From June 5 to 6, more than five months after launching his Cabinet, Prime Minister Shinzo Abe convened the government’s three councils on economic and fiscal policy, industrial competitiveness and science and technology.
The outcomes of the discussions can be summarized as follows:
1) Japan will pursue economic revitalization and fiscal reconstruction simultaneously by achieving an economic recovery via increased productivity while reducing public debt. The government will halve the fiscal deficit compared with fiscal 2012 levels by 2015, and attain a budget surplus by fiscal 2020.
2) To achieve these goals, government spending needs to be cut and neither social security, public works nor local government finances will be spared as sanctuaries.
3) Innovation will be the driving engine of the recovery and focus on five priority areas — clean and economical energy systems; health and longevity advances via new technologies, such as iPS cells; the introduction of next-generation infrastructure; revitalization of local economies and reconstruction from the Great East Japan Earthquake.
4) Greater participation by women is to be expected in all aspects of the economy. The government will aim to raise per capita income by ¥1.5 million from the current ¥3.84 million within 10 years.
This is the outline of Abe’s growth strategy aimed at encouraging private-sector investment — deemed the “third” arrow of “Abenomics” along with flexible fiscal policy and radical monetary easing.
Ironically, share prices and the dollar-yen exchange rate — which had begun rising even before Abe took office — changed course as details of the third arrow began emerging in early May.
The Nikkei 225 index, which had shot up 53 percent from the year’s low of 10,398.61 on Jan. 9 to 15,942.60 on May 23, plunged nearly 21 percent in three weeks to 12,445.38 on Thursday.
The dollar, which had climbed roughly 30 percent against the yen from its low of ¥76 in February 2012 to above ¥100 in April, fell back at one point to below ¥94 in Tokyo trading on Thursday. What is driving this turbulence?
First of all, the gap between share prices and the real economy must be noted. The rise in share prices since the beginning of the year was largely a reflection of the market’s hopes for Abe’s new Cabinet, heightened all the more by disappointment with the ousted Democratic Party of Japan. These hopes were fueled by the correction of the yen’s excessive advance against the dollar.
It’s not surprising for markets to overshoot, but the more than 50 percent rise up to May 23 had obviously gone too far. This upswing accelerated in April, but I do not think the earnings of Japanese companies are suddenly going to improve by 50 percent. This should be viewed as a stock market bubble caused by excess liquidity supplied by the Bank of Japan and its new easing regime.
The second problem is that Abe has failed to specify how he plans to achieve his lofty third-arrow goals. He has not made any clear commitments on the specifics of deregulation and there is no guarantee that innovation — touted as a spur to growth — will be achieved as it expects.
The third issue is the outcome of the BOJ’s monetary experiment — which new BOJ chief Haruhiko Kuroda has proudly described as “quantitative easing of a new dimension.”
Even as the central bank injects liquidity at a pace of ¥50 trillion a year, the yield on 10-year government bonds has risen from the 0.5 percent range to nearly 0.9 percent (on June 13). The market is simply anticipating a rise in interest rates, because if inflation reaches 2 percent — in line with the government’s target of stoking a 2 percent rise in prices in two years — interest rates will go even higher. The central bank may be able to control short-term interest rates, but long-term interest rates are determined by market forces. Higher rates will present a hazard by increasing the cost of government payouts on the massive mountain of bonds.
The fourth problem is that while the private sector is expected to bear the brunt of the upcoming consumption tax hike and cuts to pension benefits, Abe’s commitment to cutting public-sector expenditures, including the reduction of Diet and local assembly seats, is quite regrettably insufficient.
Lastly — and most importantly — I must point out that an inflation rate of 2 percent will simply hurt people’s livelihoods unless wages rise by 2 percent as well. Rather than targeting a 2 percent rise in prices, the government and BOJ need to make a 2 percent improvement in wages their key policy objective.
Teruhiko Mano is an international economic analyst.