Are Abe's arrows flying true?
We are hearing increasing calls that ‘Abenomics’ — Japan’s Prime Minister Shinzo Abe’s strategy for economic revival — has failed. We wish to challenge those voices.
Abe’s strategy consists of “three arrows” — an allusion to a story from Japanese folklore in which a father demonstrates to his three sons how one arrow can be snapped easily, but three held together are unbreakable. Abe’s first arrow is monetary stimulus and currency devaluation aimed at achieving a 2% inflation target. The second is a flexible but stimulatory fiscal policy; and the third is a growth strategy focusing on structural reform to increase human capital, physical capital and productivity.
Hitting the target
Declarations of failure too often ignore the allusion and consider the first arrow only. Inflation ebbed away again last year, despite continuing monetary stimulus (quantitative easing). This is very disappointing, but too many critics stop here. Although it is difficult to argue that the first arrow has reached terminal velocity, the other two are now closer to target, and especially structural reform.
Taking a broader view, it is not nearly so easy to declare Abenomics a failure. Indeed, as we explain below, there have been some notable successes. Even the first arrow is not faring so badly. Arguably, breaking the deflationary expectations that have prevented firms and households alike from investing for two decades is as important as bringing actual inflation up to speed. Despite inflation hovering around or below zero since September, expectations have held firm, and more people have expected prices to rise than fall consistently since 2013 — a rare streak for Japan.
As investors, Abe’s campaign to improve the way companies are run and boost shareholder returns piqued our interest particularly. If you spoke with a Japanese fund manager 10 years ago, they would tell you that a large number of listed companies were not run in shareholders’ interests, and were, therefore, uninvestable.
The Stewardship Code and the Corporate Governance Code have changed that. Since Abe’s election, return on equity in Japan has risen by more than 3.5 percentage points (pp), while it has actually fallen for global listed companies as a whole (figure 4). Although Japan still has more to do to catch up, many companies are committing to return on equity targets for the first time in their histories. Total dividend payouts from companies in the MSCI Japan index increased 72% versus just 30% for the MSCI World. Abe’s reforms and his government’s activism have led to much greater interaction between investors and shareholders.
Figure 4: Measuring the third arrow
Since Shinzo Abe's election in 2012, return on equity in Japan has risen by more than 3.5pp.
An ageing, changing population
Everyone knows that Japan’s ageing population hinders economic growth — it is much harder to increase your output with fewer workers. Abe’s reforms are helping here too. Foreign workers still account for only 1.5% of the population and there is plenty of scope for expanding migration given record-low unemployment and acute skills shortages. While the Japanese population decreased by 954,000 during Abe’s four years to December 2016, the non-Japanese population increased by 380,000 (it had fallen by 185,000 in the four previous years). Abe has achieved this by revising regulations to permit foreigners to work in housekeeping and babysitting.
Many of those laws only came into effect in 2017, so we expect even better results to come. In December, the government expanded the scope of the system that trains workers from developing nations. The ‘foreign technical trainee program’ has been extended from three to five years (targeting construction in the run-up to the Tokyo Olympics). The government is considering allowing high-skill workers to apply for permanent residence status after just one year.
Abe has said that Japan should put more Japanese women and older men to work first and immigrants second, but there is plenty of scope to do both given Japan’s shrinking population. Despite being rather socially conservative, Abe has attacked both the patriarchal culture and the availability of childcare, even penning op-eds in the Japan Times that borrow phrases such as “the glass ceiling” from feminist organisers.
From April 2016, large firms were required to disclose gender diversity action plans and female employment data. When Abe was elected only 8% of members of the lower house were women; he has set a loose target of 30% by 2020. In 2012 there were a reported 400,000 children on day-care waiting lists, preventing many mothers from returning to work. Abe intends to increase day-care capacity by 400,000 by the end of 2017. He also intends to raise wages for childcare givers in order to support that aim.
Getting back to work
It is tempting to say that female labour force participation has undergone something of a revolution already. Indeed, the participation rate — the proportion of women either in work or actively looking — has risen to the highest level on record in April (51.1%), having been stagnant at around 48% to 49% for the 10 years to 2012. Almost two million more women are employed today than when Abe took over.
Although data is not available in a timely manner, various sources suggest a disproportionate number have gone into part-time or temporary contracts. This may be less a revolution than an expedient response to intensifying labour shortages (the job-opening to applicant ratio is at an all-time high too).
Abe has also tackled corporate taxes. He inherited a corporate income tax rate of 30% (39.5% when taking into account sub-national taxation), one of the highest in the developed world. Today the headline rate is 23.4%, and sub-national taxes have also reduced to make a combined 30%. Meanwhile, the launch of a taxpayer ID system for individuals and enterprise taxation for corporates has broadened the tax revenue base, helping Abe’s second arrow.
Attracting the masses
While taxation is a broad reform, others are specific to certain sectors. Take tourism for example. In the 10 years before Abe’s election, the number of international tourists visiting Japan grew at just 4.3% a year, despite the exponential growth of Chinese tourists worldwide (from 17 million to 83 million). Korea grew its inbound tourist headcount at double Japan’s rate. Since Abe, Japan’s inbound tourism has almost tripled, growing faster than the continuing explosion of Chinese tourism abroad, and attracting far more visitors than Korea over that period.
This is in no small part policy driven. Visa deregulation has expedited access for Chinese, Thai and Malaysian visitors; the ‘open sky’ agreement permitted many more flights to take off from and land in Tokyo. Further deregulation is in the pipeline. There are bills to make it easier for hotels and inns to sell package tours, and one to build customs facilities at commercial ports to welcome more cruise ships. A bipartisan bill to deregulate casino resorts is also expected to boost inbound tourism further.
Arrows still in flight
It is too early to declare the revival of Japan’s economy. Companies still seem reluctant to raise wages; companies and households are still hesitant to borrow and invest in the future. Yet it seems wrong to write off Abenomics as a failure and, as we have hopefully demonstrated, there are many ongoing successes.