Four years on, Abenomics is still halfway to its goals — so we keep being told. So should we patiently keep waiting for the Abe administration’s policies to shoot the economy forward, or should we question whether the right policies are being pursued?
Concern since the beginning of last year that Japan may be receding back to deflation — amid the yen’s upturn in the face of uncertainties over the world economy, which clouded the prospect of corporate earnings, coupled with weak consumer spending and falling prices — has been replaced by a newfound optimism over the course of the economy since the November election of Donald Trump as the next president of the United States. Hopes that large-scale tax cuts, deregulation and infrastructure investments under the Trump presidency will drive the U.S. economy pushed up long-term interest rates and share prices in the U.S., which in turn sharply pushed down the yen’s value against the dollar and drove up the stock market in Tokyo.
The optimism has been reflected in the Bank of Japan’s quarterly tankan survey of business sentiments in December, which showed the first improvement in the confidence index of major manufacturing firms in 1½ years. In its monetary policy meeting last month, the BOJ revised its assessment of the economy upward, as did the government in its monthly economic report — for the first time in 21 months.
Whether the latest surge in confidence will be sustained or end in a temporary respite remains to be seen. It is far from clear whether and how many of Trump’s campaign promises will actually be implemented by his incoming administration — or how long the markets will keep betting on that prospect. Either way, the recent developments seem to highlight once again that the success of Abenomics depends a lot on the yen’s exchange rates.
One of the “three arrows” of Abenomics — an “unprecedented” monetary easing operation by the central bank — aimed to pump more money into the economy through the BOJ’s massive assets purchase program. That policy drove down the yen’s value, which boosted the earnings of major export-oriented firms to record levels, and led to a surge in share prices. But the Abe administration’s hopes that the improved corporate earnings would generate a self-sustained virtuous cycle — the increased profits translating into higher wages, prompting consumers to spend more and the increased consumption encouraging more business investments — has yet to materialize after four years.
The weak yen under Abe’s watch inflated the earnings of the big companies, but the improved profits have not led the firms to increase their investments at home. Despite the steady improvement in employment figures — the ratio of job openings to job seekers is now the tightest in more than a quarter century — the rises in workers’ wages (touted by the administration as the sharpest in years) were outpaced by price increases (partly caused by the higher cost of imports due to the weak yen) until wages began to see net gains in recent months (as prices continued to fall). The prospect of corporate profits meanwhile continues to be at the mercy of the yen’s fluctuations against the dollar.
As it is, growth of Japan’s economy remains uneven and fragile. Gross domestic product in the July-September period rose for the third quarterly increase in a row, but consumer spending and capital investment — the key driving engines of the economy — remain weak. Per-household consumption in November fell an inflation-adjusted 1.5 percent from a year ago for the ninth monthly decline in a row, while the consumer price index dipped 0.4 percent — also for the ninth consecutive month of decline. The 2 percent annual inflation target — set by the BOJ in 2013 as the goal in the administration’s bid to bust deflation in this country — continues to be pushed back and remains nowhere in sight after four years.
Sustained growth of Japan’s economy needs to be driven by robust domestic demand, and what’s crucial to that will be a recovery in consumer spending backed by substantial wage hikes. The Abe administration has kept urging major businesses to raise their employees’ pay, but it is ultimately the management of the businesses who makes the decisions. Companies that can afford to should raise wages as their contribution to the economy.
For its part, the Abe administration needs to carry out more structural reforms through deregulation to generate new sources of demand — which was promised to be the “third arrow” of Abenomics but has yet to bear much fruit. The problem with the windfall benefits from the Trump boom in the market is that it could again take the pressure off the government to pursue needed reforms. Four years on, it’s time to move forward.