This is the first story of a four-part series on evaluating Prime Minister Shinzo Abe’s namesake economic program, backed by the aggressive monetary-easing by the Bank of Japan.
Prime Minister Shinzo Abe’s “Abenomics” economic revitalization program marks the second anniversary Saturday of the day it got a significant boost from the Bank of Japan, in the form of radical monetary easing to combat deflation and the unprecedented target of achieving 2 percent inflation in two years.
As the deadline approaches, however, that target still seems far off, and economists are questioning the effort to end deflation as well as the prevalent belief that higher stocks and a cheaper yen, the apparent fruits of Abenomics, deserve praise.
In a BOJ monetary policy meeting on April 4, 2013, Gov. Haruhiko Kuroda pledged to achieve 2 percent inflation in about two years and launched monetary easing that sharply increased the central bank’s asset purchases, as well as expanded the scope of buying.
Since then, what was dubbed the “Kuroda Bazooka” has become the centerpiece of Abenomics, buying assets totaling ¥150 trillion with the promise of reversing the deflationary mindset that plagued the economy for more than a decade.
The bold nature of the policy — Kuroda’s predecessors had avoided setting an inflation target — made it a prominent symbol of Abenomics for the next two years, with intense media focus on consumer price trends to see if he could deliver on his price promise.
But what has been absent in the discussion is the question of how price rises can buoy the economy. Will reversing the deflationary trend, which is said to have suppressed the economy, really put Japan back on a growth track?
Economist Akihiko Suzuki is doubtful. Inflation does not necessarily boost corporate investment or private consumption, two key contributors to the economy, as assumed by policymakers, according to the chief economist at Mitsubishi UFJ Research and Consulting Co.
“The assumption was that once the Japanese economy shakes itself free from deflation, it would become robust again,” Suzuki said.
With prices rising, real interest rates would drop, encouraging businesses to borrow more and make additional capital investments. Consumers, no longer anticipating continued falling prices, would start spending instead of waiting, so the assumption goes.
“But even if real interest rates go down, companies wouldn’t increase investment unless they find viable opportunities, and rising prices would lower real income levels,” Suzuki said.
While acknowledging that Kuroda’s anti-deflation effort effectively reversed the prevailing anticipation by both consumers and businesses, that prices would continue to drop, NLI Research Institute Executive Director Koichi Haji said it didn’t boost consumption as much as expected.
“What was unexpected is that it hasn’t touched off a strong economic recovery that might have been hoped for,” Haji said, although he noted the impact of last April’s 3 percentage point consumption tax hike to 8 percent should also be taken into account as having negatively affected any recovery.
Abenomics started in November 2012 when Abe made clear his intention to combat deflation and introduce unlimited quantitative monetary easing during the Lower House election campaign that catapulted him to his second stint as prime minister.
The market quickly reacted, with stocks rising and the yen dropping. The benchmark Nikkei 225 stock index, which stood at 8,434.61 on Nov. 1, rose above 19,000 in early March, while the yen has weakened to about 120 to the dollar in recent weeks from a level just below 80 in the Tokyo market.
In the first eight quarters following the inauguration of the Abe administration in December 2012, the Nikkei rose 80 percent above what it achieved during the initial eight quarters of the previous government, led by the Democratic Party of Japan. The core consumer price index also outperformed its levels during the DPJ administration, by some 50 percent, over the same period, according to a report by Barclays Securities Japan Ltd. chief economist Kyohei Morita published on the Diamond Online website.
Abe has touted the steady rise in stocks as a key achievement of his policy, and Haji thinks it has contributed to reversing the deflationary mindset, the psychological tendency to anticipate continued falling prices.
However, when it comes to whether the stock surge helped invigorate the economy, experts saw little benefit because the expected greater spending from the “wealth effect” of asset appreciation is thought to be relatively small in Japan, where stock investment is not as common as, say, in the U.S.
“The key is to bring about an economic recovery that justifies the rising stock market, which is driven by expectations for a recovery,” Haji said. “And you want to keep the market from falling again.”
The yen’s depreciation was widely expected to help boost the economy by making Japanese products cheaper overseas and supporting exports, but this did not work out as hoped, either. The February trade balance, or exports minus imports, remained in a deficit for a 32nd straight month, renewing the record. Economists attribute this to manufacturers shifting production to locations overseas, resulting in fewer goods for export.
Exporters have benefited from the weaker yen’s effect to boost the yen value of repatriated revenues of goods sold overseas in foreign currencies. Even then, though, such benefits are only enjoyed by large exporters, such as automakers. Smaller firms meanwhile have suffered because they have had to pay more for imported materials, Suzuki noted.
“The weaker yen may have buoyed sentiment, but there are more people who are suffering from it,” Suzuki said.
The weaker yen may boost revenues at exporters, such as auto giant Toyota Motor Corp., and help raise their profits, but what is increasing is the yen value of goods, not their quantity. And unless quantity increases, production, as well as the job market, will remain flat. Smaller companies manufacturing parts for firms like Toyota can’t benefit either unless production increases, Suzuki said.
Economists attribute the dysfunction of Abenomics to its failure to focus on substance instead of just voter hype, as the policy was unveiled when Abe’s Liberal Democratic Party was about to campaign for the 2012 Lower House election, which it won handily and ousted the DPJ from power.
“They talk about the growth strategy, but when you look closely, their main concern is to hype policies to buoy the stock market. That’s why they’re called the ‘stock price-linked Cabinet,’ ” said Yasunari Ueno, chief market economist at Mizuho Securities Co. “After all, (Abenomics) is a program conceived ahead of a major election. . . . You need to see through what they say and think of what they are really thinking.”
Suzuki urged the government to introduce measures to expand the economy’s potential growth rate: the rate of increase in the capacity of the economy to produce. That may have already been reached even if additional demand is created, causing a bottleneck for growth, he said.
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