Micro-level Challenges to Abenomics

Poor macroeconomic policies over the last two decades have been highlighted as the main cause of Japan’s economic difficulties. Following the bursting of the economic bubble in the early 1990s, Japan failed to act decisively to boost money supply and lower interest rates to prevent the economy from falling into deflation. In a deflationary environment, consumers stopped spending and firms stopped investing which exacerbated deflationary pressures.

Many considered Abenomics, the non-traditional policy mix that Prime Minister Shinzo Abe embraced in 2013, a radical step to finally end the deflationary spiral. The implementation of Abenomics has revealed an inconvenient truth. Japanese firms, long known as relatively risk-averse, have become even more so under deflation. Now, many of them are full of cautious managers unable to change their mindsets even after the initiation of Abenomics. They simply are not equipped, on their own, to act quickly to take calculated risks, chase fast-moving opportunities, or develop and implement bold strategic changes. There is a sharp contrast between Japanese multinationals and American counterparts when they encounter difficulties. The latter undertook painful and fundamental restructuring two decades ago to cope with intense competition from abroad, especially from Japanese rivals. Along the way, American firms re-invented themselves through radical resource re-allocation, strategic changes to business models and, most importantly, innovation. By contrast, most Japanese multinationals remain as they used to be, producing more or less the same product lines, maintaining their workforces, and staying loyal to the vertically-integrated and mutually-dependent keiretsu network. Critics argue that Abenomics has been successful in shooting the first two arrows, monetary and fiscal expansion, but weak in the last arrow, market deregulation to induce firm investment and consumer spending. The slow response of Japanese firms to Abenomics may be a result of the dysfunctional nature of Japanese firms themselves than Abenomics.