Is Abenomics Dead?
Image Credit: U.S. Embassy Tokyo

Is Abenomics Dead?


Critics have already begun writing their obituaries for Abenomics, after the latest disappointing data showed Japan’s economy is yet to get off its hospital bed despite massive monetary stimulus. But for a government searching for more answers, the solution might lie closer to home than in the realm of exotic policy instruments.

On Thursday, the Organization for Economic Cooperation and Development (OECD) cut its growth forecast for the world’s third-biggest economy to just 0.8 percent in 2016, down 0.2 percent on its November estimate, pointing to weak private consumption and exports amid another disappointing year for the world economy.

The Paris-based body noted weaker activity in key trading partners such as China, a strengthening yen and weak inflation outcomes, despite the Bank of Japan’s move to follow the lead of a number of European nations in adopting negative interest rates.

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The OECD’s downgrade followed Monday’s release of gross domestic product (GDP) data showing Japan’s economy contracted in the last three months of 2015, with GDP shrinking at an annualized rate of 1.4 percent compared to economists’ median forecast of a 0.8 percent decline. The result meant the nation posted a 0.4 percent GDP gain for 2015 after almost sliding into recession, following zero growth in 2014.

The downturn followed a revised 1.3 percent gain in the third quarter of 2015, with economists blaming the effects of an unusually warm winter for sluggish spending. Private consumption dropped by 0.8 percent, housing investment fell by 1.2 percent and public investment dipped by 2.7 percent, although corporate spending rose by 1.4 percent on the back of higher profits.

“Consumption was weak, even after taking out seasonal factors, as households tightened their purse strings,” Meiji Yasuda Life Insurance’s chief economist Yuichi Kodama told Bloomberg News. “The downside risks to Japan’s economy are likely to increase as the yen’s gains may damp capital spending and exports, and private consumption also is looking weak. There’s no clear driver to support Japan’s economy.”

‘Austerity Back In Fashion’

Japan analyst Jesper Koll, chief executive of WisdomTree Japan, told The Diplomat the data showed austerity was back in fashion in the rapidly aging nation.

“Today’s GDP report confirms that Japanese consumers prefer to save rather than spend: while workers compensation, i.e. wages, rose 1.8 percent year-on-year (yoy) in both real and nominal terms, consumption dropped 1.1 percent yoy in real terms (up 0.4 percent nominal). This was the third consecutive quarter of wages rising faster than spending – a clear sign that austerity is back in fashion in Japan,” he said Monday.

Koll blamed uncertainty over the 2017 consumption tax hike, fear of rising health-care costs and future benefit cuts, and the introduction of the “My Number” tax and social security system, which may have hit entrepreneurs and self-employed workers.

Although concerns over Asian security or last fall’s floods may have been factors, Koll said the national debate had shifted toward “raising public claims on households’ private savings.” Households reacted rationally by cutting spending and increasing savings as a result, he said.

“For policymakers, today’s report sends a clear message – no, the labor market cannot be blamed for lackluster economic growth; household incomes are rising, but they prefer to save rather than spend because of mixed messages on future taxes and pension/health-care well-being. ‘Team Abe’ will have to refocus on more clear and credible reforms on healthcare and pensions asap, in our view,” he said.

Generation Gap

However, amid forecasts that the working-age population in Asia’s second-biggest economy could shrink by as much as 40 percent in the next 45 years, the real culprit for the nation’s economic funk could lie in a growing generational divide.

According to Daiwa Institute of Research, from 2011 to 2015 Japan’s working-aged households have been hit by an 11.3 percent rise in social insurance premiums and a 7.7 percent hike in direct taxes, compared to just a 2.6 percent rise in income.

Daiwa’s chief researcher, Hitoshi Suzuki, told NHK World that the social security system was far too skewed toward the elderly, resulting in declining consumption by the increasingly heavily taxed younger generations.

“I believe Japan needs policy reforms to distribute more resources to working people, child-rearing families and younger people. Foreign investors may not be attracted by the course Japan is taking, with the social insurance and tax burden increasing, people spending only the minimum, and vitality being lost,” he said.

“We need to think very hard about ways to prevent our country from becoming such a gloomy aged society.”

According to a government survey of working households, average incomes fell by 1.4 percent last year even while social insurance and taxes climbed by 1.9 percent, causing a 2.1 percent drop in disposable incomes.

“Although salaries have hardly changed, taxes and pension premiums are rising, so we have to lower our standard of living,” Junko Sato told the public broadcaster.

Junko and her husband Yasushi, both aged in their 30s with two children, said they had replaced their car with a smaller model to save on fuel and insurance costs, as well as cutting back on any “luxury” food items amid a growing burden from pension premiums and tax payments.

Yet according to NHK World’s reporter Yuko Fukushima, the ballooning cost of social security on Japan’s shrinking younger generations “isn’t even discussed in Japanese politics.”

Prime Minister Shinzo Abe has called for the population to be stabilized at 100 million in half a century from 127 million currently, pushing measures to expand childcare facilities and encourage more female and elderly workers. Yet while the greater Tokyo area saw its population expand for the 20th straight year in 2015 and the foreign working population hit a record high overall, other areas including western and central Japan posted further population declines.

Japan’s total fertility rate stood at a record low of 1.42 in 2014, well below Abe’s 1.8 target, while the ratio of elderly is forecast to reach nearly 40 percent by 2060 based on current projections. Total spending on those 65 and older tripled in the two decades prior to 2004 and has continued to rise, with social security spending now exceeding spending in all other categories combined, including education, defense and infrastructure.

Under Abenomics, the Bank of Japan’s aggressive monetary stimulus pushed the yen lower, driving up exporters’ profits and helping the stockmarket hit multi-year highs. These profits were seen as a key link in the “virtuous circle” leading to higher wages and inflation, benefiting younger, higher-spending generations at the expense of the cash-rich, high saving elderly, who enjoyed a stronger yen and two decades of deflation.

Yet with weak global demand hitting Japan’s exports and “safe haven” buying boosting the Japanese currency, the elderly are back in the winners’ seat while younger, working-age households pay the price.

According to Bloomberg, economists have raised their predictions of another recession in the coming 12 months to their highest level since the end of 2012, with next year’s consumption tax hike set to further crimp consumption.

For Abe, allowing the silver generation to continue ruling the roost might prove politically expedient, given their voting power. However, it could prove deadly to his bigger goal of reviving the economy, which after three years of Abenomics still appears in need of more medicine.

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