The Coming Failure Of Abenomics

Kiyoshi Okonogi

People who have placed high expectations on Abenomics to move Japan out of its deflationary state will soon be tasting bitter disappointment.

A major reason is that a huge injection of funds into the economy through monetary and fiscal measures has propped up Japan’s gross domestic product. However, that course cannot last for long.

The Abe administration’s package of economic policies is designed in part to raise prices and end the deflationary trend that has long hampered the economy.

On that point, the Bank of Japan’s unprecedented monetary easing along with the weakening of the yen against foreign currencies have improved the profit picture of export industries as well as increased Tokyo stock prices.

The problem, however, goes beyond simply pushing up consumer prices.

If concerns about jobs and social security subside, personal consumption and capital investment would recover. That, in turn, would push up overall demand. Although that is the desired course in achieving a recovery of consumer prices, the scenario is not unfolding in Japan, as witnessed by the decline in wages in real terms.

When the International Monetary Fund released its world economic outlook last week, Olivier Blanchard, director of the Research Department, told a news conference that Japan’s “growth has come largely from fiscal stimulus and from exports. For growth to be sustained, which it will need to be, consumption and investment have to take the relay.” He went on later to report, “Japan is teetering on the brink of recession.”

Expressing concerns about the possibility that growth could slow, Blanchard added: “The Japanese government will continue to face the challenge of achieving enough fiscal consolidation to reassure debt holders while not slowing down the recovery. And that’s going to be--for many years to come--a difficult challenge.”

The IMF forecast was readjusted as well last week to a 1.7 percent real growth rate for Japan in 2014, but that was predicted to fall to below 1 percent in 2015.

The forecast means that growth will eventually slow down even if a supplementary budget on the scale of about 5.5 trillion yen ($54 billion) can overcome the negative effects of the consumption tax hike which took place April 1.

Even defenders of Abenomics are raising concerns that economic growth cannot be maintained unless additional stimulus measures are implemented through large-scale public works projects and deregulation.

If Prime Minister Shinzo Abe decides to raise the consumption tax rate even further to 10 percent in autumn 2015, a chorus of calls will rise from within the ruling coalition and the business sector pleading for another round of huge economic stimulation measures in the form of public works projects.

However, economic resuscitation cannot be achieved if comprehensive measures to strengthen the jobs and welfare situation and to push energy policy away from nuclear power generation are placed on the back burner to concentrate on further dependence on huge outlays of BOJ funds and fiscal measures.

Even if additional deregulation measures are included, they will likely be mere copies of the measures implemented when Junichiro Koizumi was prime minister. And these steps only produced an economic recovery with no concrete results for the general public.

On the diplomatic front, the worsening of ties with China and South Korea has cast a dark shadow over the future of the Japanese economy.

If Japan continues a stance that leads to further disappointment expressed by the United States, as happened when Abe visited Yasukuni Shrine in December, political leaders will only end up hurting the economy and bringing unhappiness to the people.