While Prime Minister Shinzo Abe became the country’s longest continuously serving prime minister Monday, his signature economic policy, dubbed Abenomics, is rapidly losing momentum in the face of the novel coronavirus crisis, prompting calls for stepped-up structural reforms to achieve an economic turnaround.
The reflationary policy mix, comprising the “three arrows” of monetary easing, fiscal spending and growth strategy, was launched after Abe returned to the post of prime minister in late December 2012.
Abenomics has led the yen to weaken, helping increase corporate earnings and raise stock prices, but the Abe government has yet to achieve its target of overcoming the country’s prolonged deflation.
On Monday, Abe became the longest continuously serving prime minister in Japan, staying in office for 2,799 days in a row. Abe has passed his great-uncle, Eisaku Sato, who served as prime minister for 2,798 straight days between Nov. 9, 1964, and July 7, 1972.
Under the rule of the then-Democratic Party of Japan, which lasted about three years from late September 2009, the yen spiked to historic highs, and the benchmark 225-issue Nikkei average had remained below the key threshold of 10,000 until just before the launch of the second Abe administration, creating a sense of stagnation across the nation.
In line with the Abe administration’s efforts to revive the economy under Abenomics, the Bank of Japan commenced an unprecedented quantitative and qualitative easing policy in 2013. Thanks to these efforts, the yen fell back to underpin corporate earnings, and the Nikkei average retook 20,000 in 2015.
Still, many companies remained reluctant to raise wages. Price-adjusted real wages in the country rose back in 2018 from the previous year, albeit by a meager 0.2 percent, after sinking 0.2 percent in 2017, but fell again, by 0.9 percent, in 2019.
Many households do not believe that the country’s economy is on a recovery track, causing personal consumption to remain in the doldrums.
The BOJ aims to raise the nation’s consumer price growth to 2 percent, but has not reached the goal, except for a period when the impacts of a consumption tax rate hike were counted.
Abe has said that his government created a situation where Japan is not in deflation. But the government has made no clear declaration that the country climbed out of deflation.
Growth strategies from the Abe administration have failed to shore up the economy. The country’s potential economic growth rate came to 0.9 percent in 2019, standing at the level for four years in a row, according to the Cabinet Office.
The coronavirus epidemic dealt an additional blow to Abenomics, causing Japan’s annualized real gross domestic product in April-June this year to decrease by a whopping ¥41 trillion from the preceding quarter to ¥485 trillion, less than the ¥498 trillion in October-December 2012. In nominal terms, the nation’s GDP in April-June stood at ¥506 trillion on an annualized basis, a far cry from the government’s target set at ¥600 trillion.
Meanwhile, the balance of government debts ballooned. Although the consumption tax rate was doubled from 5 percent to 10 percent through a two-stage increase, implemented in April 2014 and October 2019, the fiscal condition, which had already been one of the most serious among advanced nations, worsened further due to huge spending related to the coronavirus crisis.
The balance of Japanese government bonds is expected to reach ¥964 trillion at the end of March 2021, almost twice as large as the nation’s annual real GDP.
The government has prioritized economic recovery over fiscal rebuilding, with Finance Minister Taro Aso, a close ally of Abe, having said that fiscal reconstruction is impossible without economic recovery.
But a high-ranking Finance Ministry official sounded a warning bell, saying, “The situation cannot be allowed to remain unattended.”
Takahide Kiuchi, executive economist at Nomura Research Institute Ltd., called on the government to substantially shift its focus to structural reforms for boosting economic efficiency from fiscal and monetary policies following the coronavirus shock.