July 24, 2020

Abenomics: Japan’s Final Bastion Against Populism or a Misconceived Neology Delaying an Inevitable Debt Crisis?

By Ikenna Obonna

Francis Fukuyama attributed the ‘end of history’ to the emergence of a ‘borderless world’ categorised by the integration of world economies (Fukuyama, 1989). This has been partly due to the spread of liberalism across the globe. These factors contribute to what is commonly known as globalisation. Hyperglobalists such as Fukuyama see globalisation as the final bastion fighting against populism; a movement which in recent times has sought to exploit a distorted variation of nationalism allowing for the rejuvenation of the forgotten nation state. Due to the prevalence of globalisation in culture as well as economics and politics, we have seen the surge of populism in major economies such as the UK and the USA through Brexit and Trump respectively. However, this isn’t consistent with all global economic superpowers. Japan, the world’s third largest economy, whilst contributing to almost 6% to the global GDP (Nazdaq, 2020) has rejected populism in favour of globalisation and the economic stabilisation it provides. Japan’s ‘firewall against populism’ is primarily accredited to their lack of ‘economic cleavages’ (Japan Times, 2019) due to Prime Minister Shinzo Abe’s aptly named ‘Abenomics’, an economic ideology which focuses on a ‘mix of reflation, government spending and a growth strategy designed to jolt the economy out of suspended animation that has gripped it for more than two decades’ (The Economist, 2013).

Neologisms for economic policies aren’t revolutionary, with Reaganomics being the most infamous. The difference between Abenomics and previous neologies is its support from the respective country’s electorate. Arguably the most significant of Abe’s three arrows of Abenomics is monetary easing. As part of Japan’s quantitative easing programme in ‘April 2013, the BOJ announced [..] it would buy ¥60 to ¥70 trillion of bonds a year.’ (BOJ, 2015). By purchasing bonds Japan’s central bank was able to increase money supply in the economy by swapping out bonds for cash. As a result, prices are pushed higher, facilitating a decrease in interest rates thus encouraging spending. This ‘arrow’ alone incentivises a culturally globalised Japan. Domestic prices may rise but as a consequence this means a rise in imports leading to an increase in consumption of foreign produced goods. Although this worsens Japan’s balance of payments, reflected in a trade deficit of 909bn yen in May 2014 (BOJ, 2014), the Bank of Japan has put in place policies to improve domestic companies’ international competitiveness fostering the support for globalisation.

Economic theory suggests rational agents perform the action resulting with the optimal expected outcome for themselves. This is no different for multinational organisations, the decisions they make are aimed at achieving a supernormal profit. Gordon and Hines (2002) argue that “Tax policies are obviously capable of affecting the volume and location of FDI, since, […] higher tax rates reduce after-tax returns, thereby reducing incentives to commit investment funds”. With this in mind, the Bank of Japan proceeded to reduce corporation tax, promoting investment into Japan through the increased prospect of profitability. This is clear evidence of Abe promoting Fukayama’s ‘borderless world’ henceforth rejecting the notion of populism. The effects of cutting corporation tax on Japan’s net FDI can be seen below:

As the Bank of Japan began a gradual cut of corporation tax in 2014, the tax rate dropped to 35.64% from 37%. This led to an immediate incline in inward FDI which is reflected in the rise from 17.5 (JPY tn) to 23.5. The correlation between a reduction in corporate tax with inward FDI is constant through the beginning of ‘Abenomics’ to present day. In 2018 corporation tax was recorded at 29.74%, this historically (from a domestic perspective) low level of corporate tax was met with 30.7 JPY tn in inward FDI. This ranges from greenfield investments to joint ventures and everything in between which provide multinationals the opportunity to own a wholly owned subsidiary in Asia’s second largest economy; thus, integrating Japan’s economy with the rest of the world and as a result rejecting populism. This is perfectly underlined by the government of Japan’s tagline ‘Invest in Japan, the Land of Opportunities’ (JapanGov, 2018).

Despite these positive consequences, the notion of Abenomics being this final bastion fighting against impending populism may be dumb founded. This is due to Japan’s stagnant economy and growing debt to GDP ratio. Abe’s fiscal policy revolved around rejuvenating Japan through structural reforms, for example by increasing tax revenue. In part this was successful, the reduction in corporation tax saw tax revenues increase by 7 trillion Yen compared to the previous premiership. However, during the last decade, we have seen Japan’s debt to GDP ratio rise, prior to Abe’s premiership their ratio was at 207.9% (Statista, 2020). This rose sharply due to his reforms, reflected in the ratio rising to 229% in 2012. As of 2018, Japan’s debt to GDP hit 238.2% (Statista, 2020). Japan’s debt issues aren’t new, but they have been worsened due to the fiscal reforms introduced by Abe which have outstripped tax revenues, leading to the increased issuing of bonds. Their debt issues have become even more prevalent due to the current global pandemic. The impeding economic downturn will require increased government spending and as their economy is projected to contract this will worsen their debt to GDP ratio. This economic instability and stagnant economic growth may initiate the electorate’s rejection of globalisation in favour of populism. Abenomics may have fought of populism for now however Covid-19 will act as the biggest test to Abe’s economic policy and Japan’s political climate.

Bibliography

Abe’s master plan, The Economist.  2013

Bajpai, P. 2020. Nazdaq, The 5 Largest Economies In The World And Their Growth In 2020 https://www.nasdaq.com/articles/the-5-largest-economies-in-the-world-and-their-growth-in-2020-2020-01-22

https://www.boj.or.jp/en/announcements/release_2013/k130404a.pdf

https://www.boj.or.jp/en/research/brp/ron_2015/data/ron150930a.pdf

Fukuyama, F., 1989. The end of history?. The national interest, (16), pp.3-18.

Gordon, R.H. and Hines Jr, J.R., 2002. International taxation. Handbook of public economics4, pp.1935-1995.

https://www.japan.go.jp/abenomics/business/

Minami, D. 2019 Japan Times. Is populism finally coming to Japan?

Plecher, H. 2020. Japan’s national debt in relation to gross domestic product (GDP)

https://www.statista.com/statistics/267226/japans-national-debt-in-relation-to-gross-domestic-product-gdp/

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