Japan is 'at a crucial crossroads'

Determined to wrench itself from a seemingly permanent state of deflation, Japan might end up merely accelerating its fiscal demise, experts have warned.

Tokyo’s determination to get prices rising again has fast become the main plank in premier Shinzo Abe’s efforts to get the world’s third-largest economy moving again. And central to that has been picking Haruhiko Kuroda to run the Bank of Japan (BOJ). Kuroda, a former finance ministry bureaucrat and visceral critic of “insufficient” monetary easing policies, was formally confirmed as the new BOJ governor by Japan’s parliament on Friday.

Yet already Kuroda has run into trouble. His policy of boosting prices, pushing inflation to 2% in the near-term, has been widely criticized. Current BOJ board member Koji Ishida has described Kuroda’s target as “very high”, only capable of succeeding if a wide range of players " boost Japan’s competitiveness and growth potential”.

This refers to the economic policies of the Abe administration. If Japan’s premier succeeds in his attempts to boost growth by blending an aggressive mix of reflationary fiscal and monetary policies – a process dubbed ‘Abenomics’ in the markets – Kuroda’s inflation plans could succeed.

But if Abe is unable to push through a raft of much needed reforms, from liberalizing trade to deregulating tightly-controlled industries, Kuroda’s ambitions, notes Mark Williams, chief Asia economist at Capital Economics, “have no chance of succeeding”.

So far, many investors have bought into Abenomics. Japan’s mutual fund market in February dragged in $11 billion, the largest monthly total in nearly six years. 

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And many want Japan’s leader to succeed, as the country’s economic influence across the world remains substantial. Japan pushed hard into Latin America in the 1980s before pulling back. A renewed regional drive by Japanese banks and corporates in recent years will continue only if Abenomics succeeds.

If it doesn’t, everyone, including Latin America, loses out. Frederic Neumann, co-head of Asian economic research at HSBC, describes Abenomics as “the last throw of the dice” for Japan. Everything, he adds, must magically intersect, meaning that a reflationary push must create growth, which must in turn be put to work creating further economic gains while paying down debt.

“Japan stands at a crucial crossroads,” Neumann adds. “The new monetary approach we are seeing in Tokyo is the last hand that Japanese officials can realistically play. If they don’t succeed in creating faster growth, all that they will have done is to add more debt on the country’s books.” At end-2012, Japan’s sovereign debt stood at 240% of gross domestic product.

Many believe too much stock has been placed on the seemingly magical abilities of premier Shinzo Abe and incoming Bank of Japan chief Haruhiko Kuroda. If this pairing fails, many will wonder if Japan’s economy is fundamentally broken.

“Abenomics has been built up so much by the government, and by investors,” Williams notes. “Japan’s structural problems really are quite daunting. The US and Europe have faced a bitter reckoning from the financial markets, but Japan hasn’t. If Abenomics fails, they are likely to face that day of reckoning.” 

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