly 72 million kilowatts in October 2014. These developments imply that Japan has both extraordinary financial resources which could provide funds to RE businesses and numerous firms and entrepreneurs eager to make use of them, if given a chance. Some regional banks in Japan have focused on the development of a new kind of financing, known as asset-backed lending (ABL), to provide funds to RE businesses. In short, the financial system in Japan could play a critical in promoting the development of renewable energy.

As Koo explains, Japan’s “lost decades” and its deflation are attributable to the deficiency of private borrowing for investment purposes. It could take a significant amount of time for these liberal programs to create new investment opportunities and lift the economy as a whole. But we must learn the lessons of the Fukushima nuclear disaster and start to develop renewable energy. This could end deflation and move Japan to sustainable economic growth.

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