Economic Development of Japan
No.14 Current Issues 2013
Current Issues 2013
Abenomics
 Future of manufacturing SMEｓ

LDP Government of Shinzo Abe



First Abe Cabinet (Sep.2006-Sep.2007) was unsuccessful.
Second Abe Cabinet (Dec.2012-) has the following features:
 Active, quick and vigorous (compared with past PMs)
 Politically conservative (critiques say “right wing”)
 Aiming to revise constitution—instilling nationalism,
officially approve military capability
 Diplomatically active (foreign visits, top sales, coping with
China & N. Korea, etc.)
 Economic revival as top national priority (Abenomics)
High popular support + fragmented oppositions
 LDP will very likely win a landslide victory in Upper House
election (July 21, 2013) and gain political free hand
Three Arrows of
Abenomics
To revive the economy, three “arrows” are mobilized.
1. Aggressive monetary policy (“New Dimension”)
- New BOJ Governor Haruhiko Kuroda (Mar.2013-)
- Dispel deflation mindset: inflation target of 2% within 2 years
- Monetary expansion with new asset purchases (REIT etc.);
doubling monetary base & gov’t bond holding in 2 years
- Correction of high yen
2. Flexible (=active) fiscal policy
- Revive economy first, consolidate budget later
- Increase infrastructure investment
3. New growth strategy (proposed in steps; cabinet approval June
14, 2013)
- Japanese Economy Revitalization Headquarters (under it:
Industrial Competitiveness Conference)
- 3 roadmaps and 3 plans (12 pillars – 37 items – 56 sub-items)
Source: Japan Revitalization Headquarters, PM Office
Supporters of Abenomics
J. Stiglitz—“Depreciating yen to end deflation is the right policy.
Just as I recommended 10 years ago.”
Paul Krugman—“I evaluate Abenomics highly; no other country
could do this policy mix.”
IMF Managing Director Lagarde—”Inflation target of 2% is
desirable as long as central bank independence is secured.”
Fed Chairman Bernanke—“I support it as a policy to end
deflation.”
Prof. Heizo Takenaka (Keio Univ.)— “Abenomics is 100% right.”
Prof. Koichi Hamada (Abe’s advisor)— “Don’t worry about recent
stock market drops—they are just corrections of excess
optimism. The real economy is improving.”
Prof. Takatoshi Ito (Tokyo Univ.)— “BOJ economists think QE is
ineffective. But many researchers and officials support QE as
a tool to change inflation expectation.
Critiques of Abenomics
George Soros (investment guru)—”Japan’s monetary policy is
bold but very risky; it may trigger a collapsing yen.”
Prof. Kunio Okina (Kyoto Univ.)— “If deflation mind is dispelled
but fiscal discipline is not secured, monetization of fiscal
deficit will generate a serious dilemma between financial
stability and price stability.”
Kazuo Ueda (Tokyo Univ.)—Monetary expansion increased
interest & yen volatility. If long-term interest rates rise,
expected positive impact on real economy will not happen.
Ryutaro Kono (BNP Paribas)— “The monetary transmission
mechanism is broken. Under such circumstances, monetary
expansion may destabilize asset prices, raise long-term
interest rates, and put BOJ in a macro policy dilemma.”
Nikkei Newspaper commentary—“The growth strategy lists only
easy measures; bold reforms in such key areas as medical
service, agriculture, corporate tax rates, etc. are not
clarified.”
%
9
Call rate
8
(interbank shortterm interest rate)
7
Bubble
Zero
interest
rate
policy
6
5
4
Zero
interest
rate
policy
3
Lehman
Shock
2
1
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
0
Percent
Money &
bank
lending
40
30
20
10
0
-10
Monetary base
Money supply (M2+CD)
-20
Bank lending
2012
2013
2010
2011
2008
2009
2006
2007
2004
2005
2003
2001
2002
1999
2000
1997
1998
1995
1996
1994
1992
1993
1990
1991
1988
1989
1986
1987
1984
1985
-30
1983
Excess reserves
are built up
during zero
interest rate
periods
My View on Abenomics






Compared with DPJ’s total impotence, Abe is doing much
better. He has brightened Japan’s short-term psychology—
but that is not enough for long-term growth.
A policy mix of fiscal, monetary and growth policy is nothing
new; but Abe’s policy presentation is innovative.
Growth policy is primary, and fiscal and monetary policies
are supplementary. New industries must emerge first, then
macro policies should support them. Abenomics is strong in
fiscal and monetary areas, but growth policy remains weak.
If long-term interest rates start rising, government will be
completely bankrupt.
Pumping money into a broken transmission mechanism risks
asset bubbles and financial instability. Market psychology is
unpredictable and BOJ cannot control what will happen.
Proper policy procedure is not followed: there is a disconnect
between visions and listed actions.
Pumping money
into an integrated
world is risky.
Global and national good & asset markets
General
goods &
services
Inflation
target of 2%
Bank of Japan
Aggressive
monetary
policy
Global & national
liquidity glut
Quantitative
expansions
Consumer
durables
Government
bonds
Foreign
money & assets
(F/X instability)
Driven by
unstable
market
psychology;
unpredictable
direction &
timing
(US Fed: ending QE3 within this year???)
Precious
metals
Investment
in emerging
markets
Real estate
US & EU
Energy &
commodities
Stock market
Standard Policy Making Procedure
(Five Necessary Conditions)
The entire process should take about 1 year for policy revision and 2-3 years for new policy
5. A secretariat with sufficient authority and
responsibility to coordinate the entire process
Top leader
1. Vision
2. Consensus building
3. Documentation
Brainstorming
Studies
& surveys
Set broad
goals &
direction
Drafting
work
Comments
& revisions
(Drafting may
be outsourced)
Stakeholder
consultation
4. Substantive
stakeholder participation
Ministries
＆agencies
Businesses
Academics &
consultants
Regions &
localities
Finalize
& approve
Growth Strategy Formulation in
Abenomics




Broad visions are given (three arrows, three plans, etc.)
However, concrete growth measures were presented too
quickly without deep consultation with stakeholders. They
are just a collection of various ideas proposed by committee
members and officials in charge.
Visions – (targets) – (policy areas) – actions
Because consensus building and stakeholder involvement (2
& 4 in diagram above) are skipped, proposed measures are
too many, too vague, and unlikely to be supported or
implemented by businesses and key ministries.
By taking sufficient time to interact with all stakeholders,
they will feel attached to and responsible for agreed policies.
This psychological effect is important; hasty announcement
of policy measures will not have this advantage.
Future of Manufacturing SMEs


Competitive SMEs have been a driver of Japanese growth,
but they now face many structural challenges.
 Long-term domestic recession
 Deflation (price cut pressure)
 High yen (recently largely corrected)
 High corporate tax of about 40%
 Rises of China, Korea & Taiwan in electronics & cars
 Aging of SME owners & lack of next generation engineers
 Power shortage
 Delayed participation in TPP, FTAs, EPAs, etc.
The number of Japanese SMEs is declining sharply in every
region and sector. The Lehman Shock (2008) further
accelerated this trend.
(Thousand)
1,200
Number of
establishments
1,000
800
600
400
200
2009
2006
2001
1996
1991
1986
1980
1977
1974
1971
1969
1966
1963
1960
1957
1954
1951
1947
0
（Million）
12
Number of
employees
10
8
6
4
2
2009
2006
2001
1996
1991
1986
1980
1977
1974
1971
1969
1966
1963
1960
1957
1954
1951
0
1947
In both number & jobs,
Japanese
manufacturing firms
peaked around the
bubble period and
declined significantly
since then.
Evolution of
Outward Manufacturing FDI






1960s-70s: initial FDI, some causing friction with workers
and host countries in Southeast Asia.
1980s-: Trade friction with US & EU prompted car and
electronics makers to produce in market countries instead
of exporting from Japan.
Mid 80s & 90s: a sharp yen appreciation and opening of
China pushed many large Japanese firms abroad, and some
of their SME part suppliers also followed.
2000s-: relocation of production sites due to accelerated
integration (WTO, FTAs…)
2008-: Lehman Shock & harder competition force large
firms to go abroad more and procure parts globally. SME
suppliers in Japan have lost regular customers.
Now: Long-term production networks in Aichi (Toyota),
Suwa (Epson) and other industrial cities are disintegrating.
Manufacturing SMEs have to find new customers & markets.
Disintegration of Toyota Pyramid (Aichi Prefecture, near Nagoya)
- Accelerated relocation of factories
abroad
Final car
assembler
Toyota
First-tier
suppliers
Denso, Aisin
etc.
Second-tier
suppliers
- Toyota says it will “maintain domestic
production of at least 3 million cars”
(incl. Aichi, Tohoku, Kyushu)
Numerous SMEs:
- Previously regular &
captured suppliers to Toyota
Thirdtier
4thtier
- Global part procurement with QCD
(quality-cost-delivery); no longer
committed to buy from Toyota City or
former suppliers
Parts &
components
- High technology and QCD,
but no other capabilities
- Toyota no longer promises
orders in Japan or abroad.
Japanese Manufacturing SMEs:
Features and Issues




Japanese SMEs have high technology and skills, but other
capabilities (strategy, marketing, IT, networking, English..)
are lacking—unlike Taiwanese or German top SMEs.
Many SMEs are considering to invest abroad for survival:
popular destinations are Thailand, Vietnam & Indonesia.
From 2010, METI began to promote SMEs’ outward FDI.
National & regional support networks have been created.
Local govt’s, JICA, JETRO, HIDA, SMRJ, etc. are mobilized.
Our APIR research report (for Osaka/Kansai):





A clear vision for Japan’s future monozukuri is needed
Classify SMEs: not all SMEs need to go abroad for survival or
expansion
FDI should be a means to equip Japanese SMEs with all-round
capabilities as well as to enhance host-country industries
Government can support outgoing SMEs through information,
matching and negotiation/cooperation with host countries
The risk of “hollowing-out”?—more data & discussion needed
ASEAN and Japanese SMEs



Many Southeast Asian countries want to invite Japanese
manufacturing SMEs (Thailand, Indonesia, Malaysia,
Vietnam…)
The Abe government also supports SMEs’ export & FDI (in
addition to TPP/FTAs, infrastructure export, “Cool Japan”).
Our APIR research:


Pick a few countries (Thailand & Vietnam) and help them
improve industrial capabilities and learn Japan’s core skills and
technology with intensive bilateral cooperation.
Japanese monozukuri (manufacturing) should be globalized—it
should also be practiced and developed outside Japan and by
non-Japanese people (Japan faces aging and lack of technology
inheritors).