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Abenomics and Japan’s Economic Outlook

CIIS Time:11 17, 2017 Writer:Jiang Yuechun Editor:Wang Jiapei

Abenomics, in the early stage of implementation, had certain stimulating effect on Japan’s economic recovery, but did not solve the fundamental problem of the lack of “endogenous” power and thus failed. Japan’s economy in 2017 will only maintain slow growth, because of the lack of strong domestic demand growth, pessimistic expectations of external environment, limited room for macro-economic regulation. It is worth noting that, despite the continuing downturn, the overall strength of Japan’s economy cannot be underestimated; although structural reform remains difficult, the industrial transformation has achieved initial success; and despite heavy government debts, financial crisis will not happen in the foreseeable future.


I. General Assessment on Abenomics


Firstly, it saw some initial results but failed to achieve its goals. Since 2012, in order to get rid of up to 20 years of deflation, Shinzo Abe, after the second cabinet was formed, started the Abenomics. Its core content in general can be called “three arrows”—loose monetary policy, active fiscal policy and structural reform. In terms of the effect, the first two arrows, in the initial stage, had “temporary” effect. Since the end of 2012, the yen against the dollar broke through the 100 mark from 80 within six months, devaluing by more than 20 percent. At the same time, the government increased fiscal spending and as a result, the unemployment rate declined, and exports were boosted. Nikkei index spiked all the way up to 20,000 points from about 10,000 points, and then fell to around 17,000 points. The index soared, creating the wealth effect of the capital market, but also stimulated consumption. Japan’s economy showed signs of improvement in the short term. However, in three years, the “three arrows” did not hit the targets. In this sense, it can be said that Abenomics has failed. First, 2-percent inflation target: in the last three years, the Corporal Goods Price Index fell for 14 consecutive months on a year-on-year basis, for 12 consecutive months on a month-on-month basis. At the same time, Consumer Price Index was basically hovering around zero. This is far from the goal set by Abenomics. Second, Japan ’s economic growth rate: in 2013-2015, the nominal Gross Domestic Product (GDP) growth rate was 1.0 percent, 1.6 percent and 2.2 percent respectively, and thus long-term target was not realized at all. The actual GDP growth rates were 1.6 percent, 0 percent and 0.4 percent; the average GDP growth rate stood at only 0.6 percent, less than 2010-2012’s average of 1.7 percent, which means that the target set by Abe (nominal GDP growth of 3 percent, actual GDP growth of 2 percent) [1] was also not met. If the consumption before tax increases is excluded, Japan’s real GDP growth rate is basically zero, or even minus. As to the general goal of curbing deflation, in 2014, in the context of the continuous depreciation of the yen, the Japanese inflation rate rose for a short period of time, but with the appreciation of the yen again, inflation rate fell again. So far, we cannot see the substantive mitigation of deflation.


Secondly, changes in stock market, currency exchange failed to stimulate demand and exports. An important pillar of Abenomics is to enhance people’s inflation expectations, and thereby boost consumption, through loose monetary policy. Since September 2012, following the launch of OMT and QE3 in Europe and the United States respectively, Japan issued the world’s third quantitative easing policy. In November 2014, the Bank of Japan once again introduced the quantitative easing policy, by which more currency was put into the capital market with no limit and no deadline, so as to ensure that enterprises have sufficient financial support with almost no interest to invest. Statistics of Japanese authoritative institutions show that, while the quantity of currency soared, commercial banks’ loans to enterprises on the average increased by only 2 percent, which means that most of the money from the central bank was lying on the commercial banks’ reserve account, “sleeping.” As a result, by the end of 2014, with the increase in the consumption tax rate and the devaluation of the yen excluded, Japan’s inflation had not increased substantially, far from the target of the Bank of Japan’s plan to raise its inflation rate to 2 percent by April 2015. Although two years after the Abenomics was implemented, monetary policy had led to rise in the stock market, the increase of consumption tax has offset the expected rise in the spending power, so domestic demand was not substantially expanded. In 2015’s GDP growth, domestic demand is still an important factor. In addition, the depreciation of the yen failed to significantly expand the export market. As a considerable part of Japan’s manufacturing bases had transferred to overseas, the yen depreciation was not able to significantly boost exports. According to data from Japan’s Trade Promotion Agency, in 2013- 2015, as the yen’s average exchange rate against the US dollar fell from 97.6:1 to 105.8: 1 and then to 121:1, Japan’s total exports, when measured in yen, increased by 9.5 percent, 4.8 percent and 3.5 percent respectively on a year-on-year basis, but when measured in US dollars, the volume decreased by 10.2 percent, 3.5 percent and 9.9 percent respectively.[2]  In other words, the depreciation of the yen only allowed the enterprises’ sales to seem to have increased when measured in yen, but in fact the export volume was very likely declining. In this sense, the attempt of Abenomics to use the currency devaluation to promote export expansion did not work.


Thirdly, the key issue is that there is a lack of “endogenous” motivation to drive the economy. The dynamics of economic growth should come from the efficiency of production factors and market systems, but Abenomics has given the role of consumer and allocator to the government, further underlining the government’s role in the economy. Both the monetary and fiscal policies were only changing the quantity of currencies and the distribution of wealth. Neither generated new economic growing points, which has become Abenomics’ Achilles’ heel. What’s more, Abenomics further widened the gap between rich and poor. This is because the benefits the policies brought to large and small enterprises varied sharply. Yen’s depreciation brought certain benefits to export companies, but at the same time, changes in the exchange rate also led to higher prices of imported raw materials, affecting those enterprises that rely on raw materials’ import. According to the estimation by the Nomura Institute of Japan at the end of 2016, by the end of 2015, 1.217 million wealthy households in Japan owned 100 million yen (about RMB6.16 million) in financial assets, an increase of about 20 percent compared with the end of 2013. To be more specific, from the end of 2013 to end of 2015, due to the rise in stock market brought by Abenomics, holding stocks made 210,000 households onto the wealthy list.[3]  In 2014, Japan’s “poor groups” were with a population of about 11.39 million, a surge of 42 percent compared with about 8.04 million in 1999. In just two years since Abe took office in 2012, the Japanese “poor groups” increased by about 500,000 people.[4] According to the Ministry of Health, Labor and Welfare, by the end of 2015, there were 1.634 million households, and 2.166 million people living in abject poverty on allowances, with both figures hitting record.[5]  The increase of poverty means less tax revenues and low spending power, which undermines national strength.


II. Hovering at Low Levels: Japan’s Economy Now and in the Future


Firstly, the recovery of the current Japanese economy is slow. 2015 is year of rehabilitation, after the “technical recession.” GDP growth in this year grew by only 0.6 percent; overall exports increased by 2.7 percent, but personal consumption fell by 1.2 percent, indicating that Japan’s economic recovery is still facing challenges. Entering 2016, although the economy was still hovering at low levels, compared with

the previous year, there were signs of slow recovery. According to the data released by the Japanese Cabinet Office, Japan’s economy grew by 0.5 percent and 0.05 percent respectively in the first and second quarters of 2016 compared with the last quarter, equivalent to an annual growth rate of 1.9 percent and 0.2 percent respectively. In the third quarter, due to the export data turning from negative to positive, its real GDP adjusted by inflation grew by 0.5 percent from the second quarter, equivalent to an annual growth rate of 2.2 percent, which is higher than the market generally had expected.[6]  Overall, consumption and business investment, the two key indicators, remained weak. Consumption in the New Year’s discount season grew by only 0.6 percent, while in the second quarter grew by only 0.2 percent; business investment fell for two consecutive quarters, by 0.7 percent and 0.4 percent, indicating that the Japanese government’s policies of corporate tax reduction and the Bank of Japan’s negative-interest-rate policy to promote investment failed. According to the Bank of Japan’s forecast, Japan’s real GDP in the 2016, 2017, 2018 fiscal years will grow by 1 percent, 1.3 percent and 0.9 percent respectively. It also predicted that Japan’s domestic price level will rise back to 2 percent by March 2019.


Secondly, sluggish domestic demand remains the biggest obstacle to Japan’s economic recovery. Personal consumption accounts for 60 percent of GDP in Japan. It has been growing slowly since 2014, becoming one of the main challenges for Japan’s economic recovery. First, the actual wage increase remains difficult: the actual wage of employees declined instead of rising. In the Democratic regime, the actual wage increased slightly, by 0.5 percent in the period between 2010 and 2012. After Abe took office, the number was - 0.9 percent in 2013, -2.8 percent in 2014, -0.9 percent in 2015, an accumulative decrease of 4.6 percent in 3 years.[7]  In the annual wage negotiation called “spring struggle” in 2016, large and medium-sized enterprises showed a negative attitude towards wage rise, indicating obvious deflation expectations. Second, Japanese households’ disposable income has been reduced. According to estimation by Japan Research Institute, a non-governmental think tank, currently, the actual disposable income of Japanese families with tax and social insurance premiums excluded is basically the same as that of 2012 before Abenomics was implemented. The repeated rises in insurance rates and personal income maximum tax rate have added more pressure to people’s life. In particular, the young people under the age of 35 tend to be cautious and conservative in consumption. The population earning less than 2 million (one US dollar equals 100 Japanese yen) in a year increased from 2013. The number of poor working-class workers in Japan is also higher than in 2013. Third, pessimism has limited consumption. According to the Ministry of Internal Affairs and Communications, in June 2016, Japan’s average monthly household spending fell for the fourth consecutive month compared with the same period last year. Data from Bank of Japan show that the quantity of cash and deposit of Japanese households rose by the end of March 2016 compared with March 2015, highlighting Japanese people’s distrust of the economy. Japan’s 2016 annual economic and financial white paper also pointed out that the sense of insecurity increased among working families, especially families with house owners under the age of 39, raising children. Even if their income increased, they still do not want to spend money.


Thirdly, negative interest rate policy can hardly boost enterprises’ investment. In February 2016, the Bank of Japan announced the negative interest rate policy, with the aim of putting more money into the market and promoting investment and consumption. However, in most companies’ view, investment with an anticipated benefit of less than 8 percent is not worth it. From the current economic situation in Japan, the number is unrealistic. In the final analysis, the negative interest rate policy only applies to new excess reserves, not to the Japanese banks’ existing 2.5 trillion US dollars in excess reserves. Therefore, the impact of Japan’s negative interest rate policy can only be symbolic, not revolutionary. Moreover, it is only targeted at the central bank’s excess deposits, the proportion of which is very small. In the period after the negative interest rate policy was announced, the yen did not depreciate, on the contrary, it appreciated, indicating that the US Federal Reserve’s policy has more direct impact on yen’s exchange rate.


Fourthly, external factors are not conducive to Japan’s export increase. First, unstable, uncertain factors in the world economic environment are on the rise, and the global economic recovery is still fragile. In 2017, the world economy is still under adjustment from the depth of the international financial crisis. IMF predicts that in 2017 the global economic will grow by 3.4 percent, slightly higher than that in 2016. The developed economies will increase by 1.8 percent, while emerging economies will grow by 4.6 percent. Both numbers are slightly higher than that in 2016. The US economy may continue to grow moderately, but after Trump came to power, protectionism has been on the rise, and foreign economic policies still harbor some variables. The euro zone’s economic downturn continues, and the marginal utility of its policies is also being weakened. With Brexit, the refugee crisis, geopolitical issues, and other factors, recovery remains uncertain. Emerging markets and developing countries still face many difficulties in economic growth: The risks of capital outflow risk still exist, and structural reform needs to be further deepened. The fluctuations in primary commodities prices at a low level will still affect the economic recovery in countries such as Brazil, Russia and South Africa, which rely heavily on resources export. Second, global trade continues to change. With the structural reforms of major economies, the global value chain has entered the reconstruction period, the “consumer countries-producer countries-resource countries” chain of global trade cycle is under adjustment, and economic globalization is going through profound changes. Traditional consumer countries, especially the United States, are vigorously promoting “re-industrialization,” which has seen some of the imported goods and production processes being replaced domestically. Some multinational companies from developed economies, in order to adjust to the market and lower costs, shift from offshore production to near-shore, onshore production, shortening the global supply chain and transferring those processes involving high value-added back. In terms of economic and trade rules, the multilateral trading system is struggling. With more and

more free trade zones, the risk of global trade fragmentation is rising. Third, “anti-globalization” is warming, and the international trade and investment environment is deteriorating. The world economic growth has slowed down, demand remains weak, the international market competition is intensifying, populism prevails in developed economies, and the trend of “anti-globalization” in major economies is gathering more momentum. Explicit or implicit trade protectionism policies and measures may become more nations’ options. The World Trade Organization report shows that from October 2015 to May 2016, the G20 countries implemented 145 new trade restrictions, with an average of nearly 21 new measures introduced each month. The monthly figure is record high since 2009 when WTO begun to monitor trade restrictions. Various signs indicate that in the future, demand will remain weak in the international market, traditional trade competitive advantages will continue to weaken, and the trade friction between countries may intensify. Japan, as an export-oriented country, has not seen fundamental changes in its industrial structure, and its external environment is not favorable.


Fifthly, Japan’s external-driven structural reforms suffer some impacts. Whether Japan can get rid of the economic downturn and win back the glory of its heyday depends on whether Abenomics can bring some substantial changes to the Japanese economic structure. The core of the third arrow of Abenomics is about growth strategy, one of the biggest external pillars of which lie in the Trans-Pacific Partnership Agreement (TPP). That is why Shinzo Abe is devoted to making the agreement being passed in both the House of Councilors and the House of Representatives despite all the domestic opposition. However, after the United States ended TPP negotiations, the TPP has lost its original significance, since the free trade zone agreement that was intended for 12 nations has now, indeed, become a high-end one reserved only between Japan and the United States. Abe’s Cabinet had hoped to open up the nation again through the TPP, and to raise the declining potential growth rate with the new “growth strategy.” According to estimates by the Japanese government, TPP would help create about 800,000 jobs in Japan, and increase GDP by 14 trillion yen (115.5 billion US dollars), or the equivalent of three percentage points.[8]  In other words, the target of improving GDP to 600 trillion yen by the 2020 fiscal year proposed by the three arrows of Abenomics can only be met when TPP were effective. In addition, TPP could help force advance the domestic structural reforms, with which Japan has been struggling, by opening the country up once again. For example, the agriculture sector of Japan is expected to be re-structured after it joined TPP. Over the past decades, the Japanese government has been protecting agriculture by hugely subsidizing it, as a result of which the sector has been declining without any progress or innovation. TPP would significantly cut produce tariffs, which would force Japan to make fundamental changes to its agriculture sector, and promote “agricultural enterprization” and apply the mature technology of its industrial sector into agriculture. That would help address the discontinuation problem as well as improve scale and efficiency. Therefore, TPP is a very important trade policy for Japan. In this sense, its suspension is one of the biggest black swan events for Abe.


In addition, the aging of the population has been a disease constantly constraining Japan’s economic growth. Coupled with a decreasing subreplacement fertility, it leads to the fact that the Japanese population has begun to show negative growth, with a declining proportion of working-age population in the total, which has posed a grave challenge to Japan’s economic growth. If the primary consequence of the aging population is a further slowdown in its economic growth, then the subreplacement fertility contributes to pessimistic expectations towards a sustainable growth in the future. Japan’s demographic problems are the result of too many ones, with the elderly being excessively favored in income distribution, men and women of childbearing age finding themselves not able to afford marriage and childbearing, which, in return, leads to a low overall fertility, worsening aging population and a vicious circle between the two. Without major breakthrough in improving productivity, Japan will see its growth remain at a low rate, if not negative in the long term, which is still a difficult problem facing Japan when it struggles to secure economic growth.


III. Rational Judgments on the Japanese Economy


Firstly, the Japanese overall strength is still powerful despite continuous recession in its economy. Japan became the world’s second largest economy in the late 1960s and had maintained it for more than 40 years. Despite the fact that China has surpassed Japan and become the second largest economy in the world in 2010, it is the small island, with its less than 380,000 square kilometers area (smaller than that of China’s Yunnan province), that has set a growth example unprecedented in the Asian history. What makes the Japanese economy unique is that its GDP is far below its GNP (gross national product), which means most of Japan’s wealth is derived from companies overseas. Between 1950 and 1973, Japan’s average annual growth rate of GNP was more than 10 percent, with amazingly huge overseas assets. According to the data released by the Ministry of Finance, Japan’s overseas net assets increased by 13 percent and hit 366.9 trillion yen (about three trillion US dollars) in 2014. By then, it had been the largest creditor in the world for 24 consecutive years.[9]


In fact, in addition to GDP, technology say and control over the industrial chain are also important parts of a country’s economic strength. Many of Japan’s industries remain at the tip of the pyramid, and its global resource strategy, high-end manufacturing driven by technology and innovation and others should, undoubtedly, be respected and learnt by other nations. In the 2015 Thomson Reuters Top 100 Global Innovators listings, Japan topped the list with 40 companies, surpassing the United States, which had 35. In terms of technology research and development, Japan spends the largest share of its GDP globally, and its core technology patents accounted for more than 80 percent of the world. Its “artisan spirit” is globally renowned, with many small and medium enterprises accounting for an absolute large share in the mastering of some intermediate products and technology in the global market. Furthermore, the island nation boasts its own advantages in many other sectors like finance, foreign reserves, foreign direct investment, and soft power.


Secondly, Japan’s “supply side” reforms in technological innovation have reaped some early fruits despite its staggering structural reform. Its main approach to industrial restructuring and innovation is to realize structural upgrading through restructuring, with the following major steps: Step 1, adjusting the industrial structure,

with some industries having said goodbye to mass consumption. One of the most successful transition has been made by the electronics industry, which has shifted from the mode of a company to individuals to that of a company to companies. Panasonic has extended from home appliances to automotive electronics, residential energy, business solutions and others. Step 2, some companies, after mastering core parts, win the key links of the industrial supply chain through mergers and acquisitions. For example, Sony has bought some shares of Olympus to jointly research and develop medical endoscopy, and has now held 80 percent to 90 percent share in the global market. About 75 percent of motors used in the computer hardware drivers globally are made by a Japanese company. Kyocera Corporation has always been a leader in producing integrated circuit components. Step 3, some companies invest hugely for the future and aim to hold a “commanding height” in a new technological revolution. In recent years, the Japanese companies have invested a lot of capital and energy into the “dawn industry.” For example, Panasonic and Mitsubishi, among others, are researching and developing hydrogen fuel cell of high efficiency that is pollution- and noise-free. In the future when oil supply is insufficient,

Japan’s energy-saving technology will play a pivotal role in the world. There are many other similar sectors, where Japan are making efforts to seize the initiative in the future international competition and lay a foundation for industrial construction in the future.


Thirdly, although having a heavy governmental debt, Japan will not see a financial crisis. According to the data released by the Japanese Ministry of Finance on February 10th, 2016, Japan’s national debt, including governmental debt, loans and short-term securities, had reached 1044.5904 trillion yen [10]  by the end of December 2015. That is more than twice of Japanese GDP(which stood 499.0956 trillion yen in 2015). The IMF pointed out that Prime Minister Abe’s fiscal consolidation plan could only temporarily stabilize Japan’s public debt-to-GDP ratio at 250 percent, which will then accelerate again under the current policy and will account for 290 percent of GDP by 2030. According to estimates by the Ministry of Internal Affairs and Communications, as of January 1st, 2016, Japan’s national per capita debt would be about 8.2 million yen,[11] given its total population of 126.9 million. Since 2007 when a subprime mortgage crisis happened in the United States, many developed countries in Europe have seen debt crisis erupted. However, Japan, which has a worst debt situation, has

stayed afloat by itself, with the following major reasons.


Firstly, Japan has a very low cost in issuing bonds. Due to the long-standing deflation, Japan’s interest rate continued to remain near zero for many years before 2013. At the end of March 2016, the Bank of Japan’s benchmark interest rate was minus 0.1 percent and the 10-year treasury yield was minus 0.05 percent. What is more, the Japanese nationals have a strong preference for their national debt and 95 percent of Japanese government bonds are held by their own companies and individuals. Most of these companies see the governmental bonds as their core assets. In default risks, the Japanese domestic investors are unlikely to sell off their bonds at once, as long as there are no extreme debt repayment difficulties.


Secondly, the Bank of Japan (BOJ), the central bank, and financial institutions play a special role. The main difference between the Bank of Japan and the Greek central bank is that the former has the right to independently implement monetary policy. Although it can not buy government securities in the primary market, the Bank of Japan can inject money into the economy by way of buying government bonds in the secondary market, and turn in “seigniorage revenues” to the national treasury, thus help circulating necessary funds for the Japanese government. The BOJ is also different from the central bank of the United States, which is independent from the US government and therefore plays a smaller role in helping alleviate the debt problem. By contrast, the BOJ, closely connected with the Japanese government, carries out a government-led market economy system. So coupled with the central bank, the government can exert influence on economy by extensively using fiscal policy, monetary policy and industrial policy and the overall planning. The Japanese financial institutions also keep buying government debt and provide long-term, low-cost financing arrangements for the government.


Thirdly, the Japanese government holds huge foreign assets. Over the past nearly thirty years, it has kept annually account surplus. By the end of February 2016, Japan’s official reserve assets had been 1254.149 billion US dollars.[12]  Japan is a net creditor globally and has huge foreign exchange reserves. Its overseas assets account for about 25 percent of its total debt. And it is the world’s largest overseas asset holder. The Japanese government can return to overseas assets if in the early warning of a crisis, which provides investors with a greatly reliable credit.


And fourthly, Japan has the world’s first-class high-end manufacturing sector, and most of the governmental debt is used in projects that can bring investment incomes, such as infrastructure. Its real economy, which is highly competitive, provides an underlying support for the Japanese debt.


Jiang Yuechun is a senior research fellow and Director of the Department for World Economy and Development Studies, China Institute of International Studies (CIIS). 



(Source: China’s Initiatives: Responses to an Uncertain World, World Affairs Press, 2017).

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