Waiting for the Abenomics miracle

Japan’s prime minister Shinzo Abe led his Liberal Democratic Party (LDP) to victory in the Upper House elections on July 10 and his ruling coalition government received a strong endorsement from voters. Abe took the result as a vote of confidence in the economic policies that he has pursued since returning to office at the end of 2012 and which his name has been attached to, declaring “We were given approval for our mandate to powerfully pursue Abenomics. We’d like to continue in our efforts to achieve what we’ve promised.”

Abenomics was launched consisting of three ‘arrows’ targeting economic revival:
Monetary arrow: Expanding the money supply to lift Japan out of persistent deflation. Japan is aiming for a 2% core inflation rate.
Fiscal arrow: Boosting government spending to stimulate demand in the economy.
Structural arrow: Structural reforms to ensure a more competitive and productive economy, include a shake-up of corporate attitudes and boardroom behaviour.

However, the stimulus programme has been more a case of promise than achievement so far. Japan’s economy has contracted in two of the four most recent quarters, Japan’s consumer price index (CPI) shrank by -0.4% in May and the decision of UK voters on June 23 to support ‘Brexit’ won’t help if it further pushes up the value of the yen (JPY), generally regarded by investors as one of the safer major currencies.

The UK decision to exit the European Union (EU) has also accelerated the decline in yields on Japan government bonds (JGBs), most of which are now below zero.

Moreover, despite his party’s continuing popular support, Japanese voters appear to be sceptical that Abe can pull off economic revival. A nationwide telephone survey of nearly 1,500 households randomly selected by Kyodo News found that 56.4% doubted that he could succeed, while only 32.0% were confident that his policies would eventually achieve success.

At the beginning of 2016 prospects appeared to have improved slightly. The government estimated that the Japanese economy would register growth of 1.7% for the fiscal year beginning in April and inflation would edge higher to 1.2%. In late January the Bank of Japan (BoJ) followed the lead of the European Central Bank (ECB) and nudged interest rates below zero after keeping them very low for years. By last week, the predictions had been downgraded with anticipated growth nearly halved by 0.9% and projected inflation reduced to only 0.4%.

The year ending March 2018 is seen as little better, with economic growth edging up modestly to 1.2% and inflation nearer target at 1.4%.

The International Monetary Fund (IMF) is even more pessimistic. It has just lowered its forecast for Japan’s economic growth in 2016 to only 0.3%, against 0.5% previously. As the country has now put back its planned increase in consumption tax to 2019, the IMF now expects next year to show positive growth, albeit it only 0.1%, against its earlier prediction of a -0.1% contraction.

A tough challenge

However, lifting Japan’s economy out of the doldrums is no easy task. After decades of steady growth, growth halted abruptly in the early 1990s as an asset bubble burst and both share prices and property values plummeted. The period 1991 to 2000 was originally dubbed Japan’s ‘lost decade’ but this extended to the ‘lost score’ or ‘lost 20 years’ when the malaise continued into the new century and was exacerbated by the global financial crisis of 2008.

Since this month’s election victory Abe has asked Nobuteru Ishihara, his minister for economic revitalisation, to put together a fresh package of economic measures that will lift Japan out of deflation and improve its growth potential, including a supplementary budget for fiscal 2016. It will released this autumn and reports indicate that it could be worth around JPY 10 trillion (or US$96bn). Ishihara himself hasn’t offered any figure but said that liquidity for Japan’s small to medium enterprises (SMEs) was likely to be a main feature.

The financial press has speculated over what a further economic stimulus package might include and likely contents are a comprehensive upgrade of the country’s transport systems, improved childcare and nursing care services, and student scholarships.

Additional monetary stimulus is expected from the BoJ, with an announcement likely as early as next week. Potential options include the bank selling more yen, buying more assets (the BoJ already holds nearly 30% of Japanese government bonds) and pushing interest rates, already below zero, even further into negative territory. There has even been speculation that the BoJ could even venture into the realm of so-called ‘helicopter money’, going beyond quantitative easing (QE) by increasing the budget deficit via a permanent increase in the central bank’s monetary base. This prospect has been enough to halt – at least temporarily – the steady upward path of the yen, which recently recorded its sharpest drop in 30 years.

In fairness, it should be added that Abenomics has other targets beyond inflation and growth targets and can claim a degree of success. Corporate profits have improved as businesses have eliminated waste, good corporate governance has moved up the agenda of most businesses, companies are paying greater attention to shareholders and offering more attractive returns, women are being encouraged to play a greater role in the workplace and tourism has more than doubled.

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