Can Japan pull out of deflation, thereby securing a foothold for reconstructing the national economy?
This will likely be the year that the Abenomics economic policy mix, which Prime Minister Shinzo Abe called “the only way” for Japan to overcome deflation, is put to the test.
Having the sluggish pace of the business recovery pick up significantly; increasing companies’ growth potential and reining in declines in regional economies outside the megacities; dealing effectively with the problems of the shrinking population and low birthrate combined with a growing proportion of elderly people; and carving out a path toward rebuilding the nation’s critically debt-laden public finances.
All these challenges must be addressed urgently without delay.
It is of crucial importance both for the government and the private sector to mobilize all their capabilities to achieve the goal of revitalising Japan.
Refrain from handouts
Abenomics comprises “three arrows,” a combination of aggressive monetary easing, flexible fiscal stimulus measures and a growth strategy aimed at encouraging private-sector vitality. The policy package has so far yielded a degree of positive results, such as the yen’s weakening, higher stock prices and better performance by businesses.
Personal consumption, however, has been chilled ever since the increase of the consumption tax rate to 8 percent in April last year, causing the pace of the business recovery to slow.
In the shunto pay raise negotiations between labour and management in the spring of last year, the average wage hike reached the 2 percent level for the first time in 15 years. However, pay raises have yet to catch up with increases in prices, including the consumption tax hike. In addition, the yen’s decline has triggered increases in raw material costs, putting many midsize and small companies in a predicament.
Opposition parties and others have said Abenomics has widened the disparities between major and smaller companies and between urban and rural areas. It cannot be denied that Abenomics has been slow to spread to certain areas of the economy, but a policy of pork-barrel handouts like that employed by the Democratic Party of Japan while it was in power would hardly be a fundamental solution to the problems.
The basic strategies of Abenomics ― such as boosting businesses’ profits and getting the benefits of higher corporate profits to spread to nonregular employees and regional areas, and the scheme to have the private sector’s efforts serve as the locomotive for reinvigorating the national economy ― can safely be called reasonable.
However, a blockage has appeared in efforts to realise a virtuous economic cycle, in which businesses with favorable performance will use their profits for such purposes as raising employees’ wages and expanding their capital investment to secure further growth.
Go on the offensive
In a deflation-mired economy, prices go down and the value of money people have at hand increases. One reasonable course for individual companies in such circumstances is to operate on the defensive, with the aim of amassing surplus funds.
If businesses remain hesitant to invest in human resources and equipment, however, the very foundation of their business operations could atrophy.
Japanese firms’ internal reserves, or earned surpluses, have exceeded a total of 300 trillion yen, but the nominal gross domestic product, the gauge of the scale of an economy, remains at much the same level as 20 years ago. Unless Japanese companies switch to offensive business management to break away from the “trap of diminishing equilibrium,” Japanese industry could lose its international competitiveness.
To support companies that are positive about launching new business ventures, the government must steadily implement the growth strategy, including cuts in the effective corporate tax rates and easing regulations.
Due partly to resistance from government ministries and organisations concerned, the measures to do away with entrenched “bedrock” regulations in such areas as agriculture, medical services and employment have still not gotten to the crux of the problems.
Nor can the government afford to put off the task of promoting regional revitalisation and improving the environment for women to play a more active role in society. The Abe administration has to utilise the public support gained in the House of Representatives election last month as a driving force for boldly implementing reforms.
Also needed urgently is a conclusion to the Trans-Pacific Partnership negotiations to further expand free trade and to bring in demand from growing markets in Asia and elsewhere.
The deadline for the Bank of Japan to realise its goal of bailing the nation out of deflation will come this year. The central bank’s policy of monetary easing of “a different dimension” is aimed at realising a 2 percent increase in the consumer price index within two years.
To ensure the realisation of the targeted increase, the central bank introduced additional monetary easing measures in October. As a result, the value of the yen has fallen further and import prices of foods and other products from abroad have risen, but the rise in the consumer price index for November, excluding the portion attributed to the consumption tax hike, stood only at 0.7 percent.
A rough road lies ahead for reaching the 2 percent price increase.
The low crude oil prices in recent months are favourable for the Japanese economy, but in the short run, they may exacerbate the deflationary trend.
It is indeed a difficult issue to deal with. If only traditional measures such as taking additional monetary easing are implemented, a further decline in the value of yen will push up the cost of raw materials, which may have an adverse effect on the overall economy.
Realistic fiscal restructuring
As an additional monetary-easing measure, the central bank is increasing its purchases of government bonds at an annual pace of 80 trillion yen. Yet it needs to exercise discretion so as to avoid such risks as having this action be interpreted as the central bank compensating for the central government’s fiscal deficit.
With the planned hike of the consumption tax rate to 10 percent put off until April 2017, it has become more difficult for the government to achieve the fiscal reconstruction target of a primary balance surplus for central and local governments in fiscal 2020.
Confidence in the Japanese government bonds has not necessarily been shaken markedly. Nonetheless, it must avoid relaxing its guard at all costs.
Abe said his administration will map out a new fiscal restructuring plan by this summer. It is important for the plan to be realistic and effective.
Achieving a primary balance surplus is not the ultimate goal of putting Japan’s fiscal house in order. Abe needs to demonstrate his determination to turn the government’s growing massive debt into a downward trend and evade the crisis of a fiscal collapse.
(Editorial, The Yomiuri Shimbun)
