Shinzo Abe

Japan appeared on track for recovery in the first months after Abe came to power in late 2012, but an April 2014 sales tax rise “slammed the brakes on growth” and plunged the economy into recession --- prompting Abe to delay a second tax increase slated for 2015. According to AFP, “Abe’s failure to implement some of the tough changes which economists say are needed -- freeing up the labour market and tackling an inefficient agricultural sector -- has left the premier open to the charge that he is pursuing style over substance. [Source: Kyoko Hasegawa, AFP, December 24, 2014]

Reuters reported in 2014: “Hopes for Abenomics were hit when Japan slipped into recession in the third quarter following an April sales tax rise and recent data suggest any economic rebound is fragile. Abe decided last month to put off a second tax hike to 10 percent until April 2017, raising concerns about how Japan will curb its huge public debt, the worst among advanced nations. "Between now and the delayed tax increase, we need to revive the economy and find a path to fiscal rebuilding," said LDP lawmaker Shinjiro Koizumi.

According to the Washington Post: “So far, not so good for Abenomics... Abe promised to fire “three arrows”: fiscal stimulus, monetary easing and structural reforms. He has delivered most dramatically in the monetary area, where the Bank of Japan has tried radical anti-deflation measures, including, most recently, negative interest rates on commercial bank deposits at the central bank. Yet in view of the underwhelming results — including another three months of negative growth at the end of 2015 — Japanese are worried and the prime minister’s approval ratings are falling. [Source: Editorial Board, Washington Post, March 5, 2016]

Implementation of Abenomics

Martin Wolf wrote in the Financial Times, Of the three arrows of Abenomics “monetary policy has been shot most aggressively. Under the policy of quantitative and qualitative easing adopted in April 2013, the Bank of Japan has increased its balance sheet from 34 per cent of gross domestic product at the end of the first quarter of 2013 to 73 per cent two and a half years later. Relative to GDP, the BoJ’s balance sheet dwarfs those of the Federal Reserve, the European Central Bank and the Bank of England. [Source: Martin Wolf, Financial Times, January 11, 2016 <>]

The arrow of fiscal policy has, however, not been shot. According to the International Monetary Fund, Japan had a cyclically adjusted fiscal easing of only 0.4 per cent of gross domestic product in 2013. The cyclically adjusted fiscal deficit tightened by 1.3 per cent of GDP in 2014, largely because of a misconceived jump in the rate of consumption tax, from 5 to 8 per cent, in the spring of 2014. A comparable tightening is forecast for 2015. <>

“Finally, structural reforms have been quite modest. The government has reformed agricultural co-operatives. It has also agreed to liberalisation in the Trans-Pacific Partnership (TPP), the US-led trade pact. It has made modest progress on energy and tax reform. Improvement in opportunities for women is moving at a glacial pace. Increasing immigration remains largely taboo. The labour market has entrenched differences between permanent and temporary workers.” <>

“What have been the results so far? On inflation, Japan has made modest progress. In the year to October 2015, core inflation (all items, less food, alcoholic beverages and energy) was just 0.8 per cent, still far below the 2 per cent target. On output, the outcome is also disappointing. Real GDP rose 1.7 per cent over the year to the third quarter of 2015. Yet, between the end of 2012 when Mr Abe became prime minister and the third quarter of 2015, the economy grew a mere 2.4 per cent in real terms, and was only the same size as the first quarter in 2008. <>

Sales Tax Increase in April 2014

sales implementation in 2014

A sales tax increase was implemented in April 2014 to curb Japan’s massive public debt, which is the highest among developed nations, but that reduced consumer spending which is crucial to the Japanese economy. The sales tax was initiated by the government that preceded Abe’s. Abe promised to implement the tax in return for the Democratic Party of Japan (DPJ) — the party in power before Abe — calling the elections that brought Abe to power.

The first rise - from 5 percent to 8 percent - took place in April, 2014. The BBC reported: “Abe’s government had hoped the increase would boost government income but instead Japanese consumers stopped spending. Figures released in November 2014 showed that Japan’s economy had fallen back into a technical recession. The second increase, to 10 percent, was set for October 2015 but will now be delayed by at least 18 months. [Source: Rupert Wingfield-Hayes, BBC, November 18, 2014]

Japan’s Economy Shrinks After Sales Tax Increase

The Japanese government badly underestimated the dampening effect of the consumption tax increase in April 2014, which caused the economy to shrink by 1.7 percent in the April-June quarter of 2014 and decrease again by 0.7 percent in July-September. Negative growth for two consecutive quarters is technically a recession. There were worries that Japan could fall into another deflationary spiral or fail to reach its stated goal of 2 percent inflation by 2014 or 2015. The GDP expanded at an annualized 1.5 percent rate in the October to December quarter

Simon Kennedy of Bloomberg wrote: Trying to double his nation’s sales tax to 10 percent over an 18-month period has resulted in the fourth recession since 2008 and the need to postpone the increase’s second part planned for October 2015. [Source: Simon Kennedy, Bloomberg, November 18, 2014]

The Yomiuri Shimbun reported: “ The annualized GDP figure in the July-September period was substantially below the average forecast of 2.5 percent growth by private research institutes, clearly illustrating the economic stagnation after the consumption tax rate was raised from 5 percent to 8 percent in April. “Personal consumption, which accounts for about 60 percent of the nation’s GDP, increased 0.4 percent from the previous quarter. However, its recovery from the April-June period, which marked a 5 percent decline — a reaction to a last-minute surge in demand prior to the tax hike in the previous quarter — was slow.[Source: Yomiuri Shimbun, November 17, 2014 \~/]

“Rises in income did not keep pace with a price increase of more than 3 percent, which includes the consumption tax hike. This made more consumers budget-minded, observers said. In addition, typhoons and heavy rain in July and August adversely affected the latest GDP figures. In particular, sales of automobiles and home electronics — items whose replacement cycle is long — were sluggish. Meanwhile, capital investment in the July-September period fell 0.2 percent from the previous quarter, according the Cabinet Office’s report. The corporate sector’s performance was strong, but companies refrained from investment due to concerns over economic prospects following April’s tax hike. Housing investment dropped 6.7 percent as it continued to suffer from a downturn in the previous quarter.” \~/

Experts: Japan Tax Hike: Too Much, Too Quickly

Buy stuff before the sales tax increase

In regards to the negative impact of the sales tax hike, Simon Kennedy of Bloomberg wrote: “The lesson is that the increases proved too much, too soon, and baby steps may have been more prudent, with the initial 3 percentage-point boost equivalent to 60 percent of the original level. In contrast, the U.K.’s 2011 increase of 2.5 percentage points amounted to a much smaller 14 percent boost and didn’t generate a recession. “Proportionally the increase is a lot bigger in Japan, where people are used to paying low consumption tax,” said Julian Jessop, chief international economist at research firm Capital Economics Ltd. in London. “Psychologically it’s a much bigger deal because it’s a meaningful amount of money.” [Source: Simon Kennedy, Bloomberg, November 18, 2014 \+\]

“In fact the planned increase would be almost unprecedented among members of the Organization for Economic Cooperation and Development since sales taxes first began to be introduced in the late 1960s, as governments sought to expand their tax bases through hard-to-dodge revenue-raising measures. Other countries’ recent sales-tax tweaks have been modest by comparison in relative terms. Since 2010, Spain increased its levy from 16 percent to 21 percent yet did so in two shifts spread over three years. Italy has raised its rate to 22 percent from 20 percent in 2011, also in two moves. The only shift that really rivals Japan’s is the U.K. government’s 1979 action to raise its value-added tax to 15 percent from 8 percent in one swoop. While that was aimed at containing inflation rather than restraining fiscal excesses, it still helped push the British economy into a recession.\+\

“Japan waited until 1989 to catch up with international counterparts and introduce a 3 percent tax. By 1997, in a lesson probably now understood by Abe, an increase to 5 percent cost then-Prime Minister Ryutaro Hashimoto his job after the economy slumped. As recently as last month, the International Monetary Fund said the second consumption-tax increase was “critical to establish a track record of fiscal discipline.” The U.K. has shown more recently that it’s possible to raise the rate without causing a recession. While consumer spending contracted in the first quarter and flat-lined in the second after the value-added tax was elevated in January 2011 to 20 percent, buying has gained every period since. \+\

“Now Abe will have to wait to adjust his levy even as he seeks ways to control debt that advisers to his government forecast to rise to 264 percent of gross domestic product by 2030 from 227 percent in 2013. Jessop at Capital Economics says Abe may find that voters still fear more increases, given that 10 percent is about half of the rates in the U.K., France and Germany. “It’s worth stressing even 10 percent leaves it relatively low, so people may be worried of something further,” he said.” \+\

In November 2014, Abe postponed an increase in the nation’s sales tax from 8 percent to 10 percent from October 2015 to April 2017. BOJ Governor Haruhiko Kuroda put the onus on the government to strengthen its finances after Abe announced the postponement and set plans for more fiscal stimulus to stoke the economy.“It’s the responsibility of parliament and the government, not an issue for the central bank,” Kuroda said. When asked how the delay would affect the growth and inflation outlook, he said: “There is no point giving my personal view.” [Source: Keiko Ujikane and Toru Fujioka, Bloomberg, December 1, 2014]

Moody’s Cuts Japan’s Rating

In December 2014, Moody’s Investors Service cut Japan’s credit rating to A1, the same as Bermuda, Israel, Oman and the Czech Republic. Keiko Ujikane and Toru Fujioka of Bloomberg wrote: The ratings company cited uncertainty over whether Japan will achieve its deficit-reduction goals and succeed in boosting growth. The Bank of Japan is buying record amounts of JGBs issued by a government that’s already burdened by the world’s heaviest public debt load. “This serves as a good reminder to Japanese voters that the country’s fiscal situation is terrible,” said Kazuhiko Ogata, chief Japan economist at Credit Agricole SA. “This should push Abe to accelerate his efforts to revive the economy first and then work on fiscal consolidation -- he really needs to reinvigorate the economy in a few years.” [Source: Keiko Ujikane and Toru Fujioka, Bloomberg, December 1, 2014 /^\]

“The cut by Moody’s was the first downgrade for Japan by one of the top-three ratings companies since Abe came to power in December 2012. Moody’s had rated the country in line with South Korea, Saudi Arabia and Taiwan before yesterday’s move. There are increasing risks of a rise in bond yields that could make it harder for Japan to manage its debt, according to Moody’s, even as yields on 10-year government securities hover at less than 0.5 percent. /^\

“Most of Japan’s debt is owned by domestic investors, with foreigners holding 8.54 percent at the end June 2014, according to the BOJ. The central bank became the biggest single creditor to the government for the first time on record in the first quarter. The BOJ buys 8 trillion to 12 trillion yen ($101 billion) of Japanese government bonds per month, giving it room to absorb the 10 trillion yen in new bonds that the Ministry of Finance sells in the market each month.The central bank’s bond purchases are feeding complacency in the government about its debt and preventing the market from signaling a warning through higher yields, said a former policy board member, Miyako Suda.

Record High 2014 Trade Deficit Shows Yen’s Fall Fails to Push Exports as Expected

Japan suffered a trade deficit of ¥12.78 trillion in 2014, marking a record high since 1979, when comparable data was first made available, according to Finance Ministry trade statistics. The trade deficit in 2014 was partly due to increases in such imports as liquefied natural gas, which is used for thermal power generation. The figure was also attributed to an 8.7 percent fall in the yen’s value from 2013. The currency depreciation caused the value of yen-based imports to rise 5.7 percent from the previous year to ¥85.88 trillion, another record high. [Source: Yomiuri Shimbun, January 26, 2015 ||||]

According to the Yomiuri Shimbun: Exports were brisk, with those of mainly automobiles to China and European countries reaching high levels. The total export value amounted to ¥73.11 trillion, marking the second consecutive year of growth. However, the rise in imports was greater than that of exports. As a result, the trade deficit surpassed the 2013 figure of ¥11.47 trillion. Among exported commodities, automobiles saw 4.9 percent growth, and scientific and optical instruments, such as liquid-crystal display panels, improved 9.6 percent. The total volume of exports increased 0.6 percent, marking the first rise in four years. Among imported commodities, LNG, which is used as fuel for thermal power plants, increased 11.2 percent. Imports of LNG have been on the rise, as the nation’s nuclear power plants have been idled. Import values of semiconductors and related goods rose 17.4 percent, partly due to a surge in imports of solar panels from China.” ||||

Daisuke Segawa and Kazumichi Shono wrote in the Yomiuri Shimbun, “The nation’s 2014 trade balance shows that the total value of exports did not increase as expected, although the yen’s value steadily declined because of drastic monetary-easing implemented as part of Abenomics. The goal set by the government to regain Japan’s status as a strong trading nation, which earns by manufacturing products domestically and selling them overseas, is still far away. The annual average of the foreign exchange rate in 2014 was ¥105.30 against the dollar. The yen’s value fell by about ¥8 from the average in 2013. While the yen’s depreciation is favorable for exports, it pushes up the prices of imported commodities. [Source: Daisuke Segawa and Kazumichi Shono, Yomiuri Shimbun, January 28, 2015 ==]

“The major factors pushing imports are increased demand for liquefied natural gas for thermal power plants as the nation’s nuclear power plants have been idled, and for solar panels from China in the trade category of semiconductors and electronic parts. Increases of imports of crude oil and LNG have continued to push the trade deficit since 2011, when the Great East Japan Earthquake occurred. By region, the nation’s trade deficit with China was the largest at ¥5.79 trillion. But in trade with the United States, the balance was ¥6.11 trillion in the black. However, the surplus with the United States decreased from the previous year. ==

“Though the yen’s depreciation was expected to boost exports under the government’s scenario for economic growth, it is difficult to say the tactics have progressed smoothly. Exports did not increase as expected because many major companies had shifted their production bases overseas when the yen’s value was high. Exports of automobiles lack the momentum seen in the past. From January to November 2014, the number of domestically produced cars exported from Japan fell about 5 percent from the corresponding period in 2013 as Japanese makers lost foreign market share to attractive foreign cars made abroad. ==

“Japanese manufacturers were once strong in the product category of electronic devices. But nowadays, smartphones and personal computers made in China are popular even in Japan..Even so, some economists are upbeat about the nation’s exports as the trade deficit in December 2014 decreased from the same month the year before because of falling crude oil prices. Koya Miyamae, an economist of SMBC Nikko Securities Inc., said, “There is a possibility that the trade balance will return to the black.” Some Japanese manufacturers are beginning to bring overseas production bases back to Japan.” ===

oil prices

Plunging Oil Prices and Weak Consumer Spending Hurt Abenomics

The plunge in oil prices in the mid 2010s derailed the Bank of Japan’s inflation plans. In January 2015, according to the Yomiuri Shimbun, “Bank of Japan Gov. Haruhiko Kuroda admitted there might be a delay in achieving the bank’s target of 2 percent annual inflation in fiscal 2015 due to the slump in oil prices. Although cheaper oil provides a tailwind for the economy, it also helps keep consumer prices from rising in the short term and could hurt the drive to break out of deflation. [Source: Yomiuri Shimbun, January 23, 2015 /=\]

“Kuroda indicated the target might be reached in fiscal 2016. “It might fall a little outside” the assumed period, Kuroda said. “It’s possible it could happen slightly around that period.” Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance Co., suggested Kuroda is nudging back the target date. “When the bank launched the qualitative and quantitative easing program, it initially said the emphasis was on achieving the inflation target in about two years,” Kodama said. “Now they’re gradually moving back the date by when the goal will be achieved.” /=\

“The plunging price of crude oil has blunted the rise in prices in Japan. In July 2014, oil prices on the crude oil futures market were about $100 a barrel, but this has dipped to below $50 in January 2015. Because oil has a wide range of uses as a raw material, its declining price has enabled companies to trim costs, which has led to lower prices for various products. /=\

The first positive growth in Japan in late 2014 after the consumption tax rate was raised in April 2014 was mainly the result mainly of overseas demand. Domestic demand remained weak. According to the Yomiuri Shimbun: :Exports in the October-December quarter increased 2.7 per cent from the previous quarter. Net exports - export values minus import values - pushed up the GDP growth rate by 0.2 percentage point. Consumer spending in the quarter rose 0.3 per cent, but the rate of increase matched that for the July-September quarter in which unusual weather conditions negatively affected consumption.[Source: Ryosuke Yamauchi and Takeshi Kurihara, Yomiuri Shimbun, February 18, 2015 \~\]

“Households’ tendency to cut spending, on clothes and other daily necessities, has been deep-rooted. Sales at department stores have been supported mainly by the affluent in urban areas and foreign tourists. An official at a major department store chain said, “Especially in provincial regions, improvement in consumer sentiment has been delayed.” \~\

“Capital investment by companies has also been sluggish. According to research by the Development Bank of Japan, conducted in summer last year, capital investment planned by major companies in fiscal 2014 was 15.1 per cent higher than in the previous fiscal year. The percentage was the highest in 24 years. But actual investment has not increased. Koya Miyamae, an economist at SMBC Nikko Securities Inc., said, “Because recovery of consumption has been weak, companies have continued to maintain a cautious stance.” \~\

Interest rates and growth

Bank of Japan Launches Negative Interest Rates

In February 2016, the Bank of Japan introduced negative interest rates as part a radical plan to stimulate growth. The central bank, which announced the shock decision on January 29, began charging banks 0.1 percent for parking additional reserves with the BOJ to encourage banks to lend and prompt businesses and savers to spend and invest. The once-unthinkable policy essentially means that banks charge customers to hold their cash. Analysts viewed the move as a sign of desperation and an indication of Tokyo's lack of options.[Source: By Hideyuki Sano and Leika Kihara, Reuters, February 16, 2016 =|=]

Reuters reported: “While the announcement briefly drove down the yen and buoyed Japanese share prices, markets quickly went into reverse. "It's getting clearer that Abenomics is a paper tiger," said Seiya Nakajima, chief economist at Office Niwa, a consultancy. "The impact of monetary easing is similar to currency intervention. The first time they do it, there's a huge impact. But as they repeat it, the impact will wane," said Nakajima. =|=

“Though senior BOJ officials expected only a minor impact on Japanese banks, their stock prices plunged... The problem was partly bad timing, as global markets were already in a tailspin over China's slowdown, U.S. rate hikes and tumbling oil prices. But the reaction leaves BOJ Governor Haruhiko Kuroda's assertion that his policy is having its intended effects looking threadbare."It seems as though the BOJ's action triggered the market moves," said Yoshinori Shigemi, global market strategist at JPMorgan Asset Management. "But a better explanation would be that concerns elsewhere overwhelmed the BOJ action." =|=

In the 11 days after the BOJ board's announcement, the benchmark Nikkei fell 8.5 percent, while the yen has climbed 6.5 percent against the dollar. “Japanese bank shares have slumped by as much as 30 percent as they are unlikely to pass on negative rates to savers, who already get negligible interest on their deposits but would baulk at paying to save. Negative rates could push down bank operating profits by 8-15 percent, Standard and Poor's said. The biggest beneficiary is government, by far the biggest borrower in the country, which would save 1.2 trillion yen. A poll by Asahi Shimbun daily showed 61 percent of people don't expect negative rates will help the economy while only 13 percent said they will. =|=

Unexpected Impact of Japan’s Negative Interest Rates

Japan’s experiment with negative interest rates produced some unexpected results. Eleanor Warnock and Mayumi Negishi wrote in the Wall Street Journal: “Trading has withered in Japan’s money markets, where big banks and others usually park their excess cash hoping to receive some interest—despite predictions from the Bank of Japan that its latest easing of monetary policy would spark more activity. And there has been a rush in demand for Japanese government bonds even as many yields went below zero.Instead of falling, the yen has surged to 18-month highs against the U.S. dollar. [Source: Eleanor Warnock and Mayumi Negishi, Wall Street Journal, April 14, 2016 ^|^]

“Every day is like being Alice in Wonderland,” said Tomohisa Fujiki, head of interest-rate strategy at BNP Paribas Securities Japan. “Interest-rate levels are having little effect on credit demand, the market function is declining. You can’t expect everything to go according to plan.” Japan’s minus 0.1 percent rate on some deposits that banks place at the central bank was designed to encourage banks to lend more, spurring higher spending and inflation. Yet that has not been the case so far. Lower interest rates normally lead a country’s currency to depreciate, helping its exporters—a key aim of “Abenomics.” ^|^

“Instead, the yen has been bolstered both by its re-emergence this year as a haven currency amid uncertain global markets, and by the dollar’s recent weakness after the Federal Reserve pared back expectations of U.S. interest-rate increases. Demand is coming from an unusual source: foreign investors, who in the past have largely stayed out of the low-yield market but have recently jumped in because of rising returns on Japanese-bond trades thanks to the cheaply funded yen. ^|^

“Traders also have pushed up the yen believing Japan’s central bank can’t do much more to ease policy. “There is no guarantee that lowering interest rates encourages corporate capital expenditures or expedites the shift of household financial assets from savings to investment,” said Nobuyuki Hirano, president of Mitsubishi UFJ Financial Group Inc., Japan’s biggest bank, adding the negative-interest policy had caused households and businesses to rein in spending amid growing uncertainty over the future. ^|^

“One problem has been Japanese banks’ computer systems: The trade-confirmation system used by money-market brokers wasn’t fully updated for negative interest rates until over a month after the BOJ rate cut. Money-market trading volumes dropped to their lowest level since at least 2011 at the end of March, according to Japan’s Money Brokers Association, down to nearly a 10th of January’s levels. ^|^

“Money markets allow banks and other financial institutions to lend and borrow money for a period of less than a year, often not backed by collateral. If fewer banks invest cash in short-term markets, it is harder for other banks to get short-term loans to finance their operations. Japanese trust banks that manage cash on behalf of mutual and pension funds have in recent weeks been placing excess money on deposit at the BOJ rather than into overnight money markets, where it might now attract a negative interest rate. “If the money market dries up, if there is an event like the Lehman crisis, there won’t be the infrastructure for banks to raise capital,” said Naomi Muguruma, strategist at Mitsubishi UFJ Morgan Stanley Securities. “It could cause interest rates to rise sharply.” ^|^

Problems in the money markets have run counter to Mr. Kuroda’s expectations: last month he said that as market players get used to negative rates, money-market trading should increase. Mr. Kuroda predicted banks that had to pay a minus-0.1 percent interest rate on some of their reserves would want to lend out that money for a higher rate. Instead, Japanese financial institutions have been searching overseas for higher returns, without a corresponding rise in investment at home. Japanese investors bought a total of ¥5.47 trillion ($50 billion) worth of foreign securities in March, up 11 percent from February, according to the finance ministry.

national debt of Japan

Doubts About the Effectiveness of Abenomics

According to a survey of economists canvassed by Bloomberg News, Abenomics has not had much impact reviving the Japanese economy. Abe’s signature domestic policy received an average score of 4.6 points out of 10 for overall economic effectiveness in a survey of 23 economists. The survey asked economists for their views about the efficacy of Abe’s three-pronged program — aggressive monetary policy, fiscal stimulus and a regulatory overhaul — on Japanese growth, deflation and structural reforms on a scale of 1 (worst) to 10 (best). [Source: Yoshiaki Nohara and Andy Sharp, Bloomberg, March 8, 2016 <=>]

Yoshiaki Nohara and Andy Sharp of Bloomberg wrote: “The Bank of Japan’s monetary expansion and asset purchases have helped push the yen down to multiyear lows against the dollar and sparked a stock market rally from just before Abe took power in late 2012 through most of 2015. However, the economy has performed unevenly, falling into recession in mid-2014 and then swinging between quarters of growth and contraction in 2015. Data confirmed the economy shrank an annualized 1.1 percent in the final three months of 2015. <=>

“Now, attention is increasingly shifting to whether Abe’s government will push through structural reforms that many economists believe are needed to produce sustainable growth. More than halfway through his projected term in office, which is expected to end in 2018, time is running short for Abe to push through bolder plans such as job market reforms and getting more women into management roles. <=>

“Foreign investors are turning their back on Abe, who proclaimed “Japan is back” and “buy my Abenomics!” at the New York Stock Exchange in September 2013. Among them is Alan Gayle, a senior strategist for Atlanta-based Ridgeworth Investments. “The story in Japan is not unfolding the way a lot of people expected, so that’s going to put downward pressure on their markets going forward,” according to Gayle, who has been cutting back international exposure, including Japan. “The Japanese have been trying a lot of things, and they don’t seem to be gaining traction. Most of the comments that I’m hearing float around the notion that Japan really needs to look at structural reforms as a way to unlock potential.” <=>

A survey by the Nikkei newspaper and TV Tokyo in late February 2016 showed a half of respondents said they do not approve of Abenomics, while 31 percent said they do. It was the first time that the rate of those who did not support Abenomics reached 50 percent, the newspaper said. <=>

Katsuka Okada, the leader of Japan’s main opposition party, told the Financial Times in May 2016: “At this point you can’t say [negative interest rates] are getting results,” Mr Okada said. “Of course, you can’t change direction all at once because the side effects would be too great. But further expansion of monetary policy, deeper negative interest rates — I think we should avoid them.” “It’s been three years and six months since the start of the Abe administration and I think people are getting tired of waiting,” Mr Okada said. “Abenomics isn’t producing results, life isn’t getting better. I think people no longer expect much.” [Source: Robin Harding, Financial Times, May 1, 2016]

Problems with Abenomics

Jean-Pierre Lehmann wrote in Forbes: “There has been more bad news recently on Abenomics: inflation targets are not being met, growth remains anemic, business confidence is low and national morale is poor (made worse, no doubt, by recent earthquakes). Abenomics, however, was never likely to be the solution, mainly because the problems it proposed to address are the symptoms rather than the causes of Japan’s malaise.” [Source: Jean-Pierre Lehmann, Forbes, April 24, 2016]

In the Bloomberg survey, “the economists were more critical about the so-called third arrow of Abenomics focused on structural reform to pursue a growth strategy than about changing the atmosphere with rhetoric and stimulus measures. They rated Abenomics at an average 4.1 and 4, respectively, for putting Japan’s economy on a sustainable growth path and laying the future foundation with structural reforms, while the rating was 5.1 for ending the deflationary mindset. [Source: Yoshiaki Nohara and Andy Sharp, Bloomberg, March 8, 2016 <=>]

“The problem with Abenomics is it relies on monetary policy too much,” said Akio Makabe, an economics professor at Shinshu University. “We’ve seen little progress made for fiscal rehabilitation and structural reforms like deregulation while stocks were up. I’m afraid that may hinder growth in the medium- and long-terms.” <=>

“Gains have been made in consumer prices, which are no longer in outright decline, as they were before Abenomics. When the impact of food costs and the plunge in oil is stripped away, inflation is about 0.7 percent. Until recently, the yen’s decline was also helping large companies to record profits as their products became cheaper in global markets. <=>

“Even so, there is abundant evidence that Abenomics is not working as promised: 1) Wages including bonuses and overtime pay, adjusted for inflation, fell in 2015 for a fourth consecutive year, according to the labor ministry. 2) Private consumption fell for two years following a sales tax bump in April 2014, according to the Cabinet Office. 3) Gross domestic product per person rose 2.8 percent from 2012 to 2015, according to the International Monetary Fund. That is a step back from the previous three years, when Japan jumped 6.4 percent.<=>

“Without implementing structural reforms, Japan is on course to have done little to address an underlying debt burden that may pose a future risk to the economy. “I get a sense that Abe is losing his desire to tackle bedrock-like regulations,” said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance Co. in Tokyo. “The end of regulatory reforms will be the end of Abenomics.” Abe deserves credit for securing the Trans-Pacific Partnership regional trade pact and cutting corporate income taxes, according to Hajime Takata, chief economist at Mizuho Research Institute. It is just that Japan’s economic problems run too deep to be solved in a few years, he said. “I have a 25-year-old son and he’s lived with deflation his entire life,” Takata, 57, said. “I don’t think three years can change the mindset of people.” <=>

What Exactly Are Japan’s Economic Problems

Martin Wolf wrote in the Financial Times, “A fundamental question is whether Abenomics has correctly identified what is ailing the Japanese economy. The labour market, for example, performs excellently. The unemployment rate was just 3.1 per cent in October 2015. When one allows for the shrinking labour force, the growth performance is not bad either. Trend annual growth of GDP per person of working age was 1.5 per cent between 2000 and 2010, and then 2 per cent between 2010 and 2015. Both rates were the highest in the Group of Seven leading high-income countries. [Source: Martin Wolf, Financial Times, January 11, 2016 <>]

According to the IMF, Japan’s GDP per head at purchasing power parity was only 69 per cent of US levels in 2014, ahead only of Italy within the G7. Radical reform might generate faster catch-up growth. But it would be remarkable if Japan were to sustain annual growth of GDP per worker at more than around 1.5 per cent. Without mass immigration, even this would imply potential annual growth of around 1 per cent, well below the 2 per cent envisaged. According to the BoJ, the potential annual rate of growth rate is now only 0.5 per cent. <>

Supply, then, is not Japan’s problem — or, if it is, it is because of the shrinkage of the labour force. The real problem is the weakness of private demand. The indicator of that is the enormous private sector financial surpluses — the excess of private savings over private investment. This surplus has oscillated between 5 per cent and 14 per cent of GDP since the mid-1990s. <>

“A country with a declining population does not need to build more houses — the main investment by households. Household investment has fallen from 7 per cent of GDP in the early 1990s to below 4 per cent. This fall has offset the decline in household savings rates. The result has been a chronic household financial surplus. <>

“The corporate sector financial surplus is even bigger. It averaged 7 per cent of GDP between 2001 and 2013, and, at its peak, in 2009 and 2010, reached 9 per cent. This corporate surplus is due to strong corporate savings, which averaged 22 per cent of national income since the early 2000s, and mildly declining corporate gross investment, which averaged 14 per cent of GDP over the same period. But this investment rate is still remarkably high by the standards of other G7 countries. <>

“The counterpart borrower has been the government. The ratio of gross public debt to GDP jumped from 67 per cent in 1990 to 246 per cent in 2015, while the ratio of net debt increased from 13 to 126 per cent. Yet, despite sustained fiscal deficits and near-zero short-term interest rates, the mild deflation has not been durably eliminated. The BoJ’s purchases of low-yielding Japanese government bonds (JGBs) are highly unlikely to eliminate the private sector’s huge financial surpluses. <>

“It is, in brief, “not the supply, but the demand, stupid”. The structural savings surpluses of the private and, in particular, of the corporate sectors have driven the government into its deficits and growing debts. Abenomics does not recognise this underlying reality. Japan must offset the private surpluses, export them or eliminate them. This is the dominant challenge. The first step is to recognise the core problem — one of insufficient private demand. Only then can it be solved.” <>

Possible Solutions to Improve the Japanese Economy

Martin Wolf wrote in the Financial Times, “So what is to be done? A first option is to continue with today’s large fiscal deficits and central bank purchases of JGBs, in the hope that the surpluses of the private sector will soon disappear. Unfortunately, this seems unlikely. If so, the fiscal deficits cannot be safely eliminated. This policy will end up as permanent monetisation of deficits. [Source: Martin Wolf, Financial Times, January 11, 2016 <>]

“A second option is to admit that the policy is monetisation. The BoJ would agree with the government on monetary financing or on transfers to households. Moreover, given the public sector debt overhang in Japan, a new and higher inflation target could also be set, with a view to lowering the debt burden. <>

“A third option is to impose fiscal austerity. Some will argue that the private sector would recognise the improved solvency of the state and so cut back on excess savings. In Japan, this argument looks implausible. The result is more likely to be a deep recession. <>

“A fourth option is to export the excess savings via a bigger current account surplus. This is exactly what Germany has done. The real effective exchange rate has depreciated by some 30 per cent since Mr Abe became prime minister. To do this, the BoJ could purchase foreign bonds. Alternatively, the government could set up a sovereign wealth fund financed by the sale of JGBs. Yet such policies, if pursued on a large enough scale, would worsen global imbalances. That would be unpopular abroad. A fifth option is to attack the private sector’s chronic savings surplus head on. To do that, one must first recognise that Japan saves too much. So raising taxes on consumption is the opposite of what should be done. <>

“Shifting Japan’s excess corporate retained earnings into wages and taxes would go a long way towards eliminating the structural savings surplus. One could slash depreciation allowances, for example. Reform of corporate governance might also increase the distribution of corporate earnings. Yet another possibility would be to force up wages.” <>

Image Sources: Wikimedia Commons

Text Sources: Ministry of Foreign Affairs, Japan; Library of Congress; Japan National Tourist Organization (JNTO); New York Times; Washington Post; Los Angeles Times; Daily Yomiuri; Japan News; Times of London; National Geographic; The New Yorker; Time; Newsweek; Reuters; Associated Press; Lonely Planet Guides; Compton’s Encyclopedia; Smithsonian magazine, The Guardian, Yomiuri Shimbun, The New Yorker, AFP, Wikipedia, BBC. Many sources are cited at the end of the facts for which they are used.

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© 2009 Jeffrey Hays

Last updated September 2016

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