Japan Institute for National Fundamentals

　　　　　While the government says Prime Minister Shinzo Abe’s “Abenomics” economic policy has entered the second stage, relations between the first and second stages and specific measures for the new stage are left vague. Targets cited for the second stage include 600 trillion yen in nominal gross domestic product, which is effectively the same as estimated in the government’s medium to long-term economic and fiscal projection　that had already been announced.
　　　　　More important than targets are measures to achieve the targets. The second stage still depends heavily on monetary easing and fiscal spending to expand demand over a short term. We must learn from history that Japan now must realize long-overdue structural reforms.

Lessons from U.K. decline
　　　　　Countries repeat ups and downs. The United Kingdom, which had been the world’s hegemon until the early 20th century, exploited capital export dividends, interest income on external loans and shipping services revenues to maintain a current account surplus even after its trade balance turned into deficit in the late 19th century. Facing the rise of emerging economies including the United States and Germany, however, the United Kingdom gradually lost its position as a manufacturing power and plunged into a long deflation.
　　　　　Factors behind the plunge included a high-cost economy and an earning rate fall that resulted from a decline in industrial competitiveness and a stagnant innovation. Earning rates slipped below market interest rates, causing investment stagnation that led to cumulative price drops. The United Kingdom had then been the world’s largest creditor nation and had little chance to immediately plunge into a crisis, delaying structural reforms. As a result, it remained in a long slump. Fundamental economic reforms had not been realized until Margaret Thatcher launched such reforms after becoming prime minister in 1979.

Japan free from sense of crisis
　　　　　The U.K. situation in the early 20th century is similar to the present Japanese economic situation in which Japan has lost competitiveness to China and other emerging economies that have been catching up with industrial countries.
　　　　　Japan’s gross debt and its net debt as percentages of GDP are the highest among industrial countries. Gross debt represents total government borrowings, while net debt excludes government debt offset with government-owned financial assets. Despite the high-level debt, Japan has maintained a current account surplus and has had almost all of government bonds absorbed into the domestic market to achieve the world’s lowest interest rates on government debt. Therefore, Japan has little chance to plunge into a fiscal or financial crisis that could be triggered by massive foreign fund outflow. The recognition of such situation has delayed structural reforms. Any sense of crisis has not grown despite investment’s shift from Japan to emerging economies, lagging innovation and stagnant earning rates.
　　　　　Monetary easing and fiscal spending under the Abenomics policy represent reforms on the demand side. Required for the revitalization of the Japanese economy are supply side reforms. It is indispensable for Japan to raise earning rates for real assets through restructuring including regulatory reforms. Not only the second stage of the Abenomics policy but also the revitalization of the Japanese economy depends on effective structural reforms. Unless restructuring is implemented to meet environmental changes, history may repeat itself.

Yujiro Oiwa is a JINF Planning Committee Member and Professor at Tokyo International University.