Nearly a decade after the launch of “Abenomics,” Japan still cannot do without massive monetary and fiscal stimulus — the twin hallmarks of the stimulus plan pushed by the late former Prime Minister Shinzo Abe.
A weaker yen, a by-product of the Bank of Japan’s monetary easing and hailed as beneficial for the export-dependent economy, has reached a point where current leader Fumio Kishida has had to say its rapid pace of weakening is one of the “crises” facing he faced his country.
A financial data screen in Tokyo shows that the Nikkei Stock Average (L) fell more than 800 points on August 29, 2022 and the Japanese yen weakened against the US dollar. (Kyodo) ==Kyodo
Even after stepping down as the longest-serving prime minister in 2020, Abe remained an advocate of expansionary fiscal policy and continued vigorous monetary easing. Holding a state funeral on Tuesday for Abe – an influential but divisive figure who was shot dead by a lone gunman during a campaign speech in July – remains controversial in Japan.
Japan experienced its second-longest post-war economic expansion of 71 months while Abe was in office, and the country was in a state of full employment as more women and older people entered the workforce.
But the goal of expanding the size of its economy to 600 trillion yen ($4.2 trillion) in nominal terms is still a long way off, as is the BOJ’s inflation target. Wage increases remain minimal, partly because productivity is low and potential economic growth has fallen below 1 percent.
Although the COVID-19 pandemic has been an unexpected, heavy blow to Japan and the rest of the world since 2020, the heavy reliance on monetary easing and fiscal spending paints a picture of an economy still struggling to find a path to longer-term growth — something Abe’s signature program failed to deliver, despite his claim that “Japan is back.”
Economists say Kishida is right in shifting his focus to investing in people, digital transformation and green growth after Abenomics generated a feel-good effect and buoyed stock prices on hopes of an economic revival, but mostly just in the end offered short-term solutions.
People wearing face masks to protect against the coronavirus walk on a crosswalk in front of JR Shinagawa station in Tokyo July 22, 2022. (Kyodo) ==Kyodo
“Japan has not been able to break its vicious circle where potential economic growth is low, companies have low future expectations and wages are therefore not rising,” said Yuichi Kodama, chief economist at the Meiji Yasuda Research Institute. “Whether Mr. Kishida can distinguish his ‘Kishidanomics’ from Abenomics remains an open question.”
“The positive aspects of the Abe era were a surge in inbound tourists and his drive for free trade, as seen in Japan’s participation in TPP (the Trans-Pacific Partnership). But deregulation didn’t go as far as (financial markets) hoped,” Kodama said.
Kishida’s quest to create a new form of capitalism by achieving both growth and distribution is seen as the result of his predecessor’s famous policy mix. He supports the BOJ’s monetary easing and is now planning to draft a new economic package, which some top lawmakers in the ruling party say should be at least 30 trillion yen in light of the coronavirus pandemic and Russia’s war on Ukraine.
Japan’s economic recovery from the aftermath of the pandemic has been relatively slow. The size of the economy, which grew to 560 trillion yen during Abe’s time, was 547 trillion yen in nominal terms in the April-June quarter.
“Either monetary policy has to change course or it will do lasting damage, first to the value of the yen and then to the economy. As it turns out, there is no such thing as a free lunch for monetary policy either,” said Martin Schulz, chief economist at Fujitsu Ltd.
Having gobbled up Japanese government bonds as part of its monetary easing, the BOJ owns about half of the total outstanding amount, helping to limit the rise in debt servicing costs for the government. Abe once drew fire for calling the BOJ “a subsidiary of the government” in reference to its role in allowing Japan to roll over its debt.
The BOJ must gradually “normalize” its policies by “supporting the government with policies that focus on the long-term potential of the economy and stimulate investment in growth sectors, rather than supporting indiscriminate deficit spending,” Schulz said.
BoJ Governor Haruhiko Kuroda, who has remained at the helm since Abe’s time, has ruled out the possibility of interest rate hikes over the next few years, defying market pressure to streamline policy in a global tightening wave.
Persistently zero interest rates and a weak yen – now at a 24-year low against the dollar – have led to a surge in the number of low-productivity firms unable to survive without them, dampening wage growth.
“Even after full employment was reached (in the 2010s), Japan’s ultra-loose monetary policy continued and the country repeatedly added fiscal stimulus that severely distorted resource allocation (in the economy),” said Ryutaro Kono, chief economist for Japan at BNP Paribas Securities (Japan) Ltd.
Despite low borrowing costs and resilient earnings, Japanese companies remain slow to invest in digital and other key areas for growth beyond the pandemic era.
Japanese companies’ internal reserves, which can be used to boost investment and workers’ wages, surpassed 500 trillion for the first time in the fiscal year that ended in March.
“The big problem is that while Japanese companies have increased their overseas mergers and acquisitions, they haven’t increased their investment in Japan much, let alone in workers. They receive dividends from their overseas investments and reinvest them abroad,” said Takuya Hoshino, a senior economist at the Daiichi-Life Research Institute.
“Investments in digitization and green technology are important, but another key area where Japan can lead the world is in addressing the rapid aging of society,” Hoshino said. “Labour-saving technologies like automation are part of it, and if Japan succeeds in this area, it can be exported overseas.”
For ordinary Japanese, higher wages are a prerequisite for reaping the benefits of growth – and for having faith in Kishida’s new wave of capitalism.
Hoshino and other economists say the tepid wage growth is partly due to Japan’s low labor mobility, adding that companies need to compete harder to attract skilled workers by offering higher wages or better benefits.
Japanese Prime Minister Fumio Kishida delivers a speech at the New York Stock Exchange in New York on September 22, 2022. (kyodo)
Kishida is also aware of the need for reform. “We know that intangible, non-tangible assets will be a source of great value. And human capital in particular,” he said last week at the New York Stock Exchange, where Abe also gave his speech years earlier.
“There’s nothing more exciting in baseball than a comeback win. I am here today to tell you that with the help of the Japanese people, we will revitalize and revitalize the Japanese economy,” the prime minister said. “You can invest in Japan with confidence.”
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