“Abenomics” has brought positive results, but challenges remain as to whether Prime Minister Shinzo Abe can implement structural reform to bring about sustainable growth, the International Monetary Fund said Tuesday in its first preliminary assessment of his economic policies.
“The policy actions taken so far — including monetary and fiscal stimulus and the decision to participate in TPP negotiations — have put Japan at the center of the global economic map,” Anoop Singh, director of the IMF’s Asia-Pacific department, said during a seminar in Tokyo. “There are signs Abenomics is benefiting not only Japan but also the region, but success is not guaranteed.”
The seminar was held to evaluate the so-called three arrows in Abe’s quiver — aggressive monetary policies, flexible fiscal spending, and growth strategies — almost one year since the inception of Abenomics. The economic measures are aimed at bringing Japan out of 15 years of deflation.
The IMF said the economy grew strongly in the first half of the year, driven by stimulus package, strong private consumption and rise in exports.
The economy grew at annualized rate of 3.8 percent in the three months through July, and the “core-core inflation index,” which excludes food and energy prices, stopped falling in September for the first time since December 2008, indicating steady inflation.
Yet, the IMF’s rosy assessment comes with plenty of reservations and warnings that Abe still faces many challenges.
One of the most imminent hurdles is to consolidate fiscal health by reducing the massive government debt, which is more than twice gross domestic product.
Even though the IMF applauded Abe’s decision to go ahead with the 3 percentage point hike in the consumption tax in April to help mend the government’s finances, it also warned that Japan has to find a good balance because the tax increase will reduce household disposable income.
The IMF also said wage hikes and investment growth are essential for Japan to exit deflation. Abe has kicked off three-way talks with businesses and labor unions to bring wages up to offset the sales tax hike, and some big companies such as Toyota Motor Corp. have said they aren’t ruling out the possibility of raising salaries.
Yet critics say small and midsize enterprises, on the other hand, don’t yet have enough incentive to offer higher pay. Smaller firms account for 97.7 percent of the companies in Japan.
“Firms are not 100 percent sure yet if the economic environment is new,” said Jerry Schiff, deputy director of the IMF’s Asia-Pacific section, adding that capital spending by companies is slowly increasing and is expected to rise.
The IMF said that implementing structural reforms such as deregulating the labor market is indispensable for Japan to achieve sustained growth because stimulus measures have only a temporary effect.
The Cabinet hopes to pass bills related to special economic zones and business competitiveness, but Abe has given up on comprehensive easing of the rules for laying off workers amid criticism it would create an unfair labor environment.