Japanese GDP took another tumble in the second quarter, but Abenomics has not been for naught.
Although Japanese GDP actually fell by less than analyst expectations in the second quarter, a contraction of 6.8 percent on an annualized basis compared to estimates of 7.1 percent, the concerns about whether Abenomics has failed are as loud as ever.
Most of that criticism revolves around whether the sharp drop, which came following an increase in the national consumption tax, has gutted confidence in the almost three year-old program. In the face of those criticisms, it is useful to remember not only the idiosyncrasies of that headline GDP figure, but also the transformation that the Japanese economy has begun under Abenomics.
Although Japan’s economy lurched backwards in the second quarter, the situation is not nearly as bad as it sounds. In the first quarter, the economy grew at a 6.7 percent rate, meaning it has only contracted by one-tenth of one percent this year. The consensus is that the first quarter’s strong growth was a result of consumers shifting major purchases earlier in the year to avoid the consumption tax. The results do not look nearly as bad considering the short-term pain Abe’s tax reform inflicted.
This point was technical. The real impact of Abenomics is monumental. It has undone the two biggest flaws in the Japanese economy since World War II. Abe is attempting to break down the walls that have kept women from the workplace and in the process breaking 60 years of misogyny by the Liberal Democratic Party, as well as finally ending a deflationary spiral. In the long-run, both of these changes bode well for returning Japan to growth.
“We must capitalize on the power of women”
Japan’s record on women in the workplace is deleterious to both equality and the economy. Its two-tiered employment system traps many, particularly women, in a world of low pay and no benefits, while the other tier of nearly entirely men are theoretically guaranteed employment and raises for life. Furthermore, entrenched ideas about women’s talents seem 50 years behind the US and Europe.
The system has economic costs, too: Goldman Sachs’ Kathy Matsui estimates that Japan’s economy could grow by up to 14 percent by fully including women in the workforce. For a country mired in two decades of economic mediocrity, that has to sound pretty appealing.
It certainly does to Prime Minister Abe. Equalizing Japanese women’s role in the workplace has become a central tenet of Abenomics. Since 2012, Japan has embarked on opening daycare facilities to accommodate 400,000 more children by 2017 and set goals for female corporate leadership. There is much further to go, but the rhetoric and policies of the Abe government have shifted women in the workplace to a new paradigm.
The uptick in female employment has accelerated the decline in the gender employment gap, as seen in the chart below. In terms of structural reforms, this will have a massive impact for Japanese growth, especially while the country’s working population continues to decline.
With the negativity in recent economic data, it is easy to forget that the largest shadow looming over the Japanese economy is gone. Deflation, which perpetuated Japan’s economic headwinds since 1999, has not re-emerged since the Bank of Japan beat it in mid-2013. For three straight months, inflation has topped 3 percent. Three years ago, that seemed impossible.
Ridding the country of the weight of deflation was a prerequisite for achieving any of Abenomics’ broader goals. Certainly, other tasks like reforming corporate culture and overcoming population decline will be hard to achieve. But the first hurdle of ending deflation was, if even just psychologically, the largest.
The caveat to the return to normal times is an exogenous increase in energy prices. Since the Fukushima disaster, energy costs have skyrocketed for Japanese consumers. Electricity prices have risen by an annualized average of over 5 percent over the last six months, according to Statistics Japan. Although this is not what investors should want to fuel Japan’s reflation, it is nonetheless inflationary across the household and business sectors, and has the potential to have inflationary pressure on other areas of the economy.
After decades of freefall, Abenomics has set a firm foundation for a Japanese recovery. Some aspects of the program have a long-run focus and will be tough for consumers to swallow in the short-run, such as rebalancing tax revenue and rising consumption taxes. But in the midst of the discouraging growth caused by those parts of Abenomics, major changes in the economy have already taken hold and will make the rest of the path towards normalization easier.