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Japan's economy is bouncing back, offering a possible model for U.S.

Prime Minister Shinzo Abe's fiscal-stimulus policies have guided long-suffering Japan to three consecutive quarters of growth. Prices are finally rising, along with the stock market.

September 02, 2013|By Don Lee
  • Japan's stock market has surged more than 50% in less than a year. Above, a man is reflected on a share prices board at the Tokyo Stock Exchange.
Japan's stock market has surged more than 50% in less than a year. Above,… (Yoshikazu Tsuno, AFP / Getty…)

TOKYO — After two decades of economic stagnation, once-mighty Japan is beginning to revive — under policies that some experts say could offer lessons to the still-struggling economies of the United States and Europe.

While the Eurozone tries to break out of recession and the U.S. economic recovery remains anemic, Japan has begun to grow at an encouraging rate.

The shock-therapy policies of Prime Minister Shinzo Abe have helped Japan's economy expand for three straight quarters at a pace faster than that of the United States.

Its stock market has surged more than 50% in less than a year. Leading automakers and even long-struggling electronics firms such as Sony Corp., beaten down by Apple Inc. and Samsung Electronics Co., are reporting a jump in profits.

The combination of government and financial measures popularly know as Abenomics may finally be snapping Japan out of the doldrums, and that is drawing increasing attention from economists in the West.

Japan's struggles with deflation and a rapidly aging society are in many ways unique, but some of the problems that have long trapped Japan, including sagging incomes and structural weaknesses, are similar to those dogging the U.S. and Europe.

"It may have quite a lot to teach us," Joseph Stiglitz, the Nobel laureate economist, wrote recently. "If Abenomics is even half as successful as its advocates hope, it will have still more to teach us."

Japan's central bank has begun to pump more cash into its economy, lifting the nation's exports by reducing the price of Japanese products in the global marketplace.

In addition to adopting strong monetary policy, Abe has boosted government spending to put more money into the pockets of Japan's citizens. The U.S. and Europe, by contrast, have largely emphasized cutbacks, an approach economic studies suggest have slowed job creation and overall growth.

And Abe is preparing a series of structural reforms, including changes in taxes and labor rules, in the hopes of sustaining the nation's growth long term.

"This time, Japan's economic recovery is different from the past," Akira Amari, Abe's chief economic minister, said in an interview. "We are matching fiscal, monetary and growth policies."

Abe will be detailing his growth strategy in October. So far, many Japanese are skeptical, unconvinced that their country is really making a comeback.

Some are wary of Abe, as he served briefly as prime minister before with little success and is widely known to be more interested in pursuing his non-economic, nationalistic goals, including strengthening Japan's military.

"I don't feel anything from Abenomics," said Sadao Yamaguchi, whose family shoe business in Tokyo has been catering to Japanese salarymen for nearly a century.

Yamaguchi, 79, considers his shoe store a bellwether of the Japanese economy.

His business flourished from the years after World War II until the early 1990s, when the country's bubble economy burst and fell into a spiral of falling prices and wages. Since then, he and his son and daughter-in-law have seen their livelihoods shrink as their middle-class customers hoarded cash and sought cheaper brands.

Though Abenomics has yet to touch ordinary Japanese families such as the Yamaguchis, economists expect the nation to break out of deflation. In July consumer prices rose for a second straight month.

A stronger Japanese economy, the world's third largest, would help boost global demand. And if Abe can make good on his growth goals, Japan would probably be held up as a model for making tough structural reforms that many countries, including the U.S., have tended to avoid as they have relied instead mostly on monetary stimulus to support growth.

For the U.S., important structural reforms would include policies to bolster infrastructure investment and the skills of American workers, said David Dollar, a senior fellow at the Brookings Institution.

"As the rest of the world looks at the United States' recovery, it's worried about too-rapid withdrawal of fiscal and monetary stimulus," he said during a recent briefing on the upcoming G-20 summit. "And it would like to see the United States move ahead on some of these structural reforms that would make the U.S. economy more competitive and create a solid foundation for U.S. growth going forward."

As in the U.S., many of the key structural changes that Abe is considering are fraught with political and bureaucratic obstacles, but Abe has a real chance to push his policies through Japan's bureaucracy and long-paralyzed legislature. His party won a convincing election this summer, reclaiming control of both chambers of Parliament.

Abe's ministers are considering a cut in corporate taxes for investments and research. At the same time, to bring Japan's fiscal budget under control, Abe is looking at raising the national consumption tax to 8% from 5% — a risky move that could snuff out the momentum in consumer spending.

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