How bad could it get? America’s ugly election

Big is beautiful

As well as showing that monetary policy is less powerful than

hoped, Abenomics has shown that high public debt is less danger-

ous than feared. Japan’s gross government debt was almost 230%

of 

gdp

when Mr Abe took charge and is even higher now. But the

cost of government borrowing has remained negligible. Indeed,

yields for five-year bonds are negative.

Fiscal scolds point out that yields on bonds are low because the

central bank is buying so many of them: its holdings now amount

to 99% of 

gdp

, whereas the Fed’s equal about 20% of American

gdp

. The term 

“

financial repression” gets bandied about, as if Ja-

pan’s central bank is conspiring to let the government spend more

than it should, at the expense of the private sector. But that gets

things backwards. The central bank is doing everything it can to re-

vive private spending. Until it succeeds, though, the government

has to fill whatever gap in demand remains. The shortfall in priv-

ate spending is what makes government deficits necessary. It is

also what makes them so cheap to finance. 

What about the third arrow of Abenomics? Before its lost de-

cades, Japan taught the world how to raise productivity in big

firms, through “lean manufacturing”, just-in-time delivery, and so

on. Unfortunately, the country also shows how badly productivity

can lag in small firms. Many operate in service industries, where

productivity is notoriously low. Yet even in manufacturing, small

enterprises are less than 40% as productive as their larger counter-

parts, according to the Ministry of Finance (see right-hand chart).

Just because a firm is small does not mean it is new or particu-

larly entrepreneurial. In Japan, three-quarters of small firms are

over ten years old and two-thirds of the owners of small and mid-

dling enterprises will be 70 or older by 2025, according to the 

oecd

.

The government provides plenty of support to small firms. It guar-

anteed loans worth 4.4% of 

gdp

in 2016, compared with an average

of just 0.1% in the 

oecd

, a group of mostly rich countries. In a re-

port last year, the group expressed concern that such guarantees

weaken the incentive for banks to monitor their borrowers and

push them to improve. 

For the many countries that have expanded similar guarantees

in response to the covid-19 pandemic, Japan thus provides a useful

lesson. Governments must be careful to ensure that this necessary

effort to ensure the survival of small firms in the short term does

not permit stagnation in the long term.

Abenomics will almost certainly outlast the prime minister

who introduced it. None of Mr Abe’s potential successors, includ-

ing Kishida Fumio, his party’s head of policy, Ishiba Shigeru, a for-

mer defence minister, or Suga Yoshihide, the chief cabinet secre-

tary, are likely to renounce it. They may, however, be tempted to

rebrand it. Suganomics, for example, has a nice ring to it. 

7

Parting shot