By Andrew Rosenbaum
ANKARA
Japanese Prime Minister Shinzo Abe led his party to a major, if expected, election victory on Sunday but now the creator of ‘Abenomics’ must put his economic policies into effect.
Sunday’s win, which saw Abe’s Liberal Democratic Party and its Komeito coalition partner secure a two-thirds majority, was perhaps the least of the hurdles that Abe has to overcome if he is to make his government a success.
Abenomics, the comprehensive economic policy touted as the cure to the country’s significant troubles, has not been put into full-scale effect. Nor has it been hailed by economists as the cure Japan has been waiting for.
“Abenomics worsens Japan’s structural issues,” economists at Lombard Street Research, a forecasting consultancy in London, commented in a recent note.
“What’s more, Japan, after 20 years of placid decline, is going through a self-destructive spasm that could have widespread destabilizing consequences.”
Harvard economics professor Kenneth Rogoff recently wrote: “Hopes for a continued recovery have given way to two quarters of negative growth.”
To date, Abe’s economic policy has consisted of encouraging quantitative easing by the Bank of Japan, which has obliged by boosting its interventions in the bond market to $700 billion, thus making the yen cheaper.
This promotes consumer demand at home with cheap credit and export demand abroad, as Japanese products are cheaper to buy on foreign markets.
Abe is due to meet executives at the central bank on Friday, with further easy-money interventions likely to be on the agenda.
Japan faces serious challenges – ones that Abe has not yet addressed and that will not be beaten by a loose money policy.
A way must be found to stimulate growth while still financing government debt worth 245 percent of gross domestic product and rising.
Moody’s credit agency recently downgraded Japan’s public debt to A1 from Aa3, albeit with a stable outlook that suggests another downgrade will not be coming soon.
Moody’s explained its decision in terms of the fall in GDP. In a statement, the agency said: “GDP growth sharply contracted in the second quarter of this year following the introduction on April 1 of the first step of the consumption tax increase, to 8 percent from 5 percent.
“Both real and nominal GDP contracted again in the third quarter of the year, putting Japan's economy in recession for the third time since the global financial crisis.”
After the election, Abe spoke about continuing his economic policies, vowing “to pursue Abenomics — an economic policy based on the three ‘arrows’ of aggressive monetary easing, increased fiscal spending and structural reforms — that he says will raise Japan’s long-term growth potential.
Policymakers in his party have some projects in view, such as shopping vouchers for low-income earners.
But this is too little, too late, as far as economists are concerned.
“It is now clear that the first round of Abe’s reforms… has failed to generate sustained inflation,” Rogoff commented.
Consumer demand is weak, and prices continue to fall, extending a slide that has lasted almost ten years.
It is shocking to consider that per capita income in Japan has now slipped below that of many other advanced economies – including the U.K. by some measures – and far below that of the U.S., Rogoff warned.
Rogoff pointed out that there has been no significant progress on supply-side reforms, especially on the core issue of how to expand the labor force.
He said: “With an aging and shrinking population, Japan’s government must find ways to encourage more women to work, entice older Japanese to remain in the labor force, and develop more family-friendly labor policies. Above all, Japan needs to create a more welcoming environment for immigrant workers.”
So the Bank of Japan can continue to print money but Abe is faced with pushing through challenging economic reforms – an area that he has avoided up until now. This could mean Japan will have a growing and ever more dangerous pile of debt but that the economy will not grow rapidly enough to service it.
Abenomics must take on some of these tough challenges without much further delay.
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