Abenomics: A Utilitarian Analysis

By: Richard Hudson

Since the 2012 Japanese elections, Shinzo Abe, the new Prime Minister, has been pursuing a radical new economic policy approach. Prime Minister Abe promised three “arrows” of reform; fiscal stimulus, monetary easing and structural reforms. These three arrows of reform have been collectively termed “Abenomics.” These economic policies have attracted considerable attention internationally, as they mark a significant departure from the economic policies of the Japanese Government which have guided the country since the Japanese banking crisis of the late 1980’s and early 90’s. While the financial and economic implications of Abenomics are interesting in themselves, this article focuses instead on the ethical implications of Abenomics. The best way to understand the ethical implications of these economic policies is through a Utilitarian analysis, which will be outlined shortly. Firstly though, it is necessary to explain what Abenomics is and how it has departed from orthodox Japanese economic policy.

What is Abenomics?

Since the Japanese Banking Crisis, the Japanese economy has been marked by sluggish growth and increasing unemployment. The 1990’s have been described as a ‘lost decade’ for the Japanese economy as the collapse of the Japanese asset bubble, particularly in corporate real estate, resulted in lower consumer spending. Efforts by the Japanese government to service its debt through a tax increase in 1997 further compounded the loss of consumer confidence and shrinking consumption rates. Growth continued to be sluggish into the early 2000’s, with the global recession also hitting the Japanese economy harder than many other developed countries, with the Japanese economy shrinking 5.2% (compared to 0.7% globally). It is against this backdrop that the three arrows of Abenomics have been launched, arrows which will now each be considered in greater detail.

Fiscal stimulus

Within the first weeks of Shinzo Abe’s re-election, the first two arrows of Abenomics had been launched. The First Arrow involved a massive stimulus package, roughly 2% of GDP. This stimulus package is targeted to a number of different projects, designed to boost local business activity and increase employment. In particular, the stimulus package has been used to fund a massive increase in public works spending, reaching levels not seen since the early 1990’s when similar public works programmes were undertaken. How successful these spending projects will be has yet to be seen, given the demands on Japan’s construction industry from the 2011 tsunami, the infrastructure for the 2020 Tokyo Olympics and the ageing population of skilled workers. Finally, previous infrastructure programmes in Japan have been influenced by lobbying from the construction industry which has seen construction projects used for political gain. Only time will tell whether this massive increase in government spending for infrastructure will create the sort of demand needed to promote medium-term growth in the Japanese economy.

In the short term, this stimulus will increase the amount of debt the Japanese government is holding. In order to combat this, the Japanese government is also instituting medium-term measures to boost government revenue. At the time of writing, the first of these medium-term initiatives is being undertaken, with an increase in the consumption tax to 8%. In 2015 this will increase again to 10%. The goal of these tax increases is to fund the short-term increase in Japanese government spending.

Monetary easing

The second arrow of Abenomics involves a robust series of policies designed to increase the amount of money within the Japanese economy. For the last decade, Japan has seen persistent deflation, which has in turn dampened consumer spending as consumers expect prices to decrease further in the future. The goal is to increase inflation to 2% which in turn will push down real interest rates and prompt consumer spending.

In order to increase the supply of money within the Japanese economy and in turn raise inflation to the desired 2% level, the Japanese central bank has undergone a large scale programme of Quantitative easing. Quantitative easing involves the central bank of a state (in this case the Bank of Japan). Quantitative easing has become a popular policy choice for central banks, with monetary easing occurring across the US, UK and Europe. In Japan, the aim is for the central bank to release $1.4 trillion between 2014 and 2015 in monthly purchases of Government Bonds.

Structural reform

While the monetary and fiscal arrows of Abenomics have been the easiest to implement, there is still very little concrete information on the third arrow of Abenomics- the issue of structural reforms to the Japanese economy. However, these structural reforms are frequently cited as the most important of the three arrows, as these reforms will provide for growth in the medium term, once fiscal stimulus has ended. What’s more, the Japanese government has a very large debt, standing at 200% of GDP. This is well above the levels of other OECD countries, although Japan is also unusual in the OECD as the majority of Japanese Government debt is held domestically. The Fiscal stimulus has only added to the Government’s debt, so structural reforms are also necessary in order to pay for the debt accumulated by the first two arrows.

Free trade

While this third arrow has been the vaguest of the three, there have been some concrete suggestions from Prime Minister Abe about what will be involved in this third arrow. One of these is a renewed commitment to free trade agreements, specifically the Trans-Pacific Partnership Agreement (TPPA). The TPPA is currently being negotiated by a number of Pacific-rim countries, including the United States, Peru, New Zealand, Singapore, Canada and Vietnam, among others. If completed, the agreement would see all tariffs within the bloc reduced to zero and also covers a number of trade-related areas including intellectual property and government procurement. If the Japanese government does enter the TPPA, it is estimated that the increase in trade will add 0.7% to the country’s GDP, a sizeable amount from a single trade deal. It also continues the Abe government’s commitment to promoting Japanese exports which have already benefitted from the first two arrows.

While, joining the TPPA would be a major boost to the Japanese export sector, the deal still faces considerable opposition within Japan and within Shinzo Abe’s own party. The Japanese government has for many years supported local farmers against cheap rice imports from South-East Asia, supports which may be removed under the TPPA. For these reasons, it is not clear whether Japan will join the TPPA, putting at risk the third arrow of Abenomics. However, if the Japanese government does join, there will be significant structural changes to the composition of the Japanese economy, which is the expressed goal of this third arrow.

Power-sector Reforms

Another structural reform which has already been outlined by the Abe government is the reform of the Japanese electricity sector. Currently, Japanese electricity companies are highly regionalised, with very little competition. As a result, Japanese consumers pay three times as much for electricity as South Korean consumers. The Abe government is aiming to reform the electricity market by separating the commercial sale of electricity production from the management of the electrical network. This reform will make the Japanese electricity market more competitive, as consumers are given greater choice of electricity provider and the regional oligopolies are broken up.

Neither of these reforms have currently been undertaken, nor are they the only reforms which will compose this third arrow of reform. However, they set the tone for the third arrow, which is by far the most important for growing the Japanese economy in the long term.

The Ethics of Abenomics

So far we have seen the broad policy initiatives being undertaken by the Abe government to re-inflate the Japanese economy and support long-term growth. However, the focus of this article is not just on the financial implications, but also the ethical implications of Abenomics. It is this focus which will be addressed in the remainder of the article. However, before considering the specific ethical implications of Abenomics, we first have to establish the ethical framework which will be used to analyse these financial policies. In this case, a utilitarian framework will be used to try and understand the ethical implications of Abenomics.

Utilitarian Theory

Utilitarianism is an ethical theory based on the proposition that the correct action to take in any given situation is the one which results in the greatest number of positive outcomes, relative to any negative consequences. Utilitarianism is one of a number of consequentialist theories, because the consequences of an action determines the action’s ethical value, rather than the way in which the action was conducted. For example, a utilitarian would argue that it is morally permissible to kill someone, if the result of that action creates greater good than the harm caused by killing someone. While this has only been a brief introduction to utilitarian theory, it will become clearer shortly how these ideas can analyse an economic policy like Abenomics.

This utilitarian ethical thinking is very frequently applied to financial ethics and to economic policy-making more specifically. Although in business, the notion of good is reduced to the principle of maximizing profits, economic policy-making is far more nuanced, given that the state has to take account of the well-being of its citizens beyond simply increasing profits.[1] In order to understand the impact of Abenomics, primary attention will be given to the financial benefits afforded by these policies. However, broader ethical trends also need to be considered, such as whether employment increases, wage increases outpace inflation, or simply that any benefits felt by Abenomics are spread across the population rather than concentrated around a single group. These further considerations press the limits of a utilitarian approach; Utilitarianism justifies high income inequality for example, as long as income is maximised. These broader ethical factors will be considered, along with how they stretch the utilitarian approach presented here, in order to understand the ethical implications of Abenomics.

Arrow One: Financial Stimulus

The major ethical benefits for the financial stimulus package which makes up the first arrow is the potential for greater employment. Japanese unemployment has been floating at record highs since the 1990’s, reaching 6% in 2008. While this is low compared to other OECD states, it is a sharp increase for a country which saw unemployment levels between 1 and 3% during its initial period of industrialisation. While the stimulus is focussed on public works, there is also a focus on stimulating private sector growth as well. If this broader goal of the first arrow can be achieved then there will be much greater good generated, as the private sector grows and creates more jobs even after the short-term stimulus ends. Lowering the rate of unemployment will be central to the ethical implications of Abenomics and will consequently provide a major platform for understanding the utilitarian value of Abenomics.

The utilitarian good that comes from this fiscal stimulus must also be weighed against the potential harm caused by this policy. Some of these harms have already been outlined such as the potential for corruption in the allocation of public works spending and the accompanying tax increases which will be used to pay for the financial stimulus. If these tax increases dampen consumer demand and increase the tax burden on the poorest Japanese, then these are serious ethical concerns which count against the potential increase in employment which this financial stimulus may create.

Arrow Two: Monetary Easing

The monetary easing which the Bank of Japan has undertaken also has considerable ethical implications. The main ethical concern for this policy is that wage increases may not match inflation, meaning that real wages will decline. If this is coupled with the rising prices for goods, then Japanese workers could be much worse off than they currently are.

However, the monetary easing of Abenomics also poses a significant boost to the export potential of Japanese firms. The high Yen has been an impediment to Japanese exports, as Japanese goods become more expensive in export markets. Given the Japanese economy has been built on exports, notably cars and electronic goods, increases in cost have harmed many Japanese firms. For exporters, the monetary stimulus is a huge benefit as it will make Japanese exports more competitive globally.

The ethics of monetary easing emphasises the criticism raised earlier that monetary gains are a crude way of measuring the utilitarian value of an action. For example, monetary easing may create greater good than harm, but if that good is felt by the largest Japanese firms as their exports increase, while the poorest within Japan face declining real wages, is the consequentialist argument valid? It is too early to tell whether or not this is true, only time will tell whether the positive consequnces of monetary easing are felt throughout different areas of the Japanese economy.

Arrow Three: Structural Reforms

The final arrow of Abenomics has the greatest ethical implications for the utilitarian analysis presented here. If these structural reforms can successfully modify the direction of the Japanese economy and achieve the expectations placed upon them. Of course, the problem for the consequentialist utilitarian theory presented here is that the consequences of this third arrow cannot be measured until they are actually undertaken, limiting the effectiveness of any judgements made about the ethical quality of this third arrow.

While it is still early to determine the ethical consequences of the third arrow as a whole, it is possible to judge the implications of those policies which have been suggested, namely TPPA accession and power-sector reforms, which have been discussed earlier. If the Japanese government does join more free trade agreements, like the TPPA, then there will be significant ethical implications for Abenomics as a whole. The Utilitarian value of free trade agreements is hotly contested, with no consensus on the total positive and negative results. Proponents of the TPPA point to the ethical value of increasing trade from Japan which, as pointed out earlier, could increase GDP by 0.7%. However, opponents of the TPPA counter that the agreement will increase the cost of prescription medicine and other products whose intellectual property rights are held by U.S-based firms. This raises the possibility that the TPPA will raise everyday expenses for vulnerable Japanese citizens, adding further to the negative implications of Abenomics. These two ethical positions around the TPPA, and around fair trade agreements more broadly, cannot be adequately addressed in the short space offered here. However, given that the TPPA negotiations are still ongoing, it is fairly safe to assume that the Japanese government will only join if the benefits for the Japanese public outweigh the potential harms.

Unlike the TPPA, reforms of the power sector have far clearer ethical results. If power prices reduce from the very high levels they are at currently, then consumers will benefit and have greater disposable income to devote to other purchases. The losers of this reform are the regional power company monopolies which exist in Japan and which currently benefit from limited competition. While the introduction of competition to these markets may create job losses in inefficient or poorly-managed companies, these losses would be far less than the benefits which consumers will receive.

Abenomics Thus Far

Abenomics represents a striking departure from the economic policies which the Japanese government has pursued for the last twenty years. More importantly though, it also has significant ethical implications, for the Japanese economy and population more broadly. Some of these have quite clear utilitarian value, such as the reform of the power sector. Others, like joining the TPPA and monetary easing, have far more complex consequences which question how we assign value to the outcomes of economic policies. Despite these concerns, Abenomics currently appears to be a beneficial economic policy which has already created tangible benefits for the Japanese economy. Whether these benefits continue within the third arrow of reform has yet to be seen and these continuing developments may alter the utilitarian calculations employed in this analysis. It is also difficult to apply a utilitarian analysis to an unfolding event, as the consequences have yet to materialise and may be prejudiced depending on the observers own beliefs. However, for now it is clear that Shinzo Abe’s economic policies have created a measurable benefit for the Japanese population and has restored much-needed confidence to the Japanese economy.

[1] Richard T. De George, Business Ethics (2009)