After Shinzo Abe became prime minister for the second time in December 2012, he initiated the a bold economic policy—that became known as Abenomics. Abenomics is a blend of big government spending, monetary easing and reforms to Japan’s highly regulated economy. It has helped exporters by sending the yen sharply lower and boosted stocks. Abe won high marks for the first two steps of his Abenomics strategy, hyper-easy monetary policy and fiscal spending. But investors have been disappointed with the failure of his so-called “Third Arrow” to target structural reforms and deregulation of sectors such as labor and farming.
Martin Fackler wrote in the New York Times, “His plan, one of the world’s most audacious experiments in economic policy in recent memory, combines a flood of cheap cash (doubling the money supply in two years), traditional fiscal stimulus and deregulation of Japan’s notoriously ingrown corporate culture. The hope is that this will yank Japan from a debilitating deflationary spiral of lower prices and diminished expectations, stirring what Keynes called the “animal spirits” of investors and consumers. [Source: Martin Fackler, New York Times, May 20, 2013]
“And so it has. The stock market has soared more than 60 percent over the past year, and the yen has lost more than a quarter of its value, lifting corporate earnings in a country that is dependent on exports.” In May 2013, “Abenomics got an early report card. Japan’s $5 trillion economy grew at a robust annualized pace of 3.5 percent in the first quarter, and — most important for Mr. Abe’s notion that consumer confidence is key — household consumption accounted for the lion’s share of that growth. Although there were some signs of weakness, most notably a drop in business investment, the numbers were a promising sign that the good news was not confined to financial markets.”
Mr. Abe needs “some room to maneuver, even as he promises to take on entrenched interests through deregulation and to raise inflation. A pickup in the inflation rate would cause pain for Japan’s legion of politically active retirees, but nudge people to spend before their money loses value — reversing the deflationary psychology of delaying purchases in anticipation of ever-lower prices.”
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.
Defeating Deflation Top Priority of Abenomics
Takanori Yamamoto and Hiroshi Arimitsu wrote in the Yomiuri Shimbun, “Abe aims to overcome prolonged deflation with a three-pronged approach: a flexible fiscal policy, bold monetary easing by the Bank of Japan and a growth strategy. Whether these three will complement one another to jointly stimulate the economy will be a deciding factor in Japan's revival. [Source: Takanori Yamamoto and Hiroshi Arimitsu, Yomiuri Shimbun, January 13, 2013 |::|]
“"Abenomics," makes emerging from deflation a top priority. Prolonged deflation raises the value of money, leading companies and households to avoid borrowing and instead increase their deposits or savings. Under such circumstances, a recovery of consumption and investment would be difficult using just monetary easing measures. "We want to lend money to promising companies, but demand for funds is sluggish," said a senior official of a major bank. "Companies increase their sales by borrowing money and making investments," Abe said. "By encouraging such behavior, we aim to create a favorable cycle to boost employment and wages." |::|
“Abe believes the current lack of demand for funds will be solved by implementing massive public works projects together with monetary easing measures. Then, according to his view, reserves being held by companies and households will be utilized for capital investment and consumption.” |::|
Bank of Japan’s Monetary Easing Policy to Weaken the Yen
The Abe government wanted the Bank of Japan to ease its monetary policy to get Japan out of deflation by increasing the BOJ's 101 trillion yen ($1 trillion) asset buying and lending program. Abe pressured the Bank of Japan to adopt a formal inflation target of 2 percent and to buy bonds in unlimited quantities until it reached that goal.
Japan’s monetary easing policy was called "kinyu kanwa" in Japanese. "Kinyu" means finance, and "kanwa" means relaxation. Monetary easing refers to the capacity of the Bank of Japan to increase the amount of yen in circulation. According to Yomiuri Shimbun, “This does not mean the central bank can directly inject money into the market. Instead, it increases the amount of money in circulation through payments for purchases of government bonds from commercial banks. These bonds can be thought of as certificates issued by the government for borrowing from financial institutions. Payments to commercial banks for the bonds help increase their money on hand, which allows them to lend more money to companies to build factories, individuals who want to build houses and other borrowers. Doing so eventually boosts the amount of money in circulation. [Source: Yomiuri Shimbun/Daily Yomiuri, March 7, 2013]
Taking "kinyu kanwa" steps to increase the amount of money available for loans to corporations and individuals could increase sales of goods, thereby propping up the economy. This is why Prime Minister Shinzo Abe is emphasizing the need for bold "kinyu kanwa." But there are some concerns. For instance, a surplus of money could boost sales excessively, leading to price hikes. If prices rise without being accompanied by pay hikes, it could adversely affect people's livelihoods. Also, if the central bank buys an excessive amount of government bonds, the government may run up a massive debt. The government's desire to improve the economy must be complemented by efforts to avoid amassing a huge debt.
According to The Economist: Abe “is right about introducing a formal inflation target. Japan would be better off if its central bank were given a clearer, bolder goal, and politicians are the right people to set it. But he is wrong to want to meddle in how the Bank of Japan achieves that goal. Financial markets will become alarmed if the BoJ starts to lose its independence. That could raise the cost of servicing Japan’s huge national debt.” [Source: The Economist, December 22, 2012]
In April 2013, the Bank of Japan launched an expanded quantitative easing campaign to reach 2 percent inflation in two years. Under the scheme, the BOJ's monthly purchases of government debt are the equivalent of around 70 percent of newly issued government debt.
'Deflation Basher' Kuroda Becomes Head of Bank of Japan
In February 2013, Abe named Asian Development Bank President Haruhiko Kuroda—an advocate of aggressive monetary policy easing— as the governor of Japan’s central bank. “Kuroda is a fan of a weaker yen and of deflation bashing,” Kit Juckes, a strategist at Societe Generale in London, told Reuters. [Source: Leika Kihara and Yuko Yoshikawa, Reuters, February 25, 2013]
Leika Kihara and Yuko Yoshikawa of Reuters wrote: Like the U.S. Federal Reserve, the Bank of Japan has cut interest rates close to zero. Since then it has adopted unusual measures to inject cash into the economy, currently in its fourth recession since 2000, to try to stimulate growth. But Kuroda has long criticized the BOJ as too slow to expand stimulus, so he is expected to push for more radical efforts to achieve a 2 per cent inflation target set in January.
The Bank of Japan “is also lining up Kikuo Iwata, an academic who advocates unorthodox monetary easing steps, and BOJ Executive Director Hiroshi Nakaso, who now oversees the central bank’s international operations, as deputy governors, a source familiar with the process said. Iwata told reporters he had been offered the job and he would accept it. Among other beliefs, Iwata has argued the central bank is mostly to blame for prolonging deflation by not being aggressive enough in easing policy.
“Monetary easing is pretty much a given. The question is what specifically the BOJ will do,” said one official, who spoke on condition of anonymity due to the sensitivity of the matter. The BOJ has already pledged to pump 101 trillion yen ($1-trillion) into the economy by the end of this year by buying assets and through a lending program and to shift to open-ended purchases from next year.
Kuroda, 68, has been considered a strong candidate to replace current BOJ Governor Masaaki Shirakawa because of his extensive experience in international policy and his calls for more aggressive monetary easing that matched the views of Abe. As Japan’s top financial diplomat from 1999 to 2003, he aggressively intervened in the exchange-rate market to weaken the yen to support the country’s export-reliant economy, a sign he will be keen to keep any sharp yen rises in check. He has called for the BOJ to achieve its 2 per cent inflation target in two years by pumping money into the economy through unorthodox steps, such as expanding government bond purchases and buying shares. Inflation in Japan has rarely reached 2 per cent since the early 1990s. Abe has stressed the need for the new governor to have international contacts, suggesting he prefers someone with experience in financial diplomacy, like Kuroda who, as president of the 67-member ADB rubs shoulders with policymakers around the world. In nominating a BOJ governor, the premier usually respects the views of the finance minister and the ministry’s bureaucrats because they work closely with the central bank on economic policy. The finance ministry lobbied for former financial bureaucrat Toshiro Muto, but was likely turned down by Abe and his aides who saw him as lacking international contacts and less willing to experiment with untried monetary easing steps.
Monetary Easing Stepped Up After Kuroda Becomes Head of Bank of Japan
In early April 2013, Japanese central bank doubled the money supply in fresh bid to spur inflation and end the long spell of deflation which has hindered investment and economic growth. Associated Press reported: “The Japanese central bank has said it will massively expand the country's money supply to spur inflation as it strives to get the world's third-largest economy out of its slump. The Bank of Japan (BoJ) vowed to achieve a 2 percent inflation target at "the earliest possible time". To do so, the central bank has launched "a new phase of monetary easing both in terms of quantity and quality" that will double the money supply, it said in a statement. [Source: Associated Press, April 4, 2013 ***]
“The new BoJ governor, Haruhiko Kuroda, has vowed to meet the inflation target within two years, heeding demands from the prime minister, Shinzo Abe, to once and for all end a long spell of deflation which has hindered investment and economic growth. Abe's government, accused the previous central bank governor, Masaaki Shirakawa, of balking at undertaking bold enough monetary easing to get the economy back on track. The steps announced under the first policy meeting chaired by Kuroda were in line with expectations and are likely to reassure jittery financial markets of Japan's resolve to push ahead with its "reflationary" strategy. ***
The announcement pulled the Nikkei 225 stock average out of the red and sent the yen lower against the US dollar. The BoJ will conduct money market operations to increase the monetary base by about ¥60tn to ¥70tn (£420bn to £490bn) a year. At the same time it plans to increase purchases of Japanese government bonds to total ¥50tn a year to encourage interest rates to decline, which it hopes will facilitate more lending.
The central bank is also extending the average remaining maturity of the bonds it purchases from three years to an average of seven years. Meanwhile, bonds with all maturities up to 40 years will be eligible for purchase. As expected, the bank also extended the range of assets it can purchase, to include more risky real estate investment trusts and exchange-traded funds.
As part of the new strategy, the BoJ will end its current asset-purchasing programme, absorbing it into the future purchases of bonds, it said. Answering concerns that the stimulus programme would further raise Japan's public debt, the statement said that the government bond purchases would be "executed for the purpose of conducting monetary policy and not for the purpose of financing fiscal deficits". The BoJ will "examine both upside and downside risks to economic activity and prices and make adjustments as appropriate", it said.
Abe Stimulus Packages
In January 2013, the Abe government launched emergency economic stimulus package that focused on urgent public works projects to boost the economy. Takanori Yamamoto and Hiroshi Arimitsu wrote in the Yomiuri Shimbun, “The latest package is the largest on record, excluding the stimulus measures adopted after the so-called Lehman shock in autumn 2008. "The government will put emphasis on urgent public works projects that can be implemented quickly and other measures to help expand the market," Abe said. The package centers on projects such as making schools and hospitals earthquake-resistant and repairing deteriorated bridges and tunnels. Deputy Prime Minister and Finance Minister Taro Aso said at the press conference, "Maintenance projects will help distribute money and jobs to local construction companies." [Source: Takanori Yamamoto and Hiroshi Arimitsu, Yomiuri Shimbun, January 13, 2013 ||||]
“The Abe administration is focusing on public works projects because it believes deflation cannot be defeated unless sufficient demand is created. However, there is no guarantee his plan will work. The government will spend 900 billion yen to support small and midsize companies as well as agriculture, forestry and fisheries enterprises as part of efforts to create wealth by stimulating growth. On the other hand, project costs of up to 8.5 trillion yen must be shouldered by the private sector and other relevant parties. In some cases, the government will create special funds in cooperation with companies. However, if the private sector does not invest and take on the costs, it will be impossible to make up the shortfall and approved projects could come to nothing. ||||
“The government plans to issue construction bonds totaling 5.2 trillion yen to fund public works projects incorporated into the package. As a result, the issuance of new government bonds in fiscal 2012 will be about 50 trillion yen, surpassing the 44 trillion yen cap set by the Democratic Party of Japan-led government. Abe has acknowledged the importance of fiscal discipline. However, some observers are concerned tax revenues will not increase and the new bonds will only aggravate the severity of state finances if the government fails to set the economy on a growth track as it envisions. "The extent to which the fiscal stimulus will generate a ripple effect is important," said Hideo Kumano, chief economist at Dai-ichi Life Research Institute. "I highly approve of considering ways to rejuvenate the economy other than traditional monetary and fiscal policy. It remains to be seen whether public works projects handled by local governments will proceed as planned." ||||
In December 2014, Japan’s government approved a stimulus spending worth $29 billion aimed at helping the country’s lagging regions and households with subsidies, merchandise vouchers and other steps, Takaya Yamaguchi and Tetsushi Kajimoto of Reuters wrote: “The package, worth 3.5 trillion yen ($29.12 billion) was unveiled two weeks after a massive election victory by Prime Minister Shinzo Abe’s ruling coalition gave him a fresh mandate to push through his "Abenomics" stimulus policies. The government said it expects the stimulus plan to boost Japan’s GDP by 0.7 percent... but analysts are skeptical about how much it can spur growth. [Source: Takaya Yamaguchi and Tetsushi Kajimoto, Reuters, December 27, 2014 ]
After the 2016 landslide Upper House election victory, Japanese Prime Minister Shinzo Abe ordered a new round of fiscal stimulus spending as indicators showed that corporate sector was suffering due to weak demand. Abe did not state the size of the spending program. But there are reports that it could total $100 billion. Reuters reported: “Abe did not give details on the size of the package, but Japanese stocks jumped nearly 4 percent and the yen weakened over perceptions a landslide victory in upper house elections now gives him a free hand to draft economic policy. An unexpected decline in machinery orders shows the economy needs something to overcome consistently weak corporate investment. Economists worry, however, that Abe’s focus on public works spending will not tackle the structural issues around a declining population and workforce. [Source: Stanley White and Tetsushi Kajimoto, Reuters, July 12, 2016]
Japan’s $1.02 Trillion Budget for 2013-14 Pushes Debt to New Highs
In late January 2013, Tetsushi Kajimoto of Reuters wrote: “Japan's government approved on Tuesday a $1.02 trillion draft budget for the next fiscal year that aims to nudge tax revenues above new bond sales for the first time in four years, but still relies on borrowing to cover 46.3 percent of its spending. The first full-year draft budget compiled under Prime Minister Shinzo Abe marks symbolic improvement after years of deterioration. With the 92.6 trillion yen ($1.02 trillion) in spending, the government effectively trimmed the size of its draft budget from the previous year for the first time in seven years, taking into account government funding for basic pension payouts. [Source: Tetsushi Kajimoto, Reuters, January 29, 2013 ]
“Still, the budget size hovered around record levels, underlining the difficulty which Abe's government is facing in striking a balance between economic stimulus and fiscal reform. Taken together with an 10.3 trillion yen extra stimulus plan signed off earlier this month and financed in more than half by new bond sales, it drives borrowing to new highs, pushing Japan's record high debt further into uncharted territory.
“In fiscal year 2013/14 starting in April, the government plans to issue new bonds worth 42.8 trillion yen, below this year's 44.2 trillion yen initial target. But combined with the extra budget borrowing of 5.2 trillion, Abe's government will borrow 48 trillion yen, though technically the extra budget borrowing will be booked in the 2012/13 accounts. Tax revenue is targeted to rise 750 billion yen to 43.1 trillion yen, mainly reflecting an expected pick-up in economic growth to 2.5 percent from 1.0 percent forecast for the current year.
Within the 92.6 trillion yen general-account budget, spending excluding debt servicing costs is estimated at about 70.3 trillion yen, slightly less than the 71 trillion yen earmarked in the regular budget for the current fiscal year. The previous government led by the Democratic Party of Japan had set a 44 trillion yen ceiling on annual bond issuance and a 71 trillion yen cap on spending excluding debt servicing costs. Rating agencies, institutions such as the International Monetary Fund and many economists have said that those limits were seriously insufficient, allowing Japan to rack up budget deficits of close to 10 percent of GDP, above those seen in some of the most indebted euro zone countries. So far, however, vast domestic savings have allowed Japan to comfortably cover nearly all of its financing needs at home and at record low interest rates. Abe's government has reaffirmed its predecessors' goal of bringing the primary budget, which excludes borrowing and debt service, into balance by 2020/21. This can only be achieved with substantial spending cuts and tax hikes.
Abenomics’s 'Third Arrow"
In June 2013, “the third arrow” of Abenomics— a growth strategy for Japan’s economy— was unveiled. The plan included regulatory reform measures and incentives to boost foreign investment but mostly it relied on increasing government spending through public works projects. In the growth strategy, the Abe administration set goal the target of boosting per capita gross national income by 3 per cent a year. [Source: Yomiuri Shimbun, June 6, 2013 ==]
“Abenomics consists of three arrows. The first is aggressive monetary easing by the Bank of Japan, while the second is related to flexible and timely fiscal spending. With these two arrows already released, attention has turned to the third arrow--the growth strategy. To offset the potential side effects of bold fiscal spending and monetary easing, the Economic and Fiscal Policy Council is discussing midterm measures to rebuild public finances, which are viewed as a “fourth arrow” of Abenomics. ==
“Labour-related measures proposed by the regulatory reform panel chaired by Sumitomo Corp. Adviser Motoyuki Oka call for a drastic review by autumn of the dispatch worker system, which currently sets different contract terms depending on the type of job. Specifically, the panel is urging the government to consider scrapping an exception for 26 types of jobs that do not have regulations on the number of years a worker can be dispatched. This would allow companies to receive dispatched workers for all types of jobs for more than three years. ==
“Also part of the growth strategy, the government is taking steps to establish a special financial zone in Tokyo that is designed to tap investments from abroad. The steps feature significant tax cuts for international financial transactions via Japan. The Financial Services Agency and the Finance Ministry plan to set up a task force soon and draw up specific plans this year. For companies of other Asian countries that establish financial affiliates in the special zone, the government is considering making interest and dividends that affiliates receive from group firms in and outside Japan tax-free.” ==
Abenomics 'Third Arrow" Falls Short
The last “arrow” of Abe’s three-arrow economic policy “fell short” according to the Washington Post. The third arrow “justifiably disappointed” markets when Abe outlined the package of strategic growth measures because it offered an “underwhelming approach” to tackle a major source of Japan’s chronic stagnation, the editorial board of the Washington Post said. It described this source as “a vast web of regulations, subsidies and trade barriers whose net effect has been to support inefficient sectors, and the voters who live off them, at the expense of growth and innovation.” [Source: Jiji Press, June 9, 2013]
Abe “failed to tackle agriculture, offer a convincing approach to burdensome labor-market rules or provide enough details to show whether his ideas are new or just a repackaging of proposals tried before, such as ‘special zones’ where companies can operate under looser regulations,” the editorial said. It also said political realism “should mitigate some of the disappointment” but Abe “needed to offer enough details to maintain momentum and, potentially, gain mandate but not so much that he frightened voters attached to the old system.”
The Economist reported: When Abe “unveiled the first two “arrows” of his three-point economic plan—monetary easing and fiscal stimulus—and hinted at structural reforms to come. Japan’s stockmarket soared by 80 percent in six months. Mr Abe’s approval rating soared, too. Then, after months of euphoria, at the end of May, bond-market jitters about the radical easing plans helped to spark a sell-off in shares. Now Mr Abe’s eagerly awaited “third arrow” of structural reforms has fallen well short of the rings, let alone the bull’s eye. Indeed, it is so wide of the mark that one is left wondering if Abenomics has failed before it even properly began. The disappointment is all the greater because Mr Abe’s first two efforts were so successful. [Source: The Economist, June 15, 2013 +]
“On June 5th Mr Abe let loose his third arrow. It contained some useful measures, such as lifting a ban on the sale of drugs online and obliging the government’s pension fund to start holding corporate leaders to account. But much of the rest was old-fashioned industrial policy which has been tried, and has failed, before. Meaningful deregulation, labour-market reform and steps to make agriculture competitive in order to prepare for the TPP were all shelved. Truly bold measures, such as boosting immigration or changing the electoral system to give proper weight to young and urban voters, are off the agenda entirely. The reason is not hard to spot. Ahead of a crucial election in July, the Liberal Democratic Party (LDP) has been pressing Mr Abe not to offend the farmers, doctors and businessmen on which it has long relied. Yet for those, like this newspaper, who think that Mr Abe has the chance to drag Japan out of its decline, his climb-down is a disappointment. With a public debt of 240 percent of GDP, printing money and public-works spending can go only so far. Most of what ails Japan, from its insider-dominated labour market to excessive regulation and poor corporate governance, is structural. The excitement has been that Mr Abe seemed to understand this.” +
Hiroko Tabuchi wrote in the New York Times, “The core ideas behind Prime Minister Shinzo Abe’s much-publicized growth strategy are stirring a nagging sense of déjà vu. They should. The plan, borrows liberally from a string of previous government initiatives that similarly promised to bolster the economy, including his own. And economists and investors are increasingly worried that the latest initiative will have the same effect as the past ones — that is to say, little at all. “Every prime minister in recent memory has introduced an economic growth strategy, each not much better than the other,” said Akihiko Suzuki, chief economist at Mitsubishi UFJ Research and Consulting, the research arm of the large Japanese bank. “Expectations rise, but are quickly dashed,” Mr. Suzuki said. “It’s foolish to expect something different this time.”[Source: Hiroko Tabuchi, New York Times, June 12, 2013]
Abenomics Sales-Tax-Plus-Stimulus Package
In early October 2013, Hiroko Tabuchi wrote in the New York Times, “Abe said that he would raise Japan’s sales tax next year as planned in a bid to tackle the country’s enormous debt, sweeping aside concerns that an increase might put the brakes on the country’s nascent economic recovery. To buffer against a slowdown, Mr. Abe also announced a stimulus package of roughly 6 trillion yen, or $61 billion, that would pump back into the economy much of the 8.1 trillion yen in revenue the government expects to raise during the first year of the tax increase. [Source: Hiroko Tabuchi, New York Times, October 1, 2013 ***]
“In a televised news conference, Mr. Abe said he would stick to a plan put in place by the previous government to raise the sales tax rate next April to 8 percent from 5 percent, citing the need to “maintain confidence” in Japan’s fiscal health and pay for the country’s growing number of elderly citizens. “If we raise taxes now, would consumption slump, and would the Japanese economy sink back into the deep valley that is economic morass and deflation?” he said. “I pondered these questions until the very end. But there is no road left for us but to grow our economy and to rebuild our finances at the same time.” ***
“By combining a tax increase with government stimulus, Mr. Abe is signaling to global investors that Japan will start taking concrete steps to rein in its colossal debt and that it is prepared to take ample measures to shore up the economy. Mr. Abe “hopes to have his cake and eat it too,” Tobias Harris, an associate at Teneo Intelligence, a financial advisory company based in New York, said in a note. “By going through with the tax increase, he will signal to investors and the international community that his government is serious about tackling Japan’s deficits and debt. But by returning most of the revenue to businesses and individuals he will show that his government is still focused on triggering sustainable growth.” ***
“The sales tax increase, which would begin April 1, 2014, is set to be followed by a second increase in October 2015 that would take the rate to 10 percent, though the plan allows the government to review the state of the economy before raising the tax again. Even the higher rate would still be lower than the average of 18 percent among nations in the Organization for Economic Cooperation and Development, of which Japan is a member. ***
“Economists remain divided on whether a rise in the sales tax rate will depress the economy in the long run. According to a recent survey of forecasts by the Japan Center for Economic Research, the most pessimistic economists predict economic growth to grind to a halt in the third quarter of 2014 after the tax rate is raised. But over all, the roughly 40 private economists forecast growth to remain above 1 percent despite the higher rate. “Although we think a hike in the consumption tax rate will not necessarily cause the Japanese economy to stall, we cannot rule out some kind of negative impact,” Tomo Kinoshita, chief economist for Japan at Nomura, said in a note to clients Tuesday. “In order the avoid this, the government could well implement additional measures such as tax breaks and public works at the same time that it hikes the consumption tax.” ***
There are concerns, however, about a return of Japan’s pork-barrel public works projects that riddled the country with roads and bridges in the 1990s, which may have propped up a faltering economy but did little to lay the foundations of sustainable economic growth. Mr. Abe said his stimulus package would be different. According to an outline released by the government Tuesday, the stimulus includes 5 trillion yen for pro-growth measures like lower investment taxes, more funding for venture capital funds and promoting younger people and women in the workplace. He said he had also put aside additional money to ease the pain of higher taxes on middle- and low-income households, including 300 billion yen in handouts to the poorest families and 50 billion yen in housing assistance for disaster victims. “These policies do not seek merely to spark temporary growth,” he said. “They seek to promote investment, raise pay and create jobs.” ***
Abenomics Tax and Labor Reforms
Hiroko Tabuchi wrote in the New York Times, “Trickier still is a plan pushed by Mr. Abe to hasten the expiration of a surcharge on Japan’s corporate tax, implemented by the previous government to cover reconstruction costs in the aftermath of the earthquake, tsunami and nuclear disaster of 2011. Removing the surcharge, originally set to expire in 2015, would bring Japan’s effective corporate tax rate down to 35 percent from 38 percent. The move, Mr. Abe has said, would further bolster the country’s competitiveness and encourage more foreign corporations to bring their operations to Japan. But lawmakers within the ruling coalition have expressed worries that lowering taxes for corporations while raising them for households could cause a public backlash. Both the Liberal Democrats and their junior coalition partner, the Komeito, have so far said only that they would study the issue. Mr. Abe promised that tax cuts for corporations would be conditional on visible improvement in wages and job opportunities, which have stagnated for over a decade. [Source: Hiroko Tabuchi, New York Times, October 1, 2013 ***]
“Many economists say much hangs on Mr. Abe’s promised economic policy changes, including liberalizing Japan’s labor market and joining a Pacific trade pact that would lower tariffs on imports. Opponents, however, warn those policies will bring upheaval and inequality to a country that has tended to value equality over growth. Still, Mr. Abe’s popularity, cemented by a landslide victory in parliamentary elections in July, could help him push these changes through, said Nicholas Smith, Japan strategist at CLSA Asia-Pacific Markets. Mr. Abe may not have to face election for three years. With elections won, “the gloves are off on structural reform,” Mr. Smith said. ***
Don Lee wrote in the Los Angeles Times: The Abe government wants to deregulate the nation's utility and some other industries that are controlled by powerful oligarchies. And it is also trying to broker a deal between labor and management that would at once increase workers' wages and give employers more flexibility to lay off employees. Japanese regulations and social norms have long prevented employers from large-scale layoffs, which give regular employees practically lifetime job security but can hamstring companies with bloated and unproductive workforces. "Japan has to achieve labor market reform," said Hisashi Yamada, chief economist at the Japan Research Institute, noting that it would boost not only productivity but also entrepreneurship. [Source: Don Lee, Los Angeles Times September 2, 2013 \=]
“With larger companies protecting workers and generally paying more, he said, everybody wants to join — and stay with — bigger firms. That hurts worker mobility and makes life hard for start-ups and small-business owners such as Keitaro Hiraga, 36, who runs a consulting firm in Tokyo with two employees. "If you have changed jobs twice before you are 30 years old," he said, speaking of his own experience, "companies will avoid that kind of person."
Skeptics of Abenomics
"Abenomics" combines fiscal stimulus, expanded debt purchases by the Bank of Japan and economic reforms, but some argue the policy mix could worsen Japan's debt burden, devalue the yen and disrupt global capital flows. A statement from the final communiqué at a G-8 summit in Northern Ireland in June 2013 said: Japan needed to address the challenge of defining a credible medium-term fiscal plan. "Japan's growth will be supported by its near-term fiscal stimulus, bold monetary policy and recently announced strategy for promoting private investment," it said. "However it will need to address the challenge of defining a credible medium-term fiscal plan." Japan's debt burden is the worst in the world at more than twice the size of its $5 trillion economy. Successive governments have promised to do more to rein in spending and increase revenues, but little progress has been made over the years. [Source: Stanley White, Reuters, June 18, 2013]
Martin Fackler wrote in the New York Times, “Despite the signs of success for Abenomics, skeptics abound. Many economists say it will be impossible to judge Mr. Abe’s performance until he shoots the other two economic “arrows” in his quiver, particularly the politically divisive structural changes they say are necessary to shake up Japan’s sclerotic business interests and encourage entrepreneurship and competition. They also warn that unless the new wealth is more widely spread — through rising wages, for example — the current revival could fizzle like earlier ones or, worse, plunge Japan into the painful stagflation of runaway prices without growth. [Source: Martin Fackler, New York Times, May 20, 2013]
“Without a revival of the real economy, this is all just voodoo economics,” said Yukio Noguchi, a professor of finance at Tokyo’s Waseda University. Many Japanese, in fact, complain that their wages continue to fall even as prices have started rising. “The only people benefiting from this boom are foreign money managers and the rich,” said Yuichi Magata, a taxi driver who waited for a fare on a recent weekend night in Tokyo’s upscale Ginza bar district. More people are indulging in after-work dinner and drinking, but he groused that they still refused to splurge on a cab home as they had a decade ago, during a similarly buoyant but ultimately short-lived rally.
Don Lee wrote in the Los Angeles Times: “Some are wary of Abe, as he served briefly as prime minister before with little success and is widely known to be more interested in pursuing his non-economic, nationalistic goals, including strengthening Japan's military. "I don't feel anything from Abenomics," said Sadao Yamaguchi, whose family shoe business in Tokyo has been catering to Japanese salarymen for nearly a century. Yamaguchi, 79, considers his shoe store a bellwether of the Japanese economy. His business flourished from the years after World War II until the early 1990s, when the country's bubble economy burst and fell into a spiral of falling prices and wages. Since then, he and his son and daughter-in-law have seen their livelihoods shrink as their middle-class customers hoarded cash and sought cheaper brands. [Source: Don Lee, Los Angeles Times September 2, 2013 \=]
"We still don't know if he is different from other prime ministers," said Kiyoaki Fujiwara, a director at the Japan Business Federation, an influential trade group consisting of the nation's largest companies. But he said his group was betting on Abe, if for no other reason than that the alternative could prove disastrous. "This is the last chance to make a comeback," he said. "If we don't succeed this time, the Japanese economy is really going to be shrinking." \=\
Weaknesses and Strengths in Abenomics Japan
In 2013, Japan’s national debt topped 1 quadrillion yen, or $10 trillion, for the first time — more than twice the size of Japan’s economy and larger than the economies of Germany, France and Britain combined. According to the New York Times: “That level of borrowing raises concerns that investors could one day lose confidence in Tokyo’s ability to service its debt, which could set off a crisis with grave consequences for the global economy.”
In July 2013, Sophie Knight of Reuters wrote: “Japanese apparel firm Fast Retailing has a problem: sales are surging, full-year net profits are expected to rise nearly 28 percent but the customers thronging the stores of its popular Uniqlo brand are far too frugal for its liking. Prime Minister Shinzo Abe would also disapprove. Abe's aggressive economic stimulus measures, aimed at lifting Japan out of two decades of deflation, hinge on a pick-up in consumer spending, but eight months after its launch, "Abenomics" has yet to convince many Japanese to part with their thrifty ways. "Customers are clever - they want the more expensive items but they hang on to see if they get discounted," Fast Retailing Chief Financial Officer Ken Okazaki said. "Shoppers are buying at the cheaper end of our product lines, so spending per customer has fallen.” [Source: Sophie Knight, Reuters, July 12, 2013 |=|]
“Abe's policies have boosted Japan's benchmark Nikkei average , cheering stock market investors who used their new-found wealth to splurge on luxury goods such as handbags from LVMH-owned Louis Vuitton and jewelry from Tiffany & Co. But wages have yet to show any real gains and overall consumer sentiment remains lackluster. Consumer confidence weakened in June and total cash earnings for Japanese employees were flat in May and April from a year earlier. Even the monthly pocket money Japanese wives traditionally give their husbands has fallen 3.3 percent from a year ago to 38,457 yen ($390), or just half of its 1990 peak, the latest survey by Shinsei Bank Ltd shows. "They keep saying the economy is getting better but so far I haven't seen it reflected at all in my day-to-day life," said Ayano Sakuma, 33, a housewife who was shopping in central Tokyo with her son. "I've heard that things are supposed to be getting more expensive but as far as I can see goods are still cheap." |=|
Around the same time the Wall Street Journal reported: “Japan's economic recovery showed more signs of strength as the nation's current-account surplus widened for a second straight month in May, its first consecutive monthly gain in over two years, while bank lending surged in June.The surplus in the current account, a measure of how much Japan earns from international trade and investment, grew 58.1 percent from a year earlier to ¥540.7 billion ($5.34 billion) in May before seasonal adjustment, the data released Monday showed. [Source: Takashi Nakamichi and Tatsuo Ito, Wall Street Journal, July 9, 2013 /+]
Helped by recovering exports on the back of the yen's sharp weakening since last year, Japan's current-account surplus may have shifted to a gradual expansionary trend after a few years of narrowing, economists say. The currency's drop also favors the current account by boosting the yen value of income earned from the massive amount of overseas assets held by the Japanese, such as U.S. Treasury bonds."Overall, I expect the current-account surplus to gradually increase," said Hideki Matsumura, senior economist at the Japan Research Institute. He said that despite a large deficit in the trade component, at ¥906.7 billion, he expected to see gradual improvements in both the trade and overall figures. /+\
Kojiro Sekine and Hiroyuki Tanaka wrote in Yomiuri Shimbun, “Some economists fear that if prices continue to climb--due to the depreciation of the yen and higher costs for raw materials--without an accompanying rise in salaries, such “harmful price hikes” could cool down the Japanese economy. Food prices have been increasing. In the New York futures market for crude oil, the price index reached its highest level in about 14 months, partly because of political turmoil in Egypt. There are fears in Japan that gasoline prices will surge. The nation’s three leading manufacturers of dairy products, Meiji Co., Morinaga Milk Industry Co. and Megmilk Snow Brand Co., are considering raising their prices for milk in October for the first time in about four and a half years. The prices of feed, for which dairy farmers rely on imports, have surged due to the falling yen. [Source: Kojiro Sekine and Hiroyuki Tanaka, Yomiuri Shimbun, July 5, 2013]
Surges in crude oil prices have also surfaced as a source of concern. The nationwide average of regular gasoline prices as of Monday was 151.90 yen per liter, the Natural Resources and Energy Agency announced. If crude oil prices continue to rise and it results in higher gasoline prices, people may refrain from going on driving trips. Yasuo Yamamoto, an economist with Mizuho Research Institute, estimated that if crude oil prices rise 10 percent, Japan’s real gross domestic product will be pushed down by 0.1 percent in the first year and by 0.3 percent in the second year.
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.
Last updated September 2016