TOKYO: An unprecedented campaign by Japanese Prime Minister Shinzo Abe to revive the nation’s economy is paying early dividends and earning praise, but analysts say the tough work still lies ahead.
Nearly a year after sweeping national elections on a ticket to revitalize the world’s number-three economy, Abe is basking in high approval ratings—and it’s not hard to see why.
The stock market is up about 40 percent from the start of the year, driven by a sharply weaker yen, which is boosting profits at major exporters such as Toyota and Sony, while confidence among Japan’s biggest manufacturers sits at its highest level in more than five years.
The long-suffering economy—spurred by government stimulus spending and central bank monetary easing, a policy mix dubbed Abenomics—is growing at a 3.8 percent annualized rate, outpacing other G7 nations.
And victory in July upper-house elections has effectively silenced the opposition with no national polls in sight for at least three years.
That gave Abe enough legislative muscle to smash through the political paralysis that had doomed his immediate predecessors.
On Tuesday, he vowed to go ahead with a plan to hike Japan’s sales taxes, a decision supported and derided in equal measure, opinion polls show, but one seen as critical to shrinking Japan’s massive national debt.
Abe is the first premier in 15 years to attempt a tax rise, a rare example of risk-taking in the country’s political scene but one that proved career-ending for previous leaders.
Masaaki Kanno, managing director of economic research at JPMorgan, said “all conditions were right” to raise the levy.
“The political environment is unusually stable,” said Kanno, who was among 60 economists and business leaders advising Abe on the pros and cons of the move.
“I am very bullish on Japan. We are getting out of deflation.”
Kanno is not alone in his assessment on the grand experiment to fix Japan’s once-world beating economy.
Abe’s hand-picked Bank of Japan chief Haruhiko Kuroda played his part with a huge monetary easing scheme launched in April. The yen has lost about a quarter of its value against the dollar since Abe’s promise while in opposition in November to push through such a program.
A BoJ target to reach two-percent inflation in as many years was cited as key to ending years of deflation as falling prices weighed on private spending and stifled business investment.
Abe’s supporters say the cheaper currency’s boost to corporate earnings should eventually push up wages and shareholder dividends, in turn lifting spending among the country’s 128 million people.
But appeals for the corporate sector to hike wages have largely fallen on deaf ears so far.
“If Abe fails to persuade companies to raise wages, the risks of entering another deep phase of deflation will increase,” said Yoshikiyo Shimamine, executive chief economist at Dai-ichi Life Research Institute.
“Japan’s economy is approaching a critical stage.”
Appealing to advocates of big government and small bureaucracy alike, Abe’s plan mixes social spending, including help for low-income earners, with talk of corporate tax cuts.
He has also moved on a mooted Pacific free-trade pact and pledged to lure more women and highly-skilled foreigners into the workforce.
‘Reforms crucial to success’
But this so-called Third Arrow of Abe’s plan—structural reforms—is where he faces the heaviest resistance, including from a powerful farm lobby steadfastly opposed to lifting tariffs.
“I am fairly pessimistic on reform, deregulation and the growth strategy,” said Credit Suisse chief economist Hiromichi Shirakawa, dismissing vague reform talk as “underdeveloped” and “fairly weak”.
But reforms are “what will determine whether Japan’s reflation drive succeeds,” HSBC said in a note.
If Abe fails to force deep changes in Japan’s economy, his big spending plan will fall apart like a house of cards, critics warn, leaving an already debt-crippled country even worse off.
Japan is wrestling with the rich world’s heaviest debt burden, inflated by years of ineffective efforts to stimulate the economy through spending and soaring welfare costs in a rapidly ageing society.
That has sparked credit downgrades by international ratings agencies and calls from the International Monetary Fund, among others, for Tokyo to gets its fiscal house in order.
Hiking sales taxes to 8.0 percent from 5.0 percent is seen as key boosting revenues.
But with consumers facing higher prices, convincing a high-saving population to spend more remains a daunting challenge.
The new levy may be even harder to swallow if Tokyo cuts corporate taxes, giving a further boost to Japan Inc.’s bottom line, while regular folks have little confidence of earning more.
“The fortunes of firms and households in Japan look likely to continue to diverge,” said London-based Capital Economics.
“Abenomics is widely heralded as a boon to Japanese society, but the benefits may not be as universal as commonly thought.”
Even Kanno, a proponent of Abenomics, says the toughest job will be weaning the economy off the BoJ’s massive stimulus plan a few years on.
That is a challenge now facing policymakers at the US Federal Reserve as they look to wind down their own quantitative easing scheme.
“The problem with Abenomics is not in the near term,” Kanno said. “We are going to see it succeed—the real issue is how to end it.”