Japanese Hodgepodge Of Old Ideas And New Contradictions, Stocks Dive In Sympathy

The leaders of Japan Inc. listened politely as Prime Minister Shinzo Abe laid out his intricately-woven master plan, the cornerstone of Abenomics that would fix everything and offer big handouts to Japan Inc. Yet, as his words seeped out, the Nikkei dove 5% from its intraday high in a couple of hours. Not exactly a ringing endorsement.

His plan was a veritable laundry list of reforms, tweaks, cosmetic surgeries, and vague but nearly revolutionary changes. So he wanted to increase the number of women in the workforce, and that’s a good thing to say in modern times. But the problem in Japan isn’t that women aren’t in the workforce, it’s that they rarely make it into upper management, and almost never to the top. The bureaucracy, the government, Japan Inc., even the yakuza – they’re run by guys.

He wanted to promote industrial innovation and proffered tantalizing tidbits about tax incentives and other handouts for the corporate welfare state to get companies to invest more. But they are investing – in China, Bangladesh, Mexico, even the US. In Japan, during the first quarter, the undisputed glory days of Abenomics, they cut investments by 3.9% from a year ago.

He promised to deal with the highly protected, massively subsidized, and deliriously inefficient agricultural sector. To foster competition, he’d crack the door open a bit wider for agricultural imports. But administrative hurdles that foreign suppliers have to jump over are the key impediments to imports, and they’re largely the bailiwick of the bureaucracy. Its resistance would be enormous. To crank it all into high gear, he’d promote “authentic Japanese cuisine” overseas. Yup, that’s going to turn agriculture around.

He’d also tackle the energy markets, something he’d proposed earlier. Japan’s power sector, including its energy grid, is run by ten mega-utilities, such as TEPCO, the owner of the melted-down Fukushima reactors. These entrenched geographical monopolies have enormous local and national political power. They’re woven tightly into a regulatory bureaucracy that they control – and support at the same time. Liberalizing that market and introducing competition won’t sit well with them. They don’t even know what competition is. Others before him have run their heads into that wall. But then he’d also restart the nukes come hell or high water, and that would please everyone in the power sector, the bureaucracy, and Japan Inc., but not the people….

He’d reform the restrictive web of labor policies to improve “labor-market flexibility.” From a company point of view, that would be a good thing: the government estimates that there are 4.6 million “unnecessary” workers, but rules don’t permit easy layoffs. The hot money wanted him to do away with these rules so that companies could shed “unnecessary” workers. Then these 4.6 million newly unemployed would be added to the 2.9 million who are already unemployed. The number of working people would drop from 63.1 million to 58.5 million, and the number of unemployed would shoot up to 7.5 million, in a country with no unemployment safety net to speak of. The official unemployment rate would exceed 12%. It would be the end of Japan as we know it. Even Abe saw that.

And it’s not really needed. Companies are hiring, despite these supposedly “unnecessary” workers on their payroll. In April, there were 89 job openings for 100 applicants. And 94% of all college students who graduated on March 31, the end of the academic year, did so with signed employment contracts in their hands. One of the advantages of declining birthrates: there are jobs for the young! So Abe didn’t offer the free-for-all labor market. Instead, he offered new regulations to create more job-matching and outplacement services – a horrid disappointment for the hot money.

He wanted to raise wages by 3% a year to protect workers’ purchasing power from the inflation that the Bank of Japan has vowed to unleash upon them. But these wage increases are private-sector decisions beyond his control, and they’d fly in the face of declining real wages in the US and other Western countries and would make Japanese production less competitive. This would coincide with his wish to foster competition in Japan by entering into more Free Trade Agreements….

Many of the measures would be an extension of measures already implemented bit by tiny bit over the last 20 years that did in fact partially open up the Japanese markets in various areas. When I went to Japan in 1996, T-shirts were made in Japan and cost a fortune. Now they’re made in China or Bangladesh and cost a few bucks. A welcome change. It wasn’t just T-shirts. While many sectors remain hermetically sealed off, such as the mass-market auto sector, competition from imports, including offshoring, and rising efficiencies in Japan were largely responsible for declining consumer prices – deflation, precisely the evil that Abenomics wants to stamp out.

And so it went with his master plan, a hodgepodge of vague wishes, strategies, ideas, and contradictions, similar to those made by his predecessors over the last ten years. They too had wanted to overhaul the formidable bureaucracy and introduce competition only to get stymied at every twist and turn.

Ultimately, the worst problem in Japan isn’t unemployment, which is low, or innovation in the private sector, or cordoned-off markets – though they are a problem – but an unwillingness by everyone to pay for the corporate and individual welfare state, or alternatively, to dismantle it. Hence the horrendous deficits that just keep getting bigger, and the debt that has grown out of control. And any good options to deal with them have long ago evaporated.

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