With the three arrows of Abenomics looking either bent, wide of the mark or still in the quiver, Japan’s prime minister Shinzo Abe is putting pressure on Bank of Japan governor Haruhiko Kuroda to open the monetary spigot even further.
Monetary easing is the first arrow, and the only one generally thought to have worked.
Koichi Hamada, an economic adviser to Abe, says he gives the first arrow an ‘A’ mark. But he can give only a ‘B’ for the fiscal stimulus arrow — a ¥10tr public works programme — and ‘E’ (for “effort”) to the economic reform arrow because “it will take at least five years before its full impact is felt”.
Kuroda’s onslaught of quantitative and qualitative easing has nearly doubled Japan’s monetary base to ¥240tr in less than two years. Confidence improved when it began, deflation ended, and consumer prices and GDP both began to grow at a little over 1%.
The yen has tumbled 29% against the dollar — helped latterly by dollar strength to a new six year low of ¥110 — and the Nikkei has roared up 77% on the promise of booming export earnings.
But the wheels came off in April, when, against the advice of some economists but impelled by the need to cut the budget deficit, Abe raised sales tax from 5% to 8%.
Household consumption and capital goods investment slumped. In the second quarter, GDP plunged by an annualised 7.1%, compared with the first quarter.
Since further fiscal stimulus is all but ruled out and structural reform is going to take years, eyes are on the Bank of Japan.
In reserve
Kuroda has often said he is ready to act again “if needed”. But Mikio Wakatsuki, executive director at the BoJ, told Emerging Markets that Kuroda wanted to keep such action in reserve, in case a further planned sales tax hike to 10% next year saps consumption again.
Akira Ariyoshi, former head of the IMF regional office in Tokyo, also believes Kuroda is reluctant to move for now. “The only thing that could elicit [further easing] by the BoJ would be a turnaround in the deprecation of the yen,” which is “unlikely”, he says.
Sadly for Japan, even the weak yen has not turned out to be the hoped-for boon.
“The structure of Japan’s economy has changed,” says Eisuke Sakakibara, former vice finance minister for international affairs. “Many Japanese firms have shifted production offshore. A weak yen used to be beneficial because it increased exports and reduced imports, but the recent yen weakening has not resulted in an increase in exports, and imports have not declined, because of rises in energy and food.”
Asked whether Abenomics is in trouble, the former ‘Mr Yen’ replies: “I don’t think so.”
Japan will probably achieve real GDP growth of 1.3%-1.5% for this year as a whole, despite the second quarter plunge in growth, he says. “That’s quite a strong growth rate for a mature economy like Japan’s.”
But Sakakibara’s optimism does not appear to be shared by the consumption-shy Japanese public.