The rewards and risks of Japan’s ‘Abenomics’ revival
Japan’s new prime minister, Shinzo Abe, appears to have turned the country’s economy around since his election in December 2012, with what has become known as ‘Abenomics’. But critics argue that the aggressive monetary policy of the government and its debt-financed populist projects will only be effective in the relative short term. This is the first of a two-part series on Abenomics and looks at the impact it is having – and could have - on the world’s third largest economy.
WITHIN four months of his election, Prime Minister Shinzo Abe has accomplished a sense of confidence in Japan that has been missing since 2007 following the global financial crisis.
The prime minister has created a feel-good economic environment with visible measures that do not hurt, not at least in the short run
In the six months from November 1, 2012, to April 30, 2013, the Japanese stock market index, the Nikkei-225, rose by 55 per cent. In April alone, the index increased by 12 per cent.
The key driver for the gain has been a well-timed move by the Bank of Japan. On April 4, the bank’s new governor, Haruhiko Kuroda, announced an aggressive monetary-policy plan to boost inflation to two per cent within two years. On the following day, stock trading volume rose to a record high.
The timing and the content of the announcement is typical of the operating mode of Shinzo Abe’s Liberal Democratic Party (LDP) government.
Within weeks of his election victory in December 2012, Mr Abe’s administration had built a well-oiled political and public relations machinery which has been single-mindedly focussed on keeping approval ratings high and winning the upper house election in the summer.
The prime minister has created a feel-good economic environment with visible measures that do not hurt, at least not in the short run. They include massive monetary easing through the Bank of Japan as well as debt-financed ‘pork-barrel’ populist projects such as higher subsidies for the agricultural sector.
Conveniently for Mr Abe, the Bank of Japan has agreed to buy the government’s debt on a large scale. This has driven borrowing rates down to record lows in spite of Japan’s huge public debt pile, which could approach 250 per cent of gross domestic product (GDP) in 2013.
Foreign investors have been quick to capitalise on the opportunities and have started to increase their exposure to Japan.
The movement of funds into Japan-focussed equity funds was close to zero or negative for most of 2012. At the end of 2012, the situation changed abruptly. Monthly inflows increased from approximately US$1 billion in December to more than US$6 billion in April.
‘Abenomics’, as Mr Abe’s economics policy is known, has become a day-to-day word in Japan and around the world. Its key winners are industrial exporters, financial services and commercial real estate companies, as well as distributors of luxury goods and premium automobiles.
In the immediate vicinity of the prime minister’s office, four dealers of high-end European sports cars have opened. Five-star hotels report high occupancy rates as the urban rich are splurging their money and foreign executives are coming back to Japan.
But most important for the middle class has been the acceptance of above-average salary increases by large corporations, such as the automobile company, Toyota. The prime minister has taken indirect credit for these increases because he asked major companies to consider them immediately after his election.
Economically, life in the big cities, particularly Tokyo, feels better than six months ago. The triple disaster of March 2011 with a tsunami, earthquake and nuclear plant meltdown and the three years of luckless Democratic Party of Japan (DPJ) governments are being seen as things of the past.
Mr Abe has focussed from day one on nurturing a positive perception of the Japanese economy, domestically and internationally, in contrast to previous DPJ and LDP governments, including his own first one-year stint as prime minister in 2006-2007.
Mr Abe’s critics say that his policies are ‘a dance on the volcano’
Tokyo’s former governor, Shintaro Ishihara, a nationalist who played a key role in triggering the clash with China over the sovereignty of the Senkaku Islands, known as Diaoyu in Chinese, is ill and has been widely forgotten.
Mr Abe’s approval ratings are around 75 per cent, a radical departure from previous governments whose approval ratings dropped after a few weeks in office. The ratings for disapproval of Mr Abe are around 16 per cent.
With little in the way of political opposition, there are few who doubt that he will win the upper house election in the summer with a landslide victory.
Little attention is paid to warning voices that Abenomics is built on monetary and financial engineering, very clever public relations and a good portion of luck.
Mr Abe’s critics say that his policies are ‘a dance on the volcano’. Instead of reducing the debt, they say he will do the opposite, by adopting the Keynesian school of economics approach of increasing spending to stimulate the economy.
This, they say, will open the floodgates of quantitative easing and ever-more debt, a policy which is being cheered on by much of the financial community whose income is linked to inflated asset prices.
Critics point out that these measures will push Japan closer to the abyss of a mega-scale sovereign debt crisis. Japan’s GDP is about 25 times larger than that of Greece.
The momentum gained by Mr Abe is likely to stabilise the LDP rule, most likely for the next four years or even longer
If all other economic factors remain the same, Japan could reach a tipping point by 2017-2018 when the ratio of public debt to GDP gets close to 300 per cent, an untested mark for an industrialised country in peacetime.
But in the current atmosphere these critics are broadly perceived as ‘nerdy bean counters’.
The momentum gained by Mr Abe is likely to stabilise the LDP rule, most likely for the next four years or even longer.
Foreign leaders and business executives will have to deal with the old-fashioned ‘iron triangle’ of government, bureaucracy and big business, a tightly-knit elite that understands and supports each other.
This may have the advantage that corporate and political Japan speaks with one voice internationally, similar to South Korea's ‘industrial policy’ which is much admired by Japan's establishment.
But the disadvantage is that ingrained conventions of Japanese culture regain strength, such as 'reflexive obedience', reluctance to question authority, devotion to ‘sticking with the programme’, groupism, and insularity.
It was these conventions, which, according to the Japanese parliament's investigation report, contributed heavily to the nuclear disaster in March 2011.
Critics also say that the LDP's propensity to centralisation and 'industrial policy' takes Japan back to the 20th century and makes it less able to adapt to today's fast-changing global markets.
The LDP has fully repositioned itself as the only legitimate government party of Japan. It controls central government functions as it used to in most of the post-war era.
- Third largest in the world by nominal GDP and fourth largest in purchasing power
- World's third largest automobile manufacturer and largest electronic goods industry
- World’s largest creditor nation, generally running an annual trade surplus
- In three decades following 1960, Japan experienced a post-war ‘economic miracle’, with growth rates of 10% in the 1960s, 5% in the 1970s and 4% in the 1980s
- In the second half of 1980s, exploding stock and real estate prices caused Japanese economy to overheat in what was later to be known as the ‘mother of all asset price bubbles’, said to have partly been caused by the Bank of Japan’s policy of low interest rates
- December 29, 1989: The Nikkei-225 index reached an all-time high of 38957, having grown sixfold during the decade
- In the following years, stock and real estate prices crashed. For two decades, Japan entered a period of stagnation, known as ‘the lost decades’
- In April 2003: The Nikkei-225 index bottomed out at 7604, then moved up to new peak of 18,138 in June 2007 before resuming another downward trend triggered by the global financial crisis
- March 10, 2009: The index went down to 7021 – 82 per cent below its peak 20 years earlier