Student Perspective | Abenomics: A Recovery, But Much Work Still to Be Done

Written by: Stephen Frantz ’20, Tower Center Undergraduate Research Fellow

On March 7, the SMU Tower Center hosted leading Japanese economist Dr. Motoshige Itoh. In his lecture, Dr. Itoh discussed the mixed successes of Japanese Prime Minister Shinzo Abe’s monetary policy. In 1997, Japan reached its highest-recorded GDP, but experienced economic decline in the following years; by 2011, Japan’s GDP had receded by 6-7%.

While Prime Minister Abe has been successful in stimulating the economy since his election in 2012, Japan’s supply chain has been slow to catch up.

In his lecture, Dr. Itoh pinpointed the problems preventing “Abenomics” from being a complete success and presented a few possible solutions to address them.

According to Dr. Itoh, Japan’s two main problems at the turn of the century were a financial crisis and an unchanging level of production, even as the price of goods fell. Upon being elected Prime Minister of Japan in 2012, Abe stimulated economic demand by adopting an expansionary monetary policy. Since his election, Japan’s GDP has returned to its 1997 levels, and the labor supply has grown from 0.8 jobs per person to 1.6 jobs per person. On its face, “Abenomics” seems successful, but Dr. Itoh stated that the average person would say the market has not recovered. While unemployment has fallen, wages are not increasing with price, which negatively impacts many Japanese citizens’ well-being. Dr. Itoh’s argument is that supply, outside of the government’s reach, is not catching up to the governmentally-stimulated demand because corporations are hesitant to invest in their own businesses. Instead, they prefer to save their money in case another financial crisis occurs. In fact, according to Dr. Itoh, Japanese corporations save significantly more than most other developed countries. Therefore, changes should be made in the labor market and in the level of corporate savings in order for the market to become maximally efficient.

Dr. Itoh advocates for the Japanese government to direct its attention to two policy areas if the country is to solve its supply problem. The first is trade policy. Mega-regional free trade agreements and economic partnership agreements have blossomed in recent years, opening many states’ markets to foreign competition. Dr. Itoh argues that Japan should continue its support of agreements like the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the Japan-EU Economic Partnership Agreement. Because of the World Trade Organization’s declining role as a facilitator of international trade, it is imperative for Japan to endorse trade liberalization and continue negotiating trade agreements. If there is an increase in trade liberalization, Japanese suppliers will be incentivized to invest their capital into maximizing efficiency so that they can compete with suppliers of other nations.

A second area of focus for Japan is corporate governance reform. According to Dr. Itoh, corporations are governed by internal interests; there are very few external interests (like investors) that place market pressure on corporate boards. If it is legally mandated that these interests are to be represented on the board of directors, corporations will likely be pressured to invest the capital that they’ve saved. Corporate governance reform, coupled with increased trade liberalization, will place significant pressure on Japanese corporations to invest. Japan is on the proper path towards sustainable growth through “Abenomics”, but for the country to maximize its efficiency, compete with other countries, and lower prices for its consumers, corporations will need to refrain from protecting themselves by saving money and reducing capital flow.