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Three strikes on inflation spur calls for overhaul of ‘Abenomics’

by and


The third time inflation has fallen to zero in this year persuaded some market watchers that “Abenomics” needs to be taken back for an overhaul.

The government will be forced to delay an increase in the sales tax scheduled for April 2017 and the Bank of Japan will be unable to taper its unprecedented bond buying as envisaged, according to Sumitomo Mitsui Banking Corp.

Only one economist in a survey by Bloomberg from July 27 to Aug. 3 said inflation would reach the BOJ’s goal in its target six-month period through September 2016. A majority of the 37 respondents see the BOJ boosting monetary stimulus.

China’s economic slowdown, tumbling oil prices and a rally in the yen are all conspiring against Gov. Haruhiko Kuroda’s effort to reflate the world’s third-biggest economy. While more BOJ bond buying would keep government yields close to record lows, any delays in overhauling taxes and reviving growth raise the risk of a rating downgrade for Japan, which has the world’s biggest sovereign debt burden.

“Deflation is the biggest problem for Japan,” said Junko Nishioka, the chief economist at Sumitomo Mitsui, the nation’s second-biggest bank by market value.

“We are entering a difficult phase of balancing the BOJ’s inflation target, Japan’s second sales tax hike and sustaining global economic growth. A delay could prompt a ratings downgrade.”

Consumer prices excluding fresh food were unchanged in July from a year earlier, the Statistics Bureau said on Friday. The bond market is signaling that inflation will average around 0.9 percent in the next 10 years, below the BOJ’s 2 percent target, according to the so-called break-even rate.

Japan wants to cut a debt burden that is more than twice the size of economic output, without damaging growth by moving too rapidly with spending cuts or tax increases. A sales levy hike in April 2014 pushed the nation into a recession and prompted Prime Minister Shinzo Abe to postpone another planned increase until April 2017.

“The fundamental problem is that Japan’s government is struggling to both reflate the economy and establish a semblance of fiscal credibility,” Nicholas Spiro, managing director at advisory firm Spiro Sovereign Strategy, wrote in an email on Thursday. “It’s the worst of both worlds: no meaningful growth and no credible fiscal consolidation.”

Japan’s debt is unsustainable and could climb to almost three times the size of its economic output by 2030 unless the government does more to cut its budget, according to the International Monetary Fund. The nation’s primary budget deficit will be ¥6.2 trillion in the year starting April 2020, smaller than a projection in February but still not the surplus the government is aiming for.

Stocks worldwide tumbled last week amid concerns that China’s economic slowdown will jeopardize global growth. The Japanese government cut its assessment on the global economy for the first time since August 2012 last week, citing weakness seen in some areas such as Asian emerging nations. Japan’s industrial production unexpectedly fell in July, trade ministry data showed Monday, sapping a rebound in the economy from a slump last quarter.

“Fiscal constraints keep Japan’s reliance on unprecedented monetary easing and that’s likely to continue and make tapering quite difficult,” said Tsuyoshi Ueno, a senior economist at NLI Research Institute in Tokyo. “The economy needs support to weather the sales tax hike impact while concerns about China weighing on growth may raise pressure against the tax hike.”

The benchmark 10-year government bond yield has been on a declining trend over the past 20 years despite the nation’s growing debt, driven in part by the central bank’s accommodative policy. The notes, predominantly owned by domestic investors, yielded 0.375 percent on Monday after plunging to a record low of 0.195 percent in January.

“Yields would normally climb if the market sees a retreat in the fiscal rebuilding policy, but if the economy is so bad that the sales tax can’t be raised, monetary easing will need to be prolonged,” said Ueno. “An exit from the current unprecedented stimulus is nowhere in sight.”

Japan also faces demographic challenges, Sumitomo Mitsui’s Nishioka said. Social welfare took up about a third of the budget this fiscal year in one of the fastest-aging nations in the world, while debt redemption and interest payment costs made up 24 percent, according to Finance Ministry figures.

A bright spot for the economy is that Abe’s reflationary policies have boosted corporate profits to a record, leading to the highest tax revenue since fiscal 1993 last year.

“Japan faces ballooning social security costs with the aging and shrinking population,” Nishioka said. “That means it’s essential for the government to bolster inflation and nominal tax revenue through monetary easing to enable financing the pension and medical expenses in the future.”

  • Liars N. Fools

    The Japanese wanted Abe Shinzo to fire all of his “arrows” including, most importantly, the structural reform one of agricultural market transformation, reinvigoration of localities outside of the mega metropolises, and getting the international trade and investment regime righted. This last arrow now seems to be featherless.

    Instead Abe has focused on historical revisionism and playing up to America. Sadly, the incompetence of the opposition parties means that empty quiver Abe is really the only choice Japan has right now.

    • Secret Guest

      what does revisionism and economic policy have anything to do with each other?

      • Liars N. Fools

        That is a question to address Abe Shinzo. He was elected to reinvigorate the economy and spent a lot of time on historical revisionism to justify reinterpreting the cionstitution.

  • GBR48

    The government should have grown a pair and doubled the Sales Tax (zero-rating food) instead of raising it by a pitiful amount. Prices in Japan are low, the Sales Tax is lower than most first world countries, and spending would have shown the same dip and rebound that it has done with the tiny increase they levied. The Chinese would have enjoyed the additional tourist discount that they would have been getting and bought more, whilst zero-rating food would have assisted Japan’s poorest citizens. An opportunity lost due to political weakness.

    Deflation is not the end of the world unless you are a rich, lazy, blood-sucking investor looking to make quick profits at the expense of everyone else. For people who do real work, who take something, add value and sell it for a profit, or who provide a service, it isn’t such a problem; it is just part of the economic landscape within which they make a living. And that’s the majority of Japan’s citizens.

    Just accept reality. If your horse is sick, repeatedly buying new wheels will not make your cart go faster. Stop trying to buy a change in the economy at the expense of increased debt and concentrate on more important things.

    Japan needs structural reform: Japan Inc., corporate practices, gender equality, distributed power generation, reduced energy use, increased immigration, increased commercial dynamism and innovation, an investment-orientated domestic property market, and the erasure of organised crime, which sucks huge amounts of cash out of the legitimate economy and from public finances. Do that and the economy will improve without spending a tonne of money to fake the inflation figures. The LDP have attempted policy initiatives on some of these issues, but never to an effective extent due to ‘vested interests’.

    Wherever you live in the world, the rich and powerful parasitise those they consider to be below them to maintain their lifestyles. But a good parasite doesn’t do so much damage to its host that it kills it. If Japan’s ‘1%’ continue to prevent any effective reform from taking place, their nation will rot away from under them. Gradually and almost imperceptibly at first, until it reaches tipping point.

  • Dark Night

    I doubt that there is any hope for Japan now. The Japanese people chose Abe despite his radical economic policies, and now they have to pay the price.