The mandate claimed by Prime Minister Shinzo Abe after his ruling coalition won by a landslide in the Dec. 14 general election will allow him to pursue a variety of policies that may hold the key to Japan’s economic recovery in 2015.
Since Abe took office in December 2012, the “three arrows” of “Abenomics,” his deflation-busting program comprising radical monetary easing, fiscal spending and vows of structural reforms — has triggered a sharp drop in the yen and big stock gains, benefiting big exporters and the wealthy.
Economists, however, say Abe needs to revise his economic policies because their side effects, such as higher import prices caused by the Bank of Japan’s weakening of the yen, have taken a toll on smaller firms and people with low incomes.
A major downside risk might be Abe’s failure to satisfy global investors calling for drastic structural reforms, such as deregulation of Japan’s traditionally protected health care and farm sectors, as well as steps to promote female empowerment and more immigrants.
Unless Abe gives the impression that he can generate new demand and raise productivity, hopes for sustainable economic growth would recede, sparking a sell-off in the stock market, some analysts say.
With his strong grip on power, Abe will be forced to make more serious efforts to promote structural reforms to tackle long-term issues, including the shrinking workforce and rapidly graying population, they said.
In the House of Representatives election, the ruling bloc led by Abe’s Liberal Democratic Party won over a two-thirds majority with its junior coalition partner, Komeito.
“Abe’s government is set to last for a long period. All eyes are on whether it can overcome the weaknesses of Abenomics and push through reforms necessary to bring the economy back to a sustainable growth path,” said Koichi Haji, chief economist at NLI Research Institute.
If Abe fails to face down potential political opposition to carry out economic reforms, his leadership will be called into question and share prices might fall, which could dampen household and business confidence and derail the recovery, other analysts say.
After the April 1 consumption tax hike to 8 percent from 5 percent, the economy shrank into another recession and is forecast to mark its first annual contraction in five years in fiscal 2014 ending March.
But the economy is expected to rebound at least 1.5 percent in real terms in fiscal 2015, buoyed by favorable factors such as a fiscal stimulus, possible additional credit easing, and lower crude oil prices.
On Dec. 27, Abe’s Cabinet endorsed another economic stimulus package worth ¥3.5 trillion, aimed mainly at alleviating the negative impact of the weaker yen and bolstering sluggish rural economies denied the benefits of Abenomics. Ahead of nationwide local elections next spring, Abe is eager to invigorate those economies to blunt the criticism.
Following Abe’s decision to delay a second hike in the sales tax to 10 percent, originally scheduled for October 2015, by 18 months, the latest stimulus package is likely to prop up domestic demand, said Yusuke Shimoda, a senior economist at Japan Research Institute.
If the economy bounces back, expansion in corporate profits could lead to wage growth and improvement in the job market, which in turn might shore up private spending and investment, Shimoda added optimistically.
Even if the economy recovers, it is uncertain whether prices will rise in Japan, given that a plunge in global crude oil prices is set to drive down energy prices at home.
The core consumer price index, excluding volatile fresh food prices, is projected to climb around 1 percent from the previous year in fiscal 2015. Should expectations intensify that the Bank of Japan cannot achieve its 2 percent inflation goal by the end of 2015, it may implement measures to make financial markets more accommodative in the middle of next year, many experts say.
Amid speculation that the interest rate gap between Japan and the United States will broaden, the dollar could remain on an upward trend versus the yen and extend its gains to as high as ¥130, a level unseen since 2002, they add.
The yen’s slide could help accelerate economic growth by strengthening the profitability of Japan’s export-oriented manufacturers, said Masahiro Ayukai, a senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities Co.
While the currency’s fall could raise import costs, it would be offset by a plummet in crude oil prices, Ayukai added.