Column: Will it work

Written by Amitendu Palit | Updated: Jan 8 2014, 08:21am hrs
The year 2013 was not a particularly bright one for the global economy. But among the pall of gloom, there was a tiny bright spot. Japan. Analysts would eagerly wait to see if the bright spot flowers into a sparkle in 2014. That would mark the beginning of a new chapter in the worlds third-largest economy. It would also signal the triumph of Abenomics.

Like Reaganism and Thatcherism, Abenomics has captured the fancy of financial analysts and economic experts by its effort to revive growth and economic activity in a moribund Japan.

Supporters of Abenomics point to the six-year high recorded by the Nikkei at the Tokyo Stock Exchange as vindication of its success. If the health of the Nikkei is taken as an indicator of economic rebound, then Abenomics is yielding results.

Abenomics, or the Japanese Prime Minister Shinzo Abes policies for reviving the Japanese economy, are intrinsically expansive. As in most such macroeconomic policies, the three planks for generating economic stimulus, or the three arrows of Abenomics, are monetary, fiscal and exchange rate policies.

Soon after assuming office towards the end of 2012, Prime Minister Abe announced monetary expansion leading to a significant quantitative easing by the Bank of Japan and injection of large doses of liquidity. A fiscal stimulus package worth more than $100 billion was adopted within a couple of months. At the same time, the yen has been held firmly and occasionally encouraged to slip for stimulating exports.

Exports have been central to Abes policies. There is little doubt over his keenness to get Japan back to its position of prominence as the worlds leading export-oriented economy. He is relying on three aspects in this regard. The first is the depreciating yen. The second is encouraging exports through fiscal incentives like lightly taxed zones around the country. The third is aggressive trade diplomacy.

The yen has been kept low due to large inflows of funds into the domestic capital market made possible by the easy monetary policy of the Bank of Japan. A low yen is keeping investor sentiment strong on the expectation of buoyant export outlook for SMEs as well as the established brands like Sony and Toyota.

Fiscal incentives, part of Abes structural reforms policies, should encourage exports further. Over the last one year, Prime Minister Abe has personally initiated Japans entry into major trade relationships. These include joining the Trans-Pacific Partnership (TPP) and initiating an FTA with the European Union.

Crisis usually provides opportunities for doing what cannot be done under normal circumstances. Abe is hoping to utilise Japans fairly long period of economic stagnation for structurally reforming the economy. He has been trying to rev up the hurt Japanese pride by emphasising the importance of Japan getting back its top position in Asias economic architecture, which it has surrendered to China. For doing so, he is harping hard on reforms for getting rid of the protectionism that has come to dominate several sectors of the Japanese economy such as agriculture and automobiles.

Will Abenomics succeed Business mood in Japan has hardly been any better, at least in recent years. The Japanese economys growth outlook is also better among the G7 group. But there are some major issues that might make the success of Abes policies short-lived.

The first is the doubt over continuation of the fiscal stimulus. With the debt-to-GDP ratio in Japan at around 250%, further fiscal extravagance can prove costly down the line. Much will depend on whether the consumption tax of 10%, expected to kick in from April, can continue to fetch revenues without dampening industrial revival.

Japans desperation for inflation will ensure Bank of Japan staying put on quantitative easing. This will ensure the yen remains low as well. But this is where the second problem arisesthe current account. Exports have to grow rapidly, along with capital inflows, for ensuring the current account remains stable and healthy. These complicated outcomes are compounded by Abes inability to correct the distortions in the labour market till now. Japans ageing demographics are only going to make his job more difficult as the need for the young generation to enhance productivity is going to be that much more given the imperatives of investing in elderly care.

Abe will also need to overcome vested interests in his own party (the Liberal Democratic PartyLDPof Japan) whose political growth stems from continuation of protectionism, particularly agriculture.

Abenomics will also face diplomatic challenges. Relations with China have been strained for long. Abes policies to resurrect Japan in a part of the world that has become Chinas home turf will create some ripples. Already, Japans entry in the TPP and its backing of Taiwans claims for joining the TPP has ruffled feathers. Abenomics needs to be careful about not being seen more as a security agenda rather than an economic agenda.

The author is head, partnership & programme, and senior research fellow at the Institute of South Asian Studies in the National University of Singapore. He can be reached at [email protected]

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