Abenomics Presses Ahead
Image Credit: Office of the PM (Japan)

Abenomics Presses Ahead


Japanese Prime Minister Shinzo Abe has won popular support with his pump priming, putting his party in a strong position for upcoming elections. But after a lackluster response to the latest stimulus efforts, can he win the war against deflation?

“Buy on rumor, sell on fact” may be an old trading rule, but it was seen again when markets shrugged off the Bank of Japan’s (BoJ’s) latest policy change. On January 22, Japan’s central bank finally announced its commitment to a 2 percent annual inflation target, up from the previous 1 percent, while also confirming a 13 trillion yen monthly asset purchasing program starting from January 2014.

However, after weeks of yen depreciation, financial markets reacted by selling Japanese stocks and buying yen – the opposite effect sought by “Abenomics” policies aimed at spurring export-driven growth.

The move followed Abe’s earlier announcement of a 10.3 trillion yen stimulus package, ensuring that both the fiscal and monetary policy levers in Japan are firmly yanked towards expansion.

In a joint statement released with the Cabinet Office and the Ministry of Finance, the BoJ pledged to “pursue monetary easing and aim to achieve [the 2 percent target] at the earliest possible time.”

However, it added, “Taking into consideration that it will take considerable time before the effects of monetary policy permeate the economy, the Bank will ascertain whether there is any significant risk to the sustainability of economic growth, including from the accumulation of financial imbalances.”

For its part, the government pledged “decisive policy actions” including “concentrating resources on innovative research and development, strengthening the foundation for innovation, carrying out bold regulatory and institutional reforms and better utilizing the tax system.”

More of the same?

Far from a revolution, critics described the latest move as ineffective in breaking the hold of deflation.

Once redemptions of existing bonds are factored in, the 2014 program will amount to only a 10 trillion yen annual increase.

BoJ governor Masaaki Shirakawa reasserted the independence of the central bank at a press conference held after the decision, in an apparent indication that further change may await his soon to be announced replacement.

Martin Schulz, economist at Fujitsu Research Institute in Tokyo, told The Diplomat that financial markets remained skeptical towards the prospects of overcoming deflation.

“The BoJ has said yes to a 2 percent inflation target, but in terms of more money printing they remain comparatively conservative still,” he said.

“When the 30-year bond rate is below 2 percent, and the BoJ inflation target is 2 percent, markets clearly expect that policy will not be successful in beating deflation.”

Growth forecast hiked

At Monday’s opening session of the Diet, Abe reaffirmed the three pillars of his economic policy: an aggressive monetary policy, flexible fiscal spending and growth to spur private investment.

With one eye to July’s expected upper house poll, Abe’s stimulus efforts were rewarded with the government raising its economic growth forecast for the next fiscal year to 2.5 percent, up from an August estimate of 1.7 percent, due to the weaker yen and fiscal stimulus.

The government also predicted tax revenue would exceed cash raised from bond sales for the first time in four years, with an estimated 43.1 trillion yen of tax revenue for the year to March 31, 2014, compared with 42.85 trillion yen from bonds.

Abe has seen support for his government rise to 68 percent, the first such increase in popularity for a new government one month after its election since 2001, when Junichiro Koizumi led the LDP.

Yet while the stimulus measures might win votes, will Abe deliver on structural reform?

“To get the economy moving…[this] will only happen when Japan gets serious about FTAs [free trade agreements] and the TPP [Trans-Pacific Partnership], opening up to Asian neighbors, opening up sectors from energy to healthcare,” Schulz said.

“Standard LDP policy is protecting agriculture, and with many of its supporter groups [from the rural sector] that means there will be very little progress. Mr Abe with a strong election result may be able to break out of that cycle, but you’d have to be very optimistic to think that.”

Samurai X
February 1, 2013 at 03:12

@ Bare-Foot Economist
>>> In other words, the new generation now has to pay off the debts of his/her parents. 
That’s a wrong analogy, Bare-Foot Economist. Issuing bonds is a debt to the government, not to Japan itself or the people of Japan. You have to know that 93% of Japanese bonds are consumed by Japanese entities and people with Japanese Yen. It’s a completely different situation with the US, where 70% of bonds are purchased by Japan, China and European banks.
If by any chances it defaults, Japanese people will be the creditor, thus, issuing more Japanese bonds can be described as Japanese people’s wealth. On top of this, The Abe administration promises that acqured budget will be spend to reconstruct of aging Japan instructures, from aging bridges and tunnels to the earthquake-destroyed area. That will not only create more jobs, but will be the investment for the future generations.
The interest of Japanese 10yrs bond is now the lowest at 0.7%. That’s even lower than Swiss Bond. The risk for the Japanese government is minimal. Literary, Abe and Bank of Japan can publish bonds and bills as much as they want.

Leonard R.
January 30, 2013 at 19:38

@Mr. Fensom: "However, after weeks of yen depreciation, financial markets reacted by selling Japanese stocks and buying yen – the opposite effect sought by “Abenomics” policies aimed at spurring export-driven growth."
After weeks of depreciation, I'd expect the market to react by purchasing Yen. How else should it react? The article is correct in pointing out Abe's devaluation has been too cautious to achieve the goal of 2% inflation. But it's still early in the game folks.  
I think this is the most fascinating development of 2013. The stand-off over the Senkakus was easy to predict. I think Abe was on-the-money in handling that. But if Abe abandons his cautious approach, the consequences of devaluing the Yen could be felt world-wide – especially in China & the US.  
Japan Inc. is known for quality products. If those products become cheaper in world markets, hang on. We may be in for a real currency war. And what country stands to lose the most if the Yen – followed by the Dollar are devalued?  
I would expect the country that holds the most Dollars & Yen in reserves will take the worst hit. Wouldn't you?
Think about it. The Senkakus are a piece of cake. But a currency war would have huge implications for the RMB. If China folllows suit & devalues – then the US will be forced to pass more protectionist measures against Chinese products – as it is already doing. Also, Washington will be putting its own printing presses  on overdrive – as it is already doing.
In this scenario, China is in a worse bind than either Tokyo or Washington. If China dumps Japanese currency holdings? Tokyo can say "Thanks a lot suckers,". Beijing will have just accomplished Abe's devaluation for him. The same is true for the US. China & the US are already in the early stages of a trade war. A cheaper Dollar will be exactly what the doctor ordered. And if China devalues, it can no longer expect unimpeded access to US markets. It can expect more protectionist barriers. 
This is war folks. Abe may have started a race to the bottom. If so, the country that will hit bottom first won't be Japan. 

Samurai X
January 30, 2013 at 13:52

TPP is a flawed idea only benefits american companies. No thanks. Japan with the hawky Abe administration won't take the bait.

Bare-Foot Economist
January 30, 2013 at 13:20

Abenomics might work.  But its like a guy down and out and on his last dollar.  Spending that one dollar and another to get manual help to push the stalled car might work.  But if it doesn't, he's in a worst situation than before, and his only recourse left is to sell off what assets it has in a fire-sale .. eerr .. sorry, garage sale.  ("Fire-sale" nowadays has a different meaning.)  And that's called austerity drive.  Cut your expenses and sell your assets to buy food and pay off your debts.  In other words, the new generation now has to pay off the debts of his/her parents.  Caplatism, Amerikan style, is all about short term-gain, long- term loss.  Personally, if I were a banker or a Creditor, the wisest choice for a person who has lived beyond their means in this scammous "consumption-driven" false economic ideology, would be to immediately cut off all credit lines and start selling fixed assets, reduce expenditure to bare minimum, and work hard.  There is no such thing as recovering from sickness without suffering he ill effects of he ailment. Any doctor advocating such a treatment must be living in fairy land or lala land.  I rate Mr Abe's success as 45:65

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