Japan Can’t Spend Its Way Back to Growth

Japan Can’t Spend Its Way Back to Growth

A sense of optimism is palpable in Japan as Prime Minister Shinzo Abe takes the country’s helm for a second time. Yet as his government promises to create more jobs and invest in emerging technologies to get the country back on its feet once and for all, the reality is that Japan cannot afford to spend its way out of lackluster growth. What the country really needs is sweeping social change that will tap into the power of women in the labor market and bold leadership to make painful cuts to welfare spending.

The fact that Abe’s Liberal Democratic Party won an overwhelming majority in the December elections highlights Japanese voters’ thirst for strong leadership and political stability after having cycled through seven prime ministers in as many years. Certainly, Abe’s decision this month to unveil a $116 billion fiscal stimulus aimed at creating 600,000 jobs and jump-starting green technology and other up-and-coming industries reveals the government’s understanding of where its priorities should lie. Still, it is clear that continued high spending on public works, childcare and the elderly is no longer sustainable. Indeed, the price of the latest stimulus package will be paid in part by selling about $55 billion in government bonds, even as Japan struggles with the biggest debt-to-GDP ratio among industrialized nations.

To be sure, there are some notable supporters of Abe’s latest stimulus plan. Nobel Prize-winning economist Paul Krugman lauded Abe’s efforts to get the Bank of Japan to increase inflationary pressure to counter the country’s continuing deflationary spiral, and he also welcomed Abe’s policies to drive down the value of the Japanese yen. A cheaper yen would make Japanese manufacturers more competitive by lowering the price of their exports. But any benefits to exporters of a weaker yen will be offset by the rising cost of imports, especially of energy, at a time when Japan is still struggling to recover from the devastation caused by the March 2011 earthquake and subsequent Fukushima nuclear disaster.

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