ST. PETERSBURG, RUSSIA – The Syrian crisis and sluggishness in emerging economies, major topics at the two-day Group of 20 summit that wrapped up Friday in St. Petersburg, Russia, are two issues Japan can’t afford to regard with indifference.
They could weigh on Japan’s economy, which has shown signs of emerging from nearly two decades of deflation on the back of Prime Minister Shinzo Abe’s economic policies dubbed “Abenomics,” centering on aggressive monetary easing and massive fiscal spending.
As the moment draws near for Abe’s final decision on whether to carry out the sales tax hike as scheduled next year, many observers want to see how he can fulfill his pledge to simultaneously bolster the economy and improve the government’s precarious fiscal health.
At the G-20 summit, Japan’s leaders talked optimistically about the domestic economy, as if they weren’t worried about the outlook for other countries. They were fortunate to avoid criticism for not yet coming to a decision on the tax hike, since discussions at the summit were dominated by a possible U.S. military strike on Syria.
“Our economic and fiscal policies were highly appreciated” at the G-20 gathering, Finance Minister Taro Aso said at a news conference after the meeting.
Indeed, the world’s third-biggest economy has been bouncing back since Abe took office in December.
With the depreciation of the yen boosting income from exports and driving stocks higher, helping to improve corporate and consumer sentiment, gross domestic product for April to June is likely to be upgraded to an annualized real 4.0 percent growth, up from the preliminary reading of 2.6 percent.
The Bank of Japan on Thursday upgraded its assessment of the economy for the first time in two months, saying it “is recovering moderately,” buoyed by solid consumption and recuperating business investment.
The Abe administration has stated in its monthly economic report that “recent price developments indicate deflation is ending,” as consumer prices rose 0.7 percent in July from a year before, the best increase since November 2008.
But there are several external risk factors that could drag down the economy.The pace of growth in emerging economies, including China, is already slowing. And if the U.S. Federal Reserve begins to taper its expansionary monetary easing, it will drive down currencies of emerging nations and trigger further inflation, severely stifling their economies.
If emerging economies continue to lose their momentum, it “will deal a blow to Japanese exports” and in turn hurt industrial output, said Yoshimasa Maruyama, an economist at the Itochu Economic Research Institute.
The Syrian conflict could also be a headache for Japan, which depends on imports for more than 90 percent of its energy needs. If Washington militarily attacks the Middle Eastern country, crude oil prices could surge, eroding corporate profits and household finances.
Intensifying tensions in Syria could in addition push down stocks, which “would cool consumer spending, especially by the wealthy,” said Koya Miyamae, a senior economist at SMBC Nikko Securities Inc.
After the consumption tax was lifted to 5 percent from 3 percent in April 1997, the economy shrank sharply several months later due not only to the tax increase itself but also to an economic downturn in emerging countries hit hard by the Asian currency crisis.
“The future course of emerging market economies is somewhat uncertain now,” said Junko Nishioka, chief economist at RBS Securities Japan Ltd.
If Abe proceeds with the tax hike as planned, “some measures should be taken to mitigate a temporary economic slowdown. To compile an extra budget (for the next fiscal year) is an option,” she said.
A government official, however, said that “given Japan’s deteriorating fiscal health, it would be difficult to craft a large-scale supplementary budget to alleviate the potential impact of the scheduled tax hike on the economy.”
“We have to consider economic steps that will not rely on public spending. This will be hugely challenging for Prime Minister Abe,” he added.
Under legislation enacted last year, the sales tax is to be raised from 5 percent at present to 8 percent next April and to 10 percent in October 2015 to raise the money needed to maintain the welfare system for an aging population.
The increase is widely regarded as key to fiscal rehabilitation, as Japan in this regard is the worst performer among major developed economies.
Abe is expected to announce Oct. 2 whether the first phase of the tax hike will go forward as planned.