April First is just around the corner and that means the feeble growth of the Japanese economy is about to come to a grinding halt. On that date the consumption tax (Japan’s national sales tax) will rise from 5% to 8%, meaning ordinary consumers will have to pay more for anything they buy. Even amateur economists know that when you tax something, you get less of it, so naturally consumption in Japan will go down, bringing the rest of the economy down with it. Prime Minister Shinzo Abe agreed to raise the tax as a means to pay back some of Japan’s massive debt, now more than 200% of GDP.
The rise in the consumption tax is one element in Abe’s so-called “Three Arrows” economic plan. This plan is often described as “bold” in the mainstream news media. But there is nothing bold about it.
The first arrow is a massive expansion of the money supply. Japan has had low-level deflation for the past fifteen years, and the country’s Keynesian economists have been saying that this deflation has been stifling the economy. Following their advice, the Abe administration wishes to create “targeted” inflation. But has this low-level deflation actually been detrimental to the economy, or is it merely a symptom that prices were too high? The United States had low-level deflation in the period 1875-1893 and that was a period of tremendous economic growth. On the other hand, previous attempts by governments to create targeted inflation, like that of the Johnson administration in the US in the late 1960’s, usually resulted in prices going up much faster than wages, causing much suffering among ordinary workers.
Likewise, arrow number 2, the old fashioned Keynesian approach of trying to pump up the economy with government spending has been tried so many times and failed so many times that it is a wonder that anyone still believes in it. In Japan it has been tried fifteen times between 1990 and 2008 with various “stimulus packages,” which did little more than stimulate the national debt to greater depths. Each time the politicians in Tokyo assured us that “This time the stimulus will work.” (You can fool me once, but can you fool me sixteen times?)
Abe’s third arrow, deregulation, will never be more than a few name changes or cosmetic alterations--shifting the chairs on the deck of the Titanic, to use the old metaphor. Any real efforts at deregulation will be resisted by the power-brokers in Abe’s Liberal Democratic Party and its supporter groups, who thrive on big government.
Curiously, Abe has the image of a tough guy in Japan and abroad. In reality, he is a political weakling, unable to stand up to the bigwigs in his own party.
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