With Prime Minister Shinzo Abe’s “Abenomics” initiative aimed at national economic recovery off to a good start, Japan’s economy and its stock and currency markets started the New Year on a positive note for the first time in a long while.
The yen’s exchange rate against the dollar, at the ¥79 level in October 2012, topped ¥104 and the Tokyo stock market’s Nikkei average neared the psychologically vital ¥16,000 by the yearend, up from ¥8,290 in October 2012. The country’s production and exports both gathered recovery momentum, having registered growth for four consecutive quarters since the fourth quarter of 2012. Corporate earnings turned upward and investment drives grew.
For the Abenomics project to be called a real success, however, it is necessary for workers’ incomes to rise as well and business enterprises’ equipment investment to get on a track of expansion on their own without causing runaway inflation and interest run-up. But although it is important to achieve these things, a number of destabilizing factors loom into view.
First, one such anxiety factor is the deflationary effect at the time when the consumption tax rate is set to increase to 8 percent from the current 5 percent in April.
Officials predict that a 1 percentage point rise in the consumption tax rate will increase national finances by about ¥2.7 trillion. So the government prepared an extra budget of about ¥5.5 trillion last December in an attempt to prevent the economy from sagging. But the question is how much such an effort could serve to forestall the feared economic decline. The more rush-purchases consumers make before the tax raise, the greater the backlash that may ensue. If people strongly worry about state financial reconstruction and increases in financial burdens for social insurance reforms in the future, the psychological impact might be unexpectedly large.
Second, there prevail fears that, if the yen’s decline continues any longer, serious inflation might develop.
The yen’s rate against the dollar fell to around ¥104 at the end of last year and it could go down further if the U.S. economy recovers and U.S. interest rates start rising. Besides, Japan’s trade balance has registered deficit for the past three consecutive years and there is a danger that if the present trend continues its current-payment account might run into the red. Should this happen, the yen’s value would be pushed down further and the prices of resources, energy and food would soar, resulting in serious cost-push inflation.
Third, there is persistent anxiety concerning the uptrend of energy costs in relatives terms compared with other resources. Since the great disaster at the Fukushima No. 1 nuclear power plant, public fears about nuclear power generation have mounted and a restart of nuclear power plants is not yet in sight.
While energy resources for electricity shifted from nuclear power to liquefied natural gas and oil, the ensuing extra burden on the cost of power generation has already amounted to ¥3.8 trillion a year, and the longer it takes to restart nuclear power plants, the bigger the energy cost will be. If the yen’s decline accelerates, the cost burden will further expand.
Fourth, another worrying factor is the unstable state of economic conditions overseas. The U.S. economy has bounced back to an expansion track and the world economy has regained some favorable prospects, but some elements of anxiety remain. While the U.S. Federal Reserve has been groping for an effective exit strategy to taper off its quantitative credit easing, the Obama administration has been at odds with Congress over spending authorization, adding to the decline of its leadership.
As for the European economy, Germany remains in good shape, but it is not clear whether the grand coalition led by Chancellor Angela Merkel will decide to support other problem countries, and it is not known yet when the region will be able to emerge from economic stagnation and high unemployment.
In China, there is some uncertainty about President Xi Jinping’s leadership and unstable policy management continues. Meanwhile, popular dissatisfaction is mounting over such problems as regional gaps, income gaps, corruption and air pollution.
World politics is so dominated by populism that sound operation of policy management is difficult. An unstable factor could rear its head violently at any time.
In the meantime, I think that important issues involving post-Abenomics are mostly related to the Japan’s long-range structural reforms. The most important issue concerns the problem of population policy. Japan’s population, which was 128.1 million in 2010, will decrease to 86.7 million by 2060 and the percentage of its productive-age population is expected to decline from 63.8 percent to 50.9 percent in the same period. Conceivable remedial countermeasures include raising the birth rate, increasing labor productivity, encouraging women and senior citizens to enter or remain in the labor market, and accepting more foreign workers.
Whereas it is considered necessary to combine these measures, it seems that the government has no specific strategy yet concerning this matter. The Abe administration, which pins its hopes particularly on the role of women, has been pushing efforts to appoint women to important posts in the government and the ruling Liberal Democratic Party, but such a step alone will not help Japan weather the impact of its declining population. A comprehensive vision and countermeasures are urgently needed.
As its population declines, Japan’s economic status in the world will naturally wane. London Economist magazine predicts that the percentage of Japan’s GNP in the world will decline to 1.9 percent by 2050. I see this as an underestimate of Japan’s economic power but there is no doubt that the Japanese economy’s position will diminish. Thus the question is what Japan’s national goal should be and how it can maintain its social unity.
I believe that this country should aim to enhance its per-capita wealth and choose the way for competing in terms of social charm and economic quality. For such an endeavor, it is necessary to give priority to enhancing human values and capabilities while contributing to the establishment of globalism, improving living standards and medical service, improving mutual trust and morality, boosting innovation power, upgrading cultural and educational standards, and building a society that attaches importance to protecting nature.
Should this project succeed, it would surely attract attention from the international community and encourage people and enterprises from around the world to come to Japan.
This is what the revival and enhancement of “Japanability” means. Expectations for the post-Abenomics future of Japan lie there.
Shinji Fukukawa, who formerly served as vice minister of the Ministry of International Trade and Industry (now the Ministry of Economy, Trade and Industry) and president of Dentsu Research Institute, is currently senior adviser of the Global Industrial and Social Progress Research Institute in Tokyo.