Mike Callaghan is Director of the Lowy Institute's G20 Studies Centre.
As the debate over 'growth versus fiscal austerity' continues, with the latest battleground set to be the IMF's forthcoming annual review of the UK economy, attention continues to focus on what is happening in Japan. Simon Jenkins in The Guardian says that if you thought Germany was the model economy, forget it. Look to Japan. In his view, 'if Abenomics works, Britain's leaders will look like monkeys'.
So what can the world learn from 'Abenomics', named after Prime Minister Abe's plan to revive the moribund Japanese economy which has struggled with deflation for over 15 years? The plan involves a short-term fiscal stimulus, an easing in monetary policy with an expansion in the monetary base, and structural reforms to improve Japan's medium-term growth potential.
The first lesson is the benefit of actually having a plan to restore growth. More importantly, it is a comprehensive plan that goes beyond simply debating the merits or otherwise of fiscal austerity or monetary easing. It covers fiscal, monetary and structural policies. As Joe Stiglitz points out, Prime Minister Abe likens this approach to holding three arrows: taken alone, each can be bent; taken together, none can.
The rest of the world also needs a comprehensive plan to restore growth, and most importantly, one that includes a focus on advancing structural reforms. G20 finance ministers acknowledged at their meeting on 18 April 2013 that more needed to be done to lift global growth. And while there was one brief reference to 'continuing with ambitious structural reforms', their communique failed to convince that ministers had a robust discussion (to use Abe's terminology) on the need to advance all three policy arrows together: fiscal, monetary and structural. [fold]
Yet prior to the meeting, the OECD warned G20 ministers that, in order to achieve stronger and more balanced growth, more action was required on structural reforms.
Commentators on Abenomics rightly point out that the most important part of the plan to achieve a lasting improvement in the Japanese economy is success in advancing structural reforms. This is acknowledged by Prime Minister Abe, who says that the 'graver task' confronting his government is to enhance Japan's productivity, retool its economic structure and provide women with greater opportunities.
Japanese Deputy Prime Minister and Minister of Finance Taro Aso has said the reforms will include 'massive deregulation' as well as Japan joining the Trans Pacific Partnership negotiations. The full details of the structural reforms are to be released in June, and their implementation will be politically very challenging, but their importance is at least being recognised by the Japanese Prime Minister. There is a lesson here for Europe and the G20.
Another lesson from Abenomics is the benefit of decisiveness. As Prime Minister Abe acknowledges, 'we have shot those arrows before, but only timidly, and incrementally. In my plan, the three arrows are being shot strongly, fast and all at the same time'. The monetary and fiscal policy arms of the plan are aggressive, with a short-term fiscal stimulus package amounting to about 1.5% of GDP in 2013/14 and a doubling of the size of base money in two years. Japan's Deputy Prime Minister has noted that bold policies were required because the objective was to change peoples' 'perceptions, outlook and mind-set'.
Here is another lesson for the rest of the world. The Singaporean Finance Minister and chair of the IMF's International Monetary and Financial Committees, Tharman Shanmugaatnam, has noted that 'the commodity that is in short supply now is confidence'. Greater confidence is required for businesses to increase investment and employ people, just as it is necessary if people are going to lift their spending on goods and services.
Abenomics is a high risk strategy, and it remains to be seen whether it will be successful in the long run. But it has demonstrated that bold, decisive policy can shift perceptions and lift confidence, at least in the short-term. Since the re-election of Prime Minister Abe last November, Japan's stock market, property prices and consumer confidence have reached five-year highs.
In short, the rest of the world, and in particular the G20, should look at Japan and reflect on the benefits that can come from articulating a bold, comprehensive plan to restore growth – even if it is high risk.
Photo by Flickr user nofrills.