September 30, 2015
Japanese Prime Minister Shinzo Abe has declared “stage two” of his Abenomics program for resuscitating the Japanese economy, with a goal of raising gross domestic product (GDP) by 20 percent to 600 trillion yen ($5 trillion) by 2020, among other targets. But with the nation’s deflation demon yet to be slain and the economy slowing, the Abe administration’s mixed progress on reform has given critics plenty of ammunition.
On September 24, Abe marked his re-election as head of the ruling Liberal Democratic Party (LDP) by announcing three new policy “arrows,” headlined by the GDP target, which would see the world’s third-biggest economy reach 594 trillion yen in fiscal 2020 and 616 trillion yen the following year, assuming a real GDP growth rate of at least 2 percent. Other measures include keeping the population above 100 million people as well as enhancing social security for one of the world’s richest but fastest aging societies.“For the next three years, I’d like to promote measures with an eye on the future. Today, Abenomics is entering its second phase,” Abe was quoted saying by the Japan Times.
“Low fertility and aging is a structural problem long neglected in Japanese society, and I intend to tackle it head-on,” he declared.
The center-right leader declared victory “is at hand” in Japan’s two decade-long war against deflation, despite recent data showing consumer prices reversed in August for the first decline in over two years.
He also set the target of raising the nation’s fertility rate to 1.8 from the current 1.4, helped by free preschool education, support for infertility treatments, and greater assistance for single-parent families. This would help ensure Japan’s population, currently around 127 million, stays above the 100 million mark for the next 50 years, Abe said.
Social security would also be boosted to help provide care for the estimated 150,000 people waiting to enter nursing homes, while Abe said he aimed to create more employment opportunities for retirees.
Yet despite the promised handouts, Abe said he remained committed to the planned hike in the consumption tax rate to 10 percent in April 2017, “barring a shock” like the 2008 Lehman Brothers collapse that heralded the start of the global financial crisis.
Abe described his new “arrows” as offering “hope,” “dreams,” and “peace of mind,” but critics were unconvinced.
“There’s virtually no inflation at all in Japan – after more than two years, Abenomics is starting to look like a failure,” Takuji Okubo, chief economist at Japan Macro Advisors, told Bloomberg News.
“Of the so-called three arrows, only monetary policy is working. There was a fiscal policy stimulus, but that was gone already in 2014 when the sales tax was raised. And about the third arrow, structural reform, there have really been no structural reforms at all. With his popularity starting to decline, I don’t think Prime Minister Abe can tackle any hard challenges in the rest of his tenure.”
Even the conservative Nikkei financial daily has questioned whether Abenomics can achieve its envisioned “virtuous circle” of rising corporate earnings, wage hikes, and consumer spending growth. After climbing 2.1 percent in fiscal 2013, real GDP contracted 0.9 percent the following year on the back of a consumption tax increase, with the economy predicted to post a 1.5 percent expansion in the fiscal year to March 2016.
The Nikkei also questioned where the money would come from for the promised childcare assistance, along with funds for the more than 6 million elderly Japanese needing nursing care or daily assistance. The welfare ministry has estimated a shortage of 380,000 caregivers by 2025, should present trends continue.
“Many market participants still hope for the third of Abenomics’ first three arrows: deregulation and other reforms to unleash growth. But such policies are curiously absent from the new additions to the quiver,” the newspaper said.
“Given the hand-in-glove relationship between the ruling LDP and special-interest lobbies in the upper house…some suspect Abe’s motives for relaunching his economic agenda.”
Japan analyst Naomi Fink, chief executive of Europacifica Consulting, told The Diplomat that Abe would struggle to hit his new GDP target without more concrete reforms.
“Do we assume this 20 percent growth is expected by 2020? If so, this implies a far above potential growth rate, and without a timeframe it is really tough to gauge how realistic this goal is,” she said.
“My skepticism about measures such as increasing female labor force participation still lies in the insufficient empirical data gathered for the design of effective incentives. How influential is childcare availability in driving today’s behaviour? Without answering this question the policy just does not look credible. I find vague policy directives unlikely to be credible or effective.”
However, Fink said the TPP could help liberalize the agricultural sector, while the envisaged healthcare reforms “might be used as a greater template for services sector reform.”
The Bank of Japan (BOJ) has resisted pressure to unleash extra stimulus to achieve its 2 percent inflation target, stating that upward price pressure has been weakened by cheaper energy imports such as oil. While the central bank’s record quantitative easing previously helped the yen weaken, boosting the profits of exporters and driving Tokyo stocks higher, the Japanese currency is now strengthening due to its “risk-haven” status at a time of international market turmoil.
After dropping to as low as 125 per U.S. dollar in June, the yen is now seen appreciating to 115 by year-end as investors unwind carry trades, according to Bloomberg. This could intensify pressure on BOJ Governor Haruhiko Kuroda and his board to take additional easing measures at its October 30 policy meeting.
‘Epoch-Making’ Reform
However, not all analysts are bearish on Abenomics.
Assessing the scorecard thus far, Financial Times reporters Robin Harding and Leo Lewis gave a grade “A” for corporate governance reform, noting the new corporate governance and stewardship codes that aim to raise return on equity and increase independent directors. They also awarded an “A-minus” grade for agricultural reform, citing his “epoch-making” ability to overcome vested interests in the farm sector, which are also opposed to a Trans-Pacific Partnership deal.
Abe also earned a “B plus” grade for “Womenomics,” with Japanese female equality reaching a record high 65 percent, and a new gender equality law forcing large companies to publish targets for female managers. In energy, the British daily awarded a “B” for planned full liberalization of the nation’s electricity market by 2016, while Abenomics was granted a “B minus” in its special economic reform zones.
However, the newspaper marked down Abenomics on tax reform, which earned only a “C,” notwithstanding a push to cut the corporate tax rate below 30 percent. Despite a declining population, the administration’s failure to tackle immigration earned it a “C minus” in this potential area of economic growth, while failure to reduce the gulf between employment market insiders and outsiders earned it a “D” on labor market reform.
Yet others point to the nation’s falling jobless rate, which at just 3.3 percent in July is the envy of other advanced economies. Real monthly wages posted their first year-on-year rise in July in over two years, while the average wage hike of 2.2 percent for fiscal 2015 was its highest in 17 years, a potential sign that the “virtuous circle” is starting to activate.
Meanwhile, the GDP deflator, a measure of inflation, has risen year on year for five straight quarters, a record last achieved in 1994, while nominal GDP has expanded by 5.8 percent during Abe’s term, a pace last achieved in 1997, according to Business Insider Australia’s Mike Bird.
“Abe’s efforts haven’t fulfilled the greatest hopes of his fans, and Japan isn’t yet on a sustainable growth path. Other factors, like China’s economic trauma, could still derail the plan. But for now, Abenomics is very much alive and kicking when you look beyond the headlines,” Bird said.
In a September 2015 presentation, the Japanese government points to a 2.2 percent gain in nominal GDP over the first half 2015, with corporate profits reaching a new record high around 65 trillion yen, helped by a 60 percent drop in crude oil prices. The government’s target of halving the primary deficit to GDP ratio to negative 3 percent is expected to be achieved in fiscal 2015, while it aims to achieve a “primary surplus” by fiscal 2020.
“The second stage of Abenomics” also highlights a raft of reforms, ranging from “growth-oriented corporate tax reform” to increased use of information technology, reform of medical and healthcare industries, aimed at creating a “positive cycle of innovation and business creation” through “future-oriented investment” by the public and private sectors.
Among the plan’s showcase projects are a smart mobility system utilizing autonomous driving technology, a “hydrogen society” with storage batteries, robotics and investments to attract 20 million inbound tourists a year, while also targeting more inward foreign direct investment.
With Abe on track to become Japan’s longest-serving prime minister in more than four decades, the reformist leader still has time on his side after turning his attention from defense back to economics. Japan, and the rest of the world will be hoping Abenomics has not fired its last arrow.
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