The economy of Japan, long stagnant, has taken a sharp turn for the worse: It contracted nearly 7 percent (annualized and inflation-adjusted) in the quarter ending in June. By way of comparison, consider that the U.S. contraction in the quarter ending in June 2009, when we were feeling the worst of the financial crisis, was 4 percent; the worst quarter of the 1982 recession saw a contraction of 2.6 percent. You’d have to go back to the 1940s to see a quarter with a 7 percent contraction in the United States.
That atrocious quarter may be a sign of very bad things to come for Japan, or it may turn out to be a fluke. The cause of that contraction in the view of most Japan observers was a substantial increase in the country’s consumption tax, rising from 5 percent to 8 percent — with consumers, knowing that a big tax hike was coming, moving forward purchases, contributing to more positive numbers in the last quarter and despair-inducing numbers in this one. The consumption tax is scheduled to rise to 10 percent next year.
“Abenomics,” the stimulus-oriented economic program put forward by Prime Minister Shinzō Abe, has — or had — many admirers in the United States, especially on the Democratic side of the aisle. Paul Krugman, holding up Abenomics as a model, described Japan’s policy as the only operating alternative to the “economic defeatism” of the West: “Nobody else in the advanced world is trying anything similar,” he wrote, though he was befittingly cautious, offering his judgment on it as “So far, so good.”
Matt Yglesias, identifying “important lessons for us,” declared that Abenomics “seems to be working” and praised Abe for having “brushed off the doubters and plunged ahead with new fiscal stimulus,” “leading the path forward to recovery.” Mr. Yglesias’s headline writers were even more confident than he was: Slate heralded the “Triumph of Abenomics,” called it “The Salvation of Japan,” and eschewed caution almost entirely: “Prime Minister Shinzo Abe’s bold recovery strategy is working.”
Adam Posen of the Peterson Institute for International Economics, in a generally positive assessment of Abenomics, argued in February of this year that Japan should incorporate an even steeper increase in its consumption tax: “Raising the consumption tax to 10 percent, and dangerously suggesting that it might be postponed, is not sufficient. There needs to be a multi-year commitment to raising the consumption tax to the neighborhood of 20 percent.” Mr. Posen has an interesting take on the conflicting views about Japanese economic policy: The Abe-doubters, he said, are “leftovers,” people without sufficient intellectual talent to have moved on to greener pastures as demand for Japan experts subsided in recent decades. As an example of how arguments are constructed at Mr. Posen’s level, he is worth quoting at length:
A number of the best Japan specialists have moved on to other issues — people with transferrable skills transferred and those without them remained. The unfortunate impact of this is that much of the press coverage is dominated by this group of leftover people who are very cynical about Abenomics and Japan.
It’s a little different in my community: Economists who have worked on Japan in the past. Among this group, which includes central bankers from around the world, there is huge excitement and admiration for what the Bank of Japan (BOJ) is doing. An overwhelming majority of central bankers are very strongly supportive of what the BOJ is doing and very impressed with how they are doing it. Broadly speaking, Abenomics has strong support from the central banking community.
Such non-argument arguments go on and on. Dean Baker of the Center for Economic and Policy Research, another Abenomics triumphalist, declared that Japanese policy represented the ascent of “sound economic policy” over “scare stories about debt and deficits.” All the best evidence, he was confident, supported this view: “At this point, America’s deficit hawks are jumping up and down screaming that the boost to Japan’s economy is just a ‘sugar high,’ and that it will soon face a horrible collapse as payback. Of course, anything can happen in the future, but we just don’t see any real evidence of the deficit hawks’ doom story as of yet.”
Revisiting Abenomics, Professor Krugman considered the argument that the Japanese approach would play out differently if enacted in the United States. Perhaps “considered” is too strong a word: He merely wrote that he couldn’t think of any reason, and demanded of critics: “Show me the model.”
“Show me the model” is an interesting choice of words. The modelers estimated that Japan’s quarter would be even worse than it was: The consensus estimate compiled by the Wall Street Journal called for a 7.1 percent contraction. Since the emergence of economics as a profession associated with mathematical models, we have been promised, with varying degrees of confidence, that certain policies would produce certain outcomes as predictably as an object falling in a vacuum will accelerate at 9.8m/sec2 under Earth gravity. But none of them seems to work.