‘Abenomics’, a mix of fiscal and monetary expansion together with structural reforms, is helping to revive Japan’s stagnant economy and, while some question its sustainability, at least it has helped lift morale, says Kyran Fitzgerald
A large stagnant economy has begun to revive. Sadly, the economy in question is not the eurozone, rather one thousands of miles away, that of Japan.
Once known as The Land of the Rising Sun, famed for its cars, computers and consumer goods, it has become sadly dormant, in recent years.
However, a new leader, Shinzo Abe, is shaking the place up.
The stockmarket is up by 50% since the autumn and household spending rose in March by 5% compared with a year ago.
Commentators have come up with a new name for the economic strategy being pursued by the new government: ‘Abenomics.’ What is involved is a mix of fiscal and monetary expansion, combined with structural reforms, many aimed at boosting the country’s often unproductive service sector.
The Bank of Japan has plunged into quantitative easing, with the aim of pushing inflation up to 2% in the next couple of years in an effort to get people spending, once again. This higher spend is boosting the national coffers and making money available to repair some of the huge damage to infrastructure caused by recent natural disasters.
Last November, a former prime minister, Shinzo Abe, returned to power after an absence of five years. Abe’s Liberal Democratic Party, a Shinto version of Fianna Fáil, with a strong faith in agricultural protectionism and pump-priming infrastructure investments, had bounced back a few short years after having been resoundingly rejected by the voters.
Expectations were not high for the not so new ‘new man’. Japan’s economy had been in sleepy hollow since one of the largest property and stock market bubbles in history imploded back around 1990.
GDP had barely grown since then, while the public debt is now close to 240% of total national output, levels hardly seen in an advanced nation since the end of the Second World War.
However, things are not quite what they seem.
We in Ireland sweat over a debt/GDP ratio of around one half that of Japan — the big difference is that whereas in Ireland, private indebtedness is as large as the public debt, Japan’s people and companies are thrifty and cash rich. Japan’s sovereign debt is mainly held by domestic savers. Yields on the debt have remained very low.
That said, there are concerns about how long this state of affairs can last, given the rapid ageing of the country’s population.
Many economists have begun to write Japan off as a basket case and some investors, particularly in the US, have been busily short selling the country.
At the heart of Japan’s long malaise has been the persistence of deflation or falling prices, both asset and consumer.
East Asia’s remarkable emergence has been a double-edged sword. Large new markets for Japanese goods have opened up in China, Vietnam, Indonesia, Thailand and Malaysia, but high labour costs and a lack of supply of workers has also led to an upsurge in the offshoring of Japanese industry to the Asian mainland.
But Abe had cards to play. Japan retains a very strong industrial base, along with a technically qualified workforce. The unemployment rate, officially at least, is below 5%.
Abenomics appears to be unleashing some of the country’s potential by boosting confidence, or what the economist John Maynard Keynes used to refer to as ‘animal spirits.’ In Europe, meanwhile, morale remains on the floor. Unemployment has reached record levels across the eurozone. Youth unemployment is at 50% in the Mediterranean region. The ECB has just lowered interest rates by 0.25% yet in Japan, low rates failed to lift the economy over decades.
But Japan is threatened by its demographics. Many of its savers are growing old and could soon become dissavers as they withdraw money to fund their retirements.
This will affect the funding of the huge debt, if measures are not taken to push the economy out of the doldrums.
But the new PM is, at least, throwing the dice.
He has appointed a new Central Bank governor, Haruhiko Kuroda, a man with serious experience of the private sector.
Kuroda’s job is to raise inflation expectations with the aim of boosting household spending.
On Apr 4, he launched a radical monetary expansion campaign.
He is pumping extra money, the equivalent of 15% of annual GDP, into the economy, through purchases of government bonds, investments in real estate trust and other means of oiling the economic wheels.
And the market has responded. The yen has fallen to a four-year low against the dollar, helping to boost both exports and the cost of imports, a good thing in the case of Japan. The stockmarket, becalmed for years, has jumped by 50%.
Suddenly, everyone wants to take dowdy old Japan for a twirl on the investment dance floor.
Some question whether all of this is sustainable, but most accept that it is well worth a try.
And if this policy mix can cause Japan to rebound, at least in the short to medium term, it may just concentrate minds in Europe.
Getting to know: Shinzo Abe
- Born: 1954. Grandson of former prime minister, Nobusuke Kishi (PM, 1957-1962). Kishi was also a member of the War cabinet of General Tojo.
- Education: Seikei University. Graduate, 1977. University of Southern California-School of Public Policy.
1979-82: Executive, Kobe Steel.
1982-2006: Worked in government. Key roles; Executive assistant to Minister of Foreign Affairs.
2005-6: Chief Cabinet Secretary.
2002: Chief negotiator on behalf of Japanese abductees in North Korea.
September 2006: Elected as Japan's youngest post-World War Two Prime minister.
2007: Loses office after less than a year.
November 2012: Returns to office as PM.
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