Managing Abenomics' Expectations

There is still optimism that the Japanese economy will prevail. Forecasts are that the economy is rebounding and Japan will achieve reasonably good growth for the following several years. Some progress continues to be achieved in the three years associated with Abenomics, but it has been a bumpy route.

The most immediate goal (the very first arrow) of Abenomics has been to end the little but persistent deflation that arose some 15 years ago, and to achieve an annual 2 % increase in the Consumer Price Index (CPI).

When Haruhiko Kuroda became Bank of Japan (BoJ) governor in April 2013, he committed to achieving this goal through March 2016 (the end of fiscal 2015). He has correctly pursued an easy monetary policy, including a surprising further easing on 31 October 2014. The consumer price index (CPI) grew to become positive once Kuroda’s coverage was implemented and rose to a peak of 1.5 percent in April 2014. Less anti-deflation improvement has been made than expected. It was evident even before the remarkable decline in oil prices introduced a temporary deflationary blip. But performance will improve. CPI will cv an upward trend as global oil prices ultimately stabilise.

Japan’s deflationary mindset offers weakened significantly, but hasn’t disappeared. Given the ongoing problems of achieving adequate private sector aggregate demand, Japan’s very low interest rate policy will likely continue for several years at least. Increases may reach 1 percent fairly soon, but Kuroda has had to delay reaching the 2 percent focus on until September 2016 and he probably will have to announce a further delay.

Flexible fiscal policy is the second arrow of Abenomics. In principle, the policy is to stimulate until personal aggregate demand generates full employment growth, and then to contract to reduce the government budget deficit and, eventually, our prime gross government debt/GDP ratio associated with 246 percent (the net debt percentage is 130 percent).

The main policy debate continues to be whether to give higher priority for an austere budget policy of decreasing welfare expenditures and increasing the consumption tax, or to follow a full employment development strategy by maintaining fiscal stimulus to ensure adequate domestic demand. My view is that growth is a better path than austerity to solve macroeconomic difficulties, while maintaining strong stress on policymakers to carry out required yet politically difficult structural reforms. The high debt ratio cannot increase indefinitely, without eventually creating a fiscal crisis.

Abe delayed increasing the consumption tax in order to 10 percent, rescheduling it through October 2015 until March 2017, however has stated there will be no further delay.  This implies that whatever growth momentum has been achieved will be temporarily dampened.

A ¥4 billion (about US$33 billion) increase in federal government revenue, more than was budgeted for fiscal 2014, provides the federal government leeway to delay fiscal change. However, eventually it will be necessary.

To carry out fiscal reform, Japan must cut welfare expenditures, raise taxes and reform the tax system — and do so without hurting poor people and middle classes, or the elderly. However, Japan has been relying on consumption tax increases rather than other taxes, though it hits poorer people harder. While it will be necessary to further raise taxes after 2017, this will be politically difficult. That is one reason great growth over the next many years is so important politically as well as economically and socially.

Major structural changes are necessary to achieve good growth. Thus, the third arrow of Abenomics is to ‘revitalise’ Japan’s economy to achieve continual, full-employment, rapid growth.

Most third-arrow initiatives focus on increasing corporate investment, efficiency, and profitability. On June 30 2015, the government issued the revised revitalisation and growth strategy. It includes six major projects involving innovative technologies by the 2020 Tokyo Olympics: next-generation transportation systems; energy management; robotics; medical care; 20 million foreign tourists; as well as increased inward foreign immediate investment. Deregulation to achieve more pro-business, aggressive markets is stressed, particularly where ‘bed-rock regulations’ have remained so strong, notably in farming, healthcare, energy, and employment. The government has begun to implement guidelines in these areas, but there is quite a distance to go.

Labour force reforms have also been limited. Japan’s labour pressure is 66.1 million (06 2015 seasonally adjusted), down from the peak of 68.1 million in June 1997; 38.6 million (57 percent) are male and 28.6 million tend to be female. The unemployment rate in July was Three.3 percent, and the ratio associated with positions open to those accessible is the highest it has been within 23 years. Since The month of january 2013 male employment has grown by 100,000 and feminine employment by 900,Thousand. The Abe government attributes much of this to its ‘womenomics’ policy, but it had been mainly due to increased interest in labour in tightening work markets.

In addition, while Japan, like all advanced countries, seeks highly skilled foreign professionals, it’s immigration and foreign worker policies are restrictive and minimal. Japan would benefit from much more foreign workers, unskilled in addition to skilled, but is liberalising really cautiously. The main policy initiative will only add about 60,000 foreign skilled workers a year on five-year contracts.

Good Japanese economic performance from now on reflects the difficulty of realising big percentage increases in conventional measures when the levels are already high. With a declining labour force and population, 1 % or so real growth actually is pretty good over the longer run. Japan’s standard of living (GDP for each capita) would improve from 1.5 percent or so. Along with continued advances in health care and technology, the quality of life can be expected to improve even more.

This is the reality of good Japanese performance in the longer run, therefore the Japanese, and those of us that study and care about Japan, will have to adjust our mindset accordingly.

Japan’s Abenomics bumps together is republished with permission from East Asia Forum