Despite a number of unclear factors surrounding the global economic situation, including U.S. President-elect Donald Trump’s fiscal and trade policies, Japan will likely see its economy grow this year on the back of the weak yen and government steps to stimulate sluggish consumption, economists have said.
They predict that 2017 will be a rather positive year for the nation’s economy, as the government looks to craft more measures to help boost consumption. These moves are likely to include lowering social insurance premiums, creating scholarships and rasing wages for nursery school teachers. The yen’s weaker trend against the dollar will also help boost Japanese exporters’ revenues, the economists noted.
On the subject of trade, however, they say Japan will need a rethink of its strategy.
With the apparent death of the Trans-Pacific Partnership agreement — once heralded as the new global standard — Japan must now take the leadership reins to coordinate a new multinational free trade deal. In order to bolster its export numbers, such as deal could come in the form of the China-backed Regional Comprehensive Economic Partnership (RCEP), they added.
Last month, the government revised upward its assessment of the country’s economy for the first time since March 2015. Currently, the economy is seeing a moderate recovery, and the outlook for household spending and exports is positive, it said.
Economic research bodies also say that the prospects for this year are relatively bright.
The Organisation for Economic Co-operation and Development projects 1 percent growth in real terms while Bank of America Merrill Lynch estimates growth at a 1.4 percent clip and the Japan Research Institute predicts 0.9 percent.
Experts say these predictions, however, are quite high given Japan’s potential growth rate stands at some 0.2 to 0.3 percent.
Hideki Matsumura, a senior economist at the Japan Research Institute, said it appears that while the economy will maintain a moderate recovery this year, it has not fully established a steady economic growth cycle.
“The only issue regarding the domestic economy is how to drive consumption,” Matsumura said. The economy would not really see a healthy domestic cycle that can withstand unseen factors from abroad, unless consumption is strengthened, he added.
“Since the beginning of Abenomics, the government’s economic policy has benefited companies but has been tough on households,” Matsumura said.
The government lowered the corporate tax rate from 32.11 percent to 29.97 percent for this fiscal year to March, while the Bank of Japan has been committed to the ultraloose monetary policy that has pulled down the yen against major currencies and resulted in boosting export-driven firms’ profits.
Abe started his economic policy mix known as Abenomics when he became the prime minister in December 2012 and has been urging corporate leaders to boost wages. Many have actually complied and income has concurrently been increasing.
However, economists point out that households have been hit hard by an increase in social security premiums as well as the 3 percentage point consumption tax hike in 2014. Those decisions, they said, have offset rising incomes.
“(The government) took a quite austerity stance on its fiscal policy” due to these tax burdens on the households in the past few years, said Shunsuke Kobayashi, an economist at the Daiwa Institute of Research.
Yet the Abe administration has made a shift that focuses on benefiting households to stimulate household spending, he said.
For instance, the record ¥97.45 trillion draft budget for fiscal 2017 includes raising wages for nursery school teachers and workers at nursing care facilities, creating scholarships and lowering unemployment insurance premiums.
“As for when the effects of these measures will emerge, if the fiscal policy is headed in this direction, I think consumption could be accelerated in fiscal 2018. We may not see the impact in fiscal 2017,” Kobayashi said.
He added that this year is important for the government to start taking measures to back up the economy, before the next planned sales tax hike in 2019.
The government had planned to raise the tax to 10 percent from the current 8 percent this coming April, but last year Abe decided to delay it by two years.
While strengthening the domestic economy, Japan will also have to look out for outside factors, especially Trump’s economic policies.
It remains unclear whether the new U.S. leader will be able to completely implement his campaign pledges, including to lower corporate taxes, but he will do so to a certain extent, economists said.
Trump said that his government will lower the corporate tax rate to 15 percent from 35 percent and invest $1 trillion in infrastructure.
Under such measures, the U.S. economy would likely grow in the coming years — a positive factor for Tokyo, as it could support Japanese exports to the U.S.
Since the United States is expected to quickly introduce measures to boost its economy while also raising interest rates this year, economists say the yen is likely to remain weak and, supporting Japanese exporters — also a positive factor for the Japanese economy, economists said, adding that stock prices are expected be pushed up, too.
Bank of America Merrill Lynch estimates that the average yen exchange rate will be around ¥120 this year.
On Wednesday, the first trading day this year, the benchmark Nikkei index jumped to a 13-month high at 19,594.16, up 2.51 percent.
Kobayashi said Sino-U.S. relations could also be a major factor that influences the Japanese economy.
While it remains unknown how the Trump administration will deal with China, if the new president acts on campaign threats against Beijing, he may impose tariffs on exports from the country. When that happens, profits by Japanese firms that have factories there or those who provide parts to other firms’ assembly plants in China will be hurt, he said.
Other than Trump, there are a number of other factors that could produce large-scale volatility in markets, said Kobayashi. These include progress on Britain’s exit from the European Union and a presidential election in France, in which right-wing nationalist candidate Marine Le Pen is a strong contender.
Ultimately, trade will remain a big question mark for Japan.
Trump’s economic measures are likely to have a net positive impact on the Japanese economy, the Japan Research Institute’s Matsumura said, but one key area will be the new administration’s trade policies.
“What to do with free trade is a big topic,” Matsumura said. “It’s nearly certain that the TPP deal is over, so Japan will have to make its stance clear on how it will proceed with its free trade strategy,” he said.
This may prove difficult for Tokyo, which has traditionally been hesitant to enter free trade deals let alone play leadership roles in pushing them.
In the past, the U.S. and Europe had been at the vanguard of the free trade movement.
But amid Britain bolting the EU and the ascension of Trump, a skeptic of globalism and free trade deals associated with it, the landscape has shifted.
“Now it is Japan that is calling for free trade deals,” Matsumura said. “I think it’s important that it takes a leadership role.”