Japan To Be Downgraded

 
When markets open in Tokyo tomorrow, Standard & Poor will downgrade its rating of Japanese government debt, citing weak growth. “Despite showing initial promise,” Mr. Abe’s strategy “will not be able to reverse this deterioration in the next two to three years,” the ratings agency said. It was the third of the three major ratings firms to do so. 

On Friday, the Bank of Japan had downgraded its forecast for industrial output in the current quarter to “largely flat” as a result of growth slowdowns in China and emerging economies that are weighing on Japan’s exports.

The latest signs came as doubts over Abenomics, as the Japanese leader’s three-pronged growth strategy is called, are increasingly emerging among economists nearly three years after he took power. 

“The time is not yet ripe for us to declare Abenomics a failure, but we must say we are getting there,” said economist Takuji Okubo of Japan Macro Advisors, a Tokyo economic-analysis firm, who has been supportive of Mr. Abe.

Two figures underscore the urgency. Economists believe Japan will struggle to grow in the current quarter after shrinking 1.3% the previous quarter. And despite unprecedented easing by the Bank of Japan, the leading measure of inflation shows prices are flat, a setback for Mr. Abe’s efforts to eradicate deflation. Low energy prices, while generally good for a big energy importer like Japan, have disrupted the push to generate inflation, Bank of Japan officials say.

Some benchmarks are much improved over three years. The Nikkei stock average is 80% above where it stood when Mr. Abe took office, even after the recent global stock-market shudder, backed by a sharp rise in corporate profits. Demand for workers is stronger than it has been since the early 1990s, when Japan was entering the long period of stagnation. And the headline figure on prices probably underestimates Mr. Abe’s deflation-fighting efforts because it has been pushed down by a one-time fall in oil prices.

“Abenomics is still halfway along the road,” Mr. Abe said on Sept. 8 when he was re-elected as ruling-party leader. He said he would work to “deliver a virtuous cycle of a recovering economy to every corner of the country.” 

Bank of Japan Gov. Haruhiko Kuroda said Friday that while China’s slowdown would affect Japan somewhat, he believed China’s leaders would soon take steps to boost the economy and restore stable growth.

Yet, none of what Mr. Abe calls the “three arrows” of Abenomics seems equipped to pierce through the barriers keeping consumers from spending and companies from investing more.

The first arrow, monetary stimulus, hasn’t been fired since Oct. 31, 2014, when the Bank of Japan jolted markets by pumping hundreds of billions of dollars in additional money into the financial system and expanding purchases of stocks and real-estate funds.

The second arrow, fiscal stimulus, has ceased to be a force for growth. After a sharp increase in government spending to stimulate the economy in Mr. Abe’s first year, the budget for the current fiscal year, which ends in March, will reduce overall government spending if it isn’t augmented with an extra budget.

The third arrow, structural change, has included a drive to improve corporate governance and bring more women into the workforce. While those changes have won praise from foreign investors, Mr. Abe hasn’t recently proposed any major additions to the agenda. There are no signs that bigger changes—such as opening the country more widely to foreign workers—are in the works.

It is a plight Japan has often faced in the quarter-century since its on-and-off doldrums began—difficulty in emerging from a negative cycle of flat or falling prices, pessimism about a declining population and slow growth. 

“It’s hard to imagine that households would increase spending or companies decide on more investment when the medium- and longer-term prospects remain dark,” said Tatsuhiko Yoshizaki, chief economist at trading company Sojitz Corp. ’s research unit.

While some economists say Mr. Abe could boost confidence by doing more to tackle Japan’s high government debt, those close to the prime minister say such painful steps should wait until the economy fully escapes the 15 years of deflation it experienced before Mr. Abe took over.

Tokyo intends to keep pressuring companies directly to invest more and give employees bigger raises. In government-business talks this fall, “I want to give companies a kick in the back,” said economy minister Akira Amari.

For much of the summer, Mr. Abe was occupied with getting parliament to approve one of his cherished ambitions: expanding Japan’s military role overseas and boosting cooperation with the U.S.

Takashi Nakamichi

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