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.”