I told you it wouldn't work overnight.

Source: Asahi Shimbun/Getty Images

Give It a Rest. Abenomics Is Doing Fine.

Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.
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Much of the Western press seems to have knives out for Abenomics, the ambitious program of economic reform initiated by Japanese Prime Minister Shinzo Abe. I am not sure exactly why. Perhaps it’s because one of the main policy initiatives (or “arrows”) of Abenomics involves monetary easing, which seems to scare Western pundits.
QuickTake Abenomics

But whatever the reason, the Western press proclaims the “death of Abenomics” with metronomic regularity. Here's the latest example:

Japan appears to be faltering again…[T]here are signs that output may have slipped again in the third quarter, driven down in part by a slowing Chinese economy. Economists expect any recession to be short and shallow, but the deeper lesson looks more troubling: Nearly three years after Prime Minister Shinzo Abe gained office…a decisive break with the past still appears far off...

Baseline growth is essentially zero…in part because the work force is shrinking…

So far, Mr. Abe’s policies have done little to change the dynamic.

First, an observation about using quarterly data to draw conclusions about Japan’s economy. Japanese data are notoriously volatile, and revisions are often large. For example, after revisions, Japan’s economy posted a growth rate of 3.9 percent in the first quarter of 2015 -- a breakneck pace, and clearly unsustainable. Why did American pundits not seize on that one quarterly data point and proclaim that “Abenomics is winning” and “Japan is back”? 

But even if we take the recent numbers at face value, two key facts undermine the latest anti-Abenomics thesis. First, and most important, is demography. Since Abe took office in September 2012, Japan’s working-age population (ages 15-64) has shrunk by about 3 million people, or 3.5 percent. That is slightly more than 1 percent a year. 

Therefore, the correct metric isn't total growth, but per capita growth. This is very simple. If a nation’s economy shrinks by 3 percent and its output stays unchanged, that means that the populace is about 3 percent richer. This is exactly what has happened with Abenomics. From Abe’s accession through the first quarter of this year, real gross domestic product per capita grew by about  3.3 percent, or an annualized rate of more than 1 percent. 

That is about as well as Japan could have done. With total factor productivity growth -- a proxy for the rate at which technology is improving -- running at less than 2 percent in advanced nations, and with unemployment already very low, Japan’s potential growth rate is probably less than 1 percent. 

So in terms of growth, Abe has done a good job since taking office. Of course, the last couple of quarters have looked worse. A major reason for that is the slowdown in China. No one knows how much China’s economy has slowed this year, since macroeconomic data from that country are famously unreliable. But it’s fairly certain that imports have fallen substantially. That means Japanese exports to its second-largest trading partner have slowed or even declined

So Japan’s economy is slowing due to factors totally outside of Abe’s control -- demographics and China. It is obvious that even a million “arrows” of Abenomics would not be able to revive China’s economy any faster. And as for demographics, even if Abe were able to enact policies to raise the fertility rate from its current low level, the effect on potential GDP wouldn't be felt until the new crop of children grew up -- 16 or more years from now. 

Only a miraculous surge in productivity growth can save Japan from a future of very low GDP growth. But to generate a productivity surge, you need structural reforms. And Abe has been enacting such reforms with solid results. The Trans-Pacific Partnership will remove almost all Japanese import tariffs. The new corporate governance code promises to nudge companies to focus more on profitability; although the code is meeting some resistance, profits are at an all-time high, and more buybacks and dividends are disgorging some companies’ spare cash to shareholders. Abe’s high-profile “womenomics” program may already have helped raise female labor force participation, which is now higher in Japan than in the U.S. 

Of course, these and other reforms will take a long time to work. Corporate culture, gender roles and trade arrangements don't change overnight. The early signs are encouraging, but even under the best-case scenario, it seems unlikely that the reforms could have produced a productivity boom big enough to show up in the headline statistics. Most of the work remains to be done, and will take years of effort and political creativity. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Noah Smith at nsmith150@bloomberg.net

To contact the editor responsible for this story:
James Greiff at jgreiff@bloomberg.net