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Austerity Japanese-Style

This past week Japan re-elected its prime minister, Shinzo Abe, for an additional four years despite his previous policies having precipitated a deep recession in Japan that began this past April 2014—Japan’s 4th recession since 2008.

The central elements of Abe’s policies during his first two years in office, 2012-2014, included massive central bank money liquidity injections, first introduced in 2013, and a major sales tax hike for consumers that followed in 2014. A so-called ‘3rd arrow’ of ‘Abenomics 1.0’, proposals for structural economic reforms, was also announced in 2013 but has yet to be fully defined or implemented. That 3rd arrow of structural reforms to Japan’s economy is now at the top of the political agenda in Japan. It will be defined in the coming weeks and launched in a package of new policies in 2015—i.e. ‘Abenomics 2.0’.

‘Abenomics 2.0’ in 2015 will consist of new forms of austerity measures, contained under the cover of the softer code word of structural reforms—i.e. Abe’s former ‘3rd arrow’. Much like calls for structural reform now also occurring in Europe today in France, Italy, Spain and elsewhere, ‘structural’ refers mostly to further capitalist reordering of labor markets—i.e. ‘labor market reforms’. That means changes to how workers are paid, new ways to compress wages, limits on benefits workers will be allowed to receive, and new restrictions on unions and collective bargaining.

As Abenomics 2.0 is defined in the coming weeks and months, Japan wage earning households will therefore soon face even more austerity and even more wage and income compression. While another sales tax hike and still more QE money injections by Japan’s central bank—i.e. ‘arrows’ one and two—are still possible in 2015-16, the primary focus for 2.0 will be on structural, and especially labor market, reforms and related austerity measures.

Abenomics 1.0

Abe’s 1st arrow of liquidity injection—introduced in 2013 in the form of a ‘quantitative easing’ (QE) program—consisted of Bank of Japan direct buying of $530 billion of bonds held by private investors and bankers. Abe’s ‘2nd arrow’, a major increase in the national sales tax, raised Japan’s sales tax from 5% to a new 8% level this past April 2014.

Like all QE programs introduced to date in the USA, UK and elsewhere, Abe’s $530 billion QE produced a doubling of Japan stock prices-in the case of Japan in just one year—and a corresponding consequent surge in banks and investors’ profits and capital incomes. Japanese multinational companies also benefited as their foreign currency earnings rose in value, as a result of QE’s reducing Japan’s currency (Yen) exchange rate. The lower Yen also boosted Japan export sales for Japanese non-financial companies. The currency earnings and export sales in turn drove up stock prices and returns on financial assets still further.

In contrast, the 3% additional sales tax hike—Abe’s ‘2nd arrow’—directly reduced the real incomes of Japan wage earning households. The sales tax hike was not the only factor reducing wage earners’ real incomes. The QE money injection, by reducing Japan’s currency exchange rate, also raised the price of imports and therefore inflation for Japanese households. That inflation in turn reduced real wages and real household incomes even further, in addition to the sales tax hike. Another negative effect of QE was to divert the massive$530 billion monetary injection into mostly financial asset investment. Japanese investors, now flush with $530 billion extra in cash, invested the money injection largely in stocks, bonds, derivatives, and other financial instruments, instead of into real production in the Japan homeland economy that might otherwise have led to real investment, real jobs, and real incomes for Japanese workers. Or, alternatively, they invested a good part of the $530 billion abroad, thus also denying Japan wage earning households of any sharing of the benefits of QE.

According to the business press, Japan businesses reportedly are now sitting on $2.65 trillion in uncommitted cash. That’s equal to more than 60% of Japan’s annual GDP. In other words, Japan companies, shareholders, and investors benefited nicely from Abe’s ‘1st arrow’ of QE injections. On the other hand, they have been especially reluctant to share it in the form of wages with their workers. Real wages of Japan workers declined by 3% in 2013, in the first year of QE. They are projected for a further fall of 2%-3% this year, 2014, as well.

Given the downward pressure on wage earner incomes, consumption in Japan fell steadily throughout 2013 as QE was being introduced, except for the last three months as consumers stocked up on goods in anticipation of a coming 2014 sales tax hike. But once the sales tax was raised in April 2014, the floor collapsed on Japanese consumption spending, falling by almost 20% in just one quarter, April-June 2014.

And with that consumption collapse came the deep contraction of Japan GDP in the spring 2014 quarter, during which it fell by -7.3%. That was followed in the July-September 2014 period by another -1.9% GDP decline.   Japan today finds itself mired in yet another deep recession, with no recovery light in sight at the end of the latest recession tunnel.

Abenomics 2.0: The ‘3rd Arrow’

Abenomics 2.0 promises even more of the same trends. The outlines of Abenomics 2.0 and new forms of austerity are now just beginning to emerge in Japan. Measures reportedly being considered include: major changes to Japan’s social security retirement system that will reduce benefits. That means a cut in what amounts to ‘deferred’ wages. Japan’s joining the USA led negotiations to establish a trans-pacific free trade zone, called the Transpacific Partnership (TPP), which will mean downward compression on wages as a result of free trade arrangements. Still undefined measures to increase business productivity, which almost always means jobs displaced by technology and workers working harder and longer for little or no more pay. Following ‘labor market reform’ initiatives now emerging in Europe, Abe will also reportedly propose changes to make it easier for businesses to hire and fire full time workers. That will likely lead to an even greater shift to contingent employment, i.e. more part time and temporary job hiring as businesses lay off full time and replace with part time and temp workers. That too will also result in downward wage compression. Meanwhile, as a cover to all these real measures, Abe will continue to ‘talk’ to businesses, urging them to raise wages for their employees, even when both understand such talk is only for public consumption.

Wage compression forms of austerity will most likely also be accompanied by more traditional austerity forms as Abenomics 2.0 is rolled out. Despite having raised sales taxes to 8% on wage earning households, and still considering raising them further to 10%, Abe has called for further cuts in corporate taxes from the current tax rate of 36% to 30% or less to help boost business earnings, adding further to their $2.65 trillion still un-invested cash hoard. And government spending will likely also be cut further. With government spending essentially flat over the past two years in Japan despite its recession, and with the current recession reducing government tax revenues further, Japan’s government debt of 240% of GDP—one of the largest in the world—will likely lead to government spending decreases under Abenomics 2.0.

So Abenomics 2.0 will mean continuation of traditional forms of austerity , combined with the newer forms comprised of a new emphasis on structural and labor market reforms.

Given the clear failure of Abenomics 1.0 to generate sustained economic growth and economic recovery for all but investors, bankers and big corporations in Japan since 2012, plus the strong likelihood that Abenomics 2.0 will prove little different in that regard, why then did Japan voters this past week vote to return Abe and his Liberal Democratic Party back into office? What’s going on? And is this apparent anomaly strictly a Japanese phenomenon? Or does it represent political changes occurring in some similar fashion throughout the advanced economies of Europe-USA-Japan, as the global capitalist economy continues to slowly weaken and slide into another general recession?

The Political Bases for Continued Austerity

Despite Abenomics 1.0’s abysmal record for the majority of Japanese households, Japan voters elected Abe for another four years. Moreover, his Liberal Democratic Party (LDP) captured 290 of 475 seats this past week in the lower house of Japan’s Parliament as well. With its coalition partners’ additional 35 seats, Abe’s LDP controls more than two-thirds majority in Japan’s national legislature, which enables it to pass legislation without recourse to the upper house of the Parliament, according to Japan’s political system. In short, Abe can now get whatever policies he wants passed, including his ‘3rd arrow’ however he defines it, and that means more austerity measures.

So why would Japan voters re-elect Abe again, and give his party a safe majority in the legislature? The answer to this question reveals important broader political trends at work in the global capitalist economy—trends that not only ensure continuation of austerity policies but the likely intensification of such policies.

Abe’s re-election was hardly an endorsement of his failed policies by Japan voters. Barely half the eligible voters turned out to vote last week, down from a 70% turnout in 2009. What Abe’s re-election represents is a collapse of centrist parties now underway everywhere in the advanced economies and a rejection of their policies by the voting public—i.e. policies which have largely failed to generate economic recovery for all but investors, bankers, and big corporations since the 2008-09 global crash. That collapse is making possible a return of even more aggressive, pro-capitalist parties and policies.

Japan voters saw nothing to vote for in the now discredited Democratic Party (DP) of Japan, a mostly center-right party that was in power between 2009-2012 and that failed miserably to achieve any real economic recovery for any but wealthy investors, bankers and multinational companies. So Japan voters stayed home or else voted against the DP by voting for the LDP as a protest.

The dissolution of Japan’s DP as a political force began in 2012 and accelerated this past election, with the DP winning only 73 seats out of 475, well below its projected 100 seats. Today it remains in disarray, divided, without effective leadership or any new ideas as to how to pull Japan out of its current, latest recession.

A similar dissolution is now beginning with the Democratic Party of Obama in the USA in the wake of its recent November election debacle. It too is in disarray, increasingly divided internally, lacking in effective leadership and bereft of new ideas as to how to bring recovery to the rest of the populace .

Like the 20 percentage point collapse in Japan voter turnout last week, in the recent USA midterm November 2014 elections a similar record low turnout resulted in deep losses for Barack Obama and Democrats. Obama and Democrats lost by landslides in both the US House and US Senate in November 2014, largely because key working class constituencies refused to turn out and vote for them after Obama and Democrats failed to deliver in a so-called economic recovery after 2009 that largely left them, and continues to leave them, behind. Constituencies like immigrant workers, union workers, and youth everywhere in the USA—potential tens of millions of voters—abandoned the Democrats and Obama in USA midterm elections last month. They simply did not turn out to vote. Their major, historic losses in the US House and US Senate in November 2014 have left the USA Democratic Party today fissuring, if not yet fracturing, along several lines; floundering and dividing into a continuing and still dominant pro-corporate wing, on the one hand, and a small, growing vociferous ‘populist’ wing on the other.

In other words, both Japan and USA recent elections reveal the same basic trend: Centrist parties and their policies are now perceived as having failed by most voters, especially those of working class backgrounds. In response, those voters are now refusing to vote and/or voting against those failed centrist parties and policies as a protest.

The political dynamic that accompanies the continuing global economic crisis is thus similar in Japan and the USA, though not exactly. Both reflect a system dominated by two political parties—the one unapologetically pro-business (i.e. Abe’s party and the USA Republican Party) and the other dominated by business interests but harboring wishful thinking but misguided populist elements (i.e the Democratic Parties in both Japan and USA).

The now deeply entrenched political party dynamic in the key capitalist sectors of the USA and Japan goes something like this:

The former conservative parties—LDP and Republican—ensure their investor-capitalist constituencies get rich even though they wreck the economy in the process; the latter centrist Democrat Parties then win elections and ensure those same constituencies get further rich while failing to generate general recovery for all. When the center-right parties fail to bail out the broad populace from the economic crisis, that populace itself in turn ‘bails out’ of the political system and does not vote. That allows the unabashedly pro-business conservative (Japan) and republican (USA) parties to take advantage of low turnout and return again to office. The cycle then repeats itself: the conservative-republicans proceed once again to wreck the economy further while making their wealthy friends still wealthier, and so on.

In Europe the political dynamic is a variation on this trend of growing dissolution of center-right political parties. Due to its more open Parliamentary systems and histories, as social-democratic centrist parties in Europe decline and give way to dominant pro-Business parties after they fail to generate economic recovery, the dissolution of centrist parties stimulate the growth of smaller 3rd parties on both the left and the right. The case of France today and the collapse of the Socialist Party and rise of the National Front is perhaps the most notable case. But similar developments are also underway in Greece with the rise of the Syriza party, with Podemos in Spain, with UKIP in the UK, and perhaps even ‘Die Linke’ in Germany. Other less developed trends are also occurring in Italy, Netherlands and elsewhere.

What’s similar in Europe is that center-right parties are in decline there as well as in Japan and the USA. What’s different in Europe is that the collapse of the center does not necessarily result in the return of the unapologetic pro-business conservative party—i.e. Abe’s LDP in Japan and Republican-Teaparty in the USA. The ability of pro-business parties in Europe to impose structural and labor market reforms—i.e. new labor market forms of austerity—is therefore more unstable and less assured.

How the current efforts to push ‘structural’ and labor market reforms in Europe plays out remains to be seen in 2015. Political maneuvering by pro-business parties and elements in Europe to impose Abenomic 2.0-like and USA Republican Congress-like further labor market forms of austerity has begun. But unlike the USA and Japan, the outcome is less clear.

Meanwhile, as the global economy slows, the push for still more and newer forms of austerity continues worldwide—with Abenomics 2.0 in Japan, with the new pro-corporate/anti-worker initiatives of the USA’s newly elected Republican Congress, with France’s Socialist government’s new labor market reform proposals for 2015, with similar efforts by Italy’s Renzi government, and with Germany’s Merkel conservatives proposing to restrict bargaining and strikes of workers there. Austerity is far from dead; it is simply morphing into new forms with a new global capitalist offensive to expand it about to occur.

Jack Rasmus teaches economics at St. Mary’s College in California. He is the author of the book, ‘Obama’s Economy: Recovery for the Few’, Pluto Press, 2012, and ‘Epic Recession: Prelude to Global Depression, Pluto, 2010.  He hosts the weekly radio show, Alternative Visions, on the Progressive Radio Network. His blog is, his website, and twitter handle @drjackrasmus.

Source: teleSUR English

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Jack Rasmus is author of the recently published book, ‘Central Bankers at the End of Their Ropes: Monetary Policy and the Coming Depression’, Clarity Press, August 2017. He blogs at and his twitter handle is @drjackrasmus. His website is

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