Will 2018 be the year Abenomics finally comes of age?
In late 2012, the Japanese prime minister Shinzo Abe unveiled a comprehensive economic policy package to sustainably revive the Japanese economy while maintaining fiscal discipline.
The programme, which came to be known as “Abenomics,” is based upon the “three arrows” of monetary easing, fiscal stimulus and structural reforms. It postulated that unprecedented monetary easing and government spending would tackle deflation and buy time to implement much-needed structural reforms.
Specific policies include inflation targeting at a 2 per cent annual rate, correction of the excessive yen appreciation, setting negative interest rates, radical quantitative easing, expansion of public investment, buying operations of construction bonds by the Bank of Japan and revision of the Bank of Japan Act.
Two of the “three arrows” were implemented in the first weeks of the Abe government. Mr Abe quickly announced a ¥10.3 trillion (Dh336.8 billion) stimulus bill, and appointed Haruhiko Kuroda, then president of the Asian Development Bank, to the post of governor of the BoJ, with a mandate to achieve the 2 per cent target inflation rate through quantitative easing.
Structural reforms have taken more time to implement, although Mr Abe made some early moves on this front such as pushing for Japanese participation in the Trans-Pacific Partnership agreement.
Abenomics had immediate effects on various financial markets in Japan. By February 2013, the Abenomics policy led to a dramatic weakening of the yen and a 22 per cent rise in the Tokyo Stock Price Index.
Corporate Japan enjoyed record profits for fiscal 2016 despite the headwinds from a strong yen. According to a Nikkei survey, listed companies’ net profit grew by 18 per cent, a first increase in two years, with trading houses rebounding from their previous resource losses and communications businesses benefiting from the smartphone boom.
The unemployment rate fell from 4 per cent in the final quarter of 2012 to the current 2.8 per cent, figures from Japan’s ministry of internal affairs and communications’ statistics bureau show.
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In the second quarter of 2013, the yen fell about 25 per cent against the US dollar compared to the same period in 2012, with a loose monetary policy being followed.
The lower rate compared to 2012 has remained about unchanged, with the US dollar currently at ¥112, compared to just under ¥84 then.
Under a weaker yen, Abenomics increased the cost of imports, including food, oil and other natural resources upon which Japan is highly reliant. However, the Abe government viewed this as a temporary setback, as the weaker yen would eventually increase export volumes.
Japan also managed to maintain an overall current account surplus because of investment income from overseas. Japanese ministry of finance figures show last year’s surplus set hit a 10-year high of ¥10.51tn, the largest since the ¥12.25tn logged through the second half of 2007.
But the current inflation rate is nowhere near the BoJ’s 2 per cent target. FocusEconomics, a provider of economic analysis and forecasts for 127 countries in Africa, Asia, Europe and the Americas, expects inflation of only 0.8 per cent in calendar year 2018, and only 1.4 per cent in calendar year 2019.
Still, Abenomics, particularly on monetary policy, has been helpful in preventing the Japanese economy from falling into a deflationary trap, says economist Akira Ariyoshi.
However, the weak global economy and commodity prices over much of the past four years has meant the inflation rate has fallen short of target and growth has been mediocre, says Mr Ariyoshi, a lecturer at the Graduate School of International Relations at the International University of Japan in Minamiuonuma, Niigata Prefecture.
“More recently, we have seen several quarters of growth above potential, buoyed by stronger global growth. But the entrenched deflationary sentiment and still-cautious business sentiments have meant that it is not translating into wage growth,” he says.
Overall, developments are far better than what is likely to have occurred without Abenomics, but the full target of the three arrows plan – prospects of a strong medium-term growth with moderate inflation and falling debt – is unlikely to be achieved this year, Mr Ariyoshi says.
Since structural problems have not been dealt with and after the temporary economic benefits from the global upward trends, 2020 Olympic Games-related activities and the yen’s depreciation, economic growth will slow down, says Sayuri Shirai, professor of economics at Keio University in Tokyo.
Abenomics has helped to correct the yen’s overvaluation and stocks’ undervaluation. It gave breathing space for large multinational companies that garnered greater foreign profits after converting them into yen. “Also, large companies benefited from issuing long-term corporate bonds cheaply,” Ms Shirai says.
Wealthy stockholders also benefited from higher share prices and an increase in foreign assets after converting to the yen. However, the general public did not see much benefit because real wages dropped.
Still, they can get jobs more easily now because of a growing demographics-related labour shortage, Ms Shirai says.
“So while their wages did not pick up much, their household incomes grew as housewives, as well as the elderly once they pass the official retirement age, take part-time jobs,” she says.
However, Abenomics has not dealt with structural issues such as labour shortages, the country’s lifetime seniority system (which hinders the young and females from getting managerial positions), fiscal consolidation and social security reforms, as well as low productivity growth, Ms Shirai says.
In five to seven years from now, many senior-age people will leave the labour market and the potential economic growth rates will slow down again. The contribution of productivity on potential economic growth has also been limited, with no rising trends, Ms Shirai says.
Current higher economic growth rates are temporary and will start to ease from 2019 and quite clearly from 2020 once the global upward trends start to phase out and the 2020 Olympic Games are over, she adds.
“By that time, the BoJ also will find it very difficult to continue with the ongoing monetary easing,” Ms Shirai adds.
The BoJ’s extremely low interest rate policy may actually have generated unwanted side effects, since it has reduced incentives for politicians and firms to take structural reforms, she says.
It is unclear whether 2019 will mark the start of the sustained recovery Abenomics is designed to fire up. “Time will tell whether Abenomics is really changing the economy structurally or only temporarily boosting the economy,” Ms Shirai says.