Paul Krugman, the liberal economist and Nobel Prize winner, said that there was a growing risk of failure of "Abenomics" the policies of Japanese Prime Minister Shinzo Abe designed to boost the Japanese economy out of a two-decade slump.
Krugman has been a supporter of many aspects of Abenomics. However, he convinced Abe to delay another planned sales tax hike. An increase in the tax last April probably reduced consumer spending and contributed to the resulting depression. Japan has been unable to come near its target of 2 percent inflation. Quite the opposite, for the third time this year in July, the central bank's measure of inflation fell to zero. Kozo Yamamoto of the ruling Liberal Democratic Party said that the Bank of Japan should expand its monetary easing program even more by $83 billion.
Abenomics is a response to the failure of the Japanese economy to grow. In 2010 China already passed Japan as the world's second largest economy. Abe insists that his economic strong medicine is necessary for national security and to retain Japan's position as a prime world economic power.
Abe won a mandate last December to forge ahead with plans that includes an unprecedented amount of quantitative easing, government spending and at the same time considerable deregulation of business. He calls these measures a "three arrow" strategy, borrowing an image from a Japanese folk tale that three sticks together are harder to break than one. At first, the measures appeared to be working. Certainly they sent Japanese stocks soaring and the situation was aided by a weaker Japanese currency that increased exports. However, a sales tax imposed in April to increase revenue and help reduce the world's largest debt burden only helped return Japan to recession. As mentioned, Krugman convinced Abe that he should not increase the rate further as planned. However, he has cut the corporate tax rate further reducing his revenue. He hopes this will encourage business investment.
Abe is also contemplating other measures to make the private sector more competitive and profitable. He wants to change labor regulations that offered lifetime employment at some large companies. He is contemplating other legislative changes that will bring him into conflict with farmers, drugmakers and utility companies. Ever since the Japanese stock market and real estate bubble burst in the early part of the 1990's, Japanese companies have concentrated on cutting their debt and shifting their manufacturing base overseas where they make more profit. Wages did not grow and Japanese consumers failed to increase spending leading to a no growth economy.
The earthquake disaster and problems with nuclear power have not helped the struggling Japanese economy. Japanese demographics are unfavorable as well with an aging and shrinking population. While many economists support the idea of the purchase of government debt as a way to stimulate the economy and fight inflation, the IMF and others claim that Abenomics could cause a spike in bond yields and make the government's already huge debt load unsustainable.
Japan is facing an ageing population with the labor pool shrinking and the number of retired people increasing. As a result the government faces increases in spending on pensions, medical expenses and social security that increases debt. Japan already faces the world's largest debt to GDP ratio at 240 percent. Thomas Piketty the French economist has suggested that Japan should change its tax structure to help a younger generation be able to afford the cost of supporting seniors. Piketty suggests that taxes should be doubled on the wealthy and large firms from 10 percent to 20 percent. Redistribution of wealth could constitute a fourth arrow in Abenomics, Piketty argues.