Japan has won the mantle of being the only major industrial nation to swing like a pendulum between recession and growth spurts over the past 20 years. Imagine a country where mainstream economists talk first of correction, then soft landing, hard landing, recession, double dip, triple dip and deflation, eventually running out of vocabulary because no one cares anymore.
Well, in 2013 Japan turned the corner, thanks to Prime Minister Shinzo Abe and Central Bank Chief Haruhiko Kuroda’s implementation of Abenomics. Abenomics is a package of monetary and fiscal stimuli, or ‘arrows’, aimed at growing the economy.
The first arrow is reflation, targeting to get inflation at 2%. In 2013 the Japanese yen lost some 25% against the US dollar, and the consumer price index crept up to 1,4% and core inflation to 0,8%. Japan is expected to reach an inflation rate of 2% and gross domestic product (GDP) growth of 2% to 3% by 2015. One could argue that the devaluation of the currency has been a critical part of the inflation story.
The currency devaluation was achieved through monetary easing – the second arrow – with truckloads of money being printed every month to prop up asset prices. This caused a 60% rally in equities and a resurgence of exports. However, in the absence of structural reforms – the third arrow – stimulus packages would not be a long-term answer to Japan’s problems.
Remember that Japan is a ‘Master Stimulator’. Japan launched a stimulus package of ¥10,7 trillion in August 1992, with another ¥13,2 trillion in April 1993, ¥6,2 trillion in September 1993, ¥15,3 trillion in February 1994, ¥14,2 trillion in September 1995, ¥16,7 trillion in April 1998, ¥23,9 trillion in November 1998 and ¥18 trillion in November 1999 – plus many more such packages in the 2000s.
Each time Japan announced a recovery plan and stimulus the country experienced short-term euphoria and transient economic growth, which quickly slowed as the economy relapsed into recession while the Nikkei plunged to lower lows.
To ensure that Abenomics is effective Japan needs to follow up the first two arrows, ie fiscal stimulus and an easy monetary policy, with the third one – structural reforms – to complete the triangle. The third arrow will place the country on a long-term growth path, but may be politically unpopular as Minister Shinto will have to shake up the status quo. For example, negotiations around the Trans-Pacific Partnership (TPP) trade agreement have put the US and Japanese at loggerheads over the Japanese government’s protectionist policies in its agricultural sector.
Another issue is the failure of government to deal with the corporate sector’s debt overhang since the stock market crash in 1989 followed by the property burst of 1992. Since then the Liberal Democratic Party (LDP), which has ruled Japan since the end of World War II, has incurred debt equal to 200% of GDP to turn the economy around, but sadly to no avail. The LDP saved some unprofitable companies from going bankrupt through a zero-interest-rate policy (ZIRP), endless stimuli and the shifting of companies’ debts onto government’s balance sheet. Continually throwing money at unprofitable institutions causes a misallocation of capital that could have been deployed where it would have generated positive returns.
Now, Abe’s Democratic Party of Japan (DPJ) is in a good position to implement structural reforms. Political stability has returned to Japan after seven prime ministers over the past eight years, with an average tenure of just over a year each. Shinzo Abe is expected to stay in power up to the Tokyo Olympics in 2020 and is basking in the glory of healthy poll ratings. Japan’s market continues to rally, but questions will remain about whether or not Abe has what it takes to reform the economy.