Time to reassess economic policy

The anemic growth of Japan’s economy in the April-June period raises more doubts over Prime Minister Shinzo Abe’s signature policies. The Bank of Japan has been resorting to a negative interest rate policy for six months, but the controversial step does not appear to have done much to increase consumer spending or business investments by encouraging more bank lending.

The central bank says it will review the effectiveness of its monetary policies in fighting deflation at its Policy Board meeting next month. Instead of blindly “revving up the engine of Abenomics,” the Abe administration should also reflect on its economic policies to see whether they are helping to generate a private sector-driven virtuous cycle of sustained growth.

The nation’s gross domestic product was nearly flat from the previous quarter, expanding a minuscule 0.048 percent for an annualized 0.2 percent growth in real terms — compared with an annual 2 percent expansion rate in the January-March period. Consumer spending rose a scant 0.2 percent, while capital investments by businesses fell 0.4 percent for the second quarterly decline in a row. Housing investments rose 5 percent for the first increase in three quarters, while public works spending gained 2.3 percent thanks to the spending in the government’s extra budget for fiscal 2015.

It has been reported that the April-June growth would have been faster if the January-March data had not been inflated due to the leap-year effect of having one extra day of economic activity in February. Either way, the figures continue to underline the fragile and uneven state of growth. Private-sector economists generally forecast that growth will remain slow in the July-September period, given the continuing uncertainties over global slowdowns and the impact of the stronger yen — which again hit 99 to the dollar in overseas markets Tuesday — on corporate profits.

With the ongoing weakness in consumer spending, which accounts for 60 percent of Japan’s GDP, the economy continues to lack a robust private-sector engine to drive its growth. The government’s scenario of improved corporate earnings — aided by the yen’s depreciation under the BOJ’s massive monetary easing program — resulting in wage increases that drive up consumption and in turn encourage more business investments, has yet to materialize on a sustained basis in the 3½ years of Abenomics, while the yen’s upturn in recent months threatens to negate the very foundation of that scenario.

The government’s own assessment of the economy — in an annual white paper on the economy and fiscal spending — appears to defy this scenario by highlighting that salaried workers are spending less and less of their wages on consumption, despite what the administration likes to tout as the steepest pay raises in years and the best employment figures in nearly a quarter century. The Abe administration’s latest ¥28 trillion stimulus package, which relies heavily on large public works spending and fiscal loans to the private sector, may help shore up GDP figures in coming months, but its impact for generating a self-sustained cycle of growth is uncertain.

After more than three years, BOJ Gov. Haruhiko Kuroda’s monetary “bazooka” of massive asset-purchase programs — widely credited as the main driving force of Abenomics — is increasingly seen as nearing its limit in having an impact on the economy. The negative interest rate policy introduced for the first time in February — in which the BOJ charged fees on a certain portion of commercial banks’ deposits with the central bank — has indeed lowered interest rates, but it’s doubtful whether it had the effect of facilitating more bank lending to boost consumer spending or corporate investments — given that the rates had already been low enough.

Outstanding loans by banks nationwide in July rose 2.1 percent from a year ago, but the margin of increase is little different from before the policy was introduced. Record low levels of housing loans led to an increase in mortgage refinancing by homeowners taking advantage of the lower rates to pay off their debts, but the rise in fresh lending is reported to have been slow. Per-household consumer spending in June fell 2.2 percent in real terms for the fourth monthly decline in a row.

Some media reports indicate that the BOJ, in assessing the effects of its monetary policy measures on the economy in the September Policy Board meeting, may resort to additional easing steps in the central bank’s bid to achieve its 2 percent annual inflation target to bust deflation — which it keeps pushing further back. What the BOJ, along with the government’s policymakers, should be doing instead is making a candid assessment on whether they have set the right policy priorities to address the state of the economy.