Japan is the world’s third largest economy, Australia’s second largest export market, and third largest import market. It is also a country whose economy has been stagnant since the land market crash of 1990.
This stagnation, accompanied by a rise from 30% to 40% in the number of workers without permanent full-time jobs since 2002, validates the “stagnation thesis” that Keynes advanced in his 1836 book General Theory.
What they all pointed out was that capitalism does not find its equilibrium at full employment, but instead, “it seems capable of remaining in a chronic condition of sub-normal activity for a considerable period without any marked tendency towards recovery or complete collapse. Moreover, the evidence indicates that full, or even approximately full employment is of rare and short-lived occurrence.”
The Democratic Party of Japan (DPJ) was elected to office in 2009 after the incumbent Liberal Democratic Party (LDP) proved unable to rejuvenate the economy.
The DPJ's solution was to raise the national consumption tax from 5% to 8%, a policy supported by the LDP.
This caused a split in the DPJ with about 50 MPs leaving the party in protest. In the 2012 election that followed, the LDP's Shinzo Abe became prime minister. During the campaign, he unveiled his policy of “Abenomics”, which once again promised to revive Japan’s economic prospects.
Abenomics is a quiver containing three arrows. The first is conventional stimulus measures, the second a version of the “quantitative easing” adopted by the US and Britain and now said to be under consideration in the European Union.
In the US, quantitative easing involved printing money to buy long-term treasury bonds and mortgage securities. In both Britain and the US, it was aimed at lowering long term interest rates to make them unattractive to investors and steer them towards buying shares and corporate bonds.
The prevailing economic wisdom of those who caused the global crisis is that this will somehow stoke economic growth from above.
Yet its contribution so far is limited to creating asset bubbles.
Another contradiction with this “cure” is that it drives up public debt. The money markets have a fundamental difficulty with this because they say it puts governments in competition with private capital for access to debtor finance.
Quantitative easing led to a rise in government debt as a share of GDP in the US from about 60% to just over 100% from 2006. In Britain, it went from 40% to just under 100% over the same period.
But Japan’s government debt stood at a ratio to GDP of over 180% in 2006. At the end of this year, it has climbed to more than 240%.
What the banks and the global money markets demanded was a program of government debt cuts. Britain and the US obliged with austerity measures, and in Japan Abe introduced the consumption tax rise to 8% in April.
The previous rise in the national sales tax, from 3% to 5% in 1997, is said by many economists to be responsible for extending Japan’s downturn.
History has now repeated itself once more with Japan moving from stagnation to official recession. Real GDP fell by 1.6% on an annualised basis in the July-September quarter, after a 7.3% contraction in the previous quarter.
Consumer spending, which accounts for almost two thirds of Japan’s GDP, has been restrained by the fall in real wages. These have declined by 9% since 1997. Under Abe’s prime ministership, they have declined for 15 consecutive months, including a 3% fall in September compared with a year earlier.
Abe’s response has been to call an early election for December 14, just two years into his four year term. It’s an election he is likely to win because the main opposition party, the DPJ is still in disarray.
The anti-nuclear movement, the anti-militarisation movement, and the anti-base movement in Okinawa are the real opposition.
What is also likely is that the voter turnout will be lower than that in 2012. Then, just over 40% of those eligible to vote declined to do so a record low.
A recent survey indicates that the percentage of Japanese voters interested in the election is down by 15% from the 2012 figure.
The LDP’s main policy seems to be to postpone for 18 months the further 2% sales tax rise scheduled for October next year.
If Abe is re-elected and puts the third arrow in his quiver into the policy bow, the economy can only weaken further. Their provisions include; setting up six strategic economic zones where labour laws will not apply; making further concessions to employers to encourage investment; cutting corporate tax rates; and dismantling the permanent employment guarantees that some workers still have.
Lawrence Summers, the conservative former US Treasury secretary, is a recent, if reluctant, convert to the Keynesian stagnation thesis.
He now argues that all of the advanced economies are stuck in what he calls “secular stagnation” and that what they can all learn from Japan is the relative efficacy of different policies.
One obvious lesson is the disconnection between the Nikkei Stock Average, which has surged to a seven-year high, and a real economy that has been stagnant for a quarter of a century.
The result is that a small elite gets richer while the great majority, whose increased consumption can lift the economy, get poorer and cut consumption. In October, household spending fell 4% from the previous year.
Japan’s early election is a political ploy, one that has little support. In a recent poll, only 18% of respondents approved of the decision to call an early election and 62% were opposed to it.
What Abe is trying to do with his re-election is claim a "mandate" for the restart of nuclear reactors -- which most Japanese people oppose --and a change to the constitution to overturn the prohibition on collective self-defence.
This would allow him to deploy Japanese troops overseas alongside US and other allied troops for the first time since the end of World War II.
Fukushima is ticking away in the background like a time bomb. Despite spending $US17 billion attempting to clean up the plant in the past four years, 500,000 tonnes of contaminated water with nowhere else to go is now stored in more than 1000 tanks on site.
A large quantity of contaminated water still finds its way to the site and into maintenance trenches with outlets to the sea. The latest “solution’” is to build a 1.5 kilometre frozen barrier to prevent contaminated groundwater reaching the reactors basements. Having never been tried before, no-one knows whether it will work.
Should Abe be re-elected and try to implement his belligerent policies in the name of a parliamentary mandate, he’ll face the more powerful opposition of Japan's social movements.