Is Abenomics failing? Recent data from Japan are mixed at best. The core inflation rate, stripped of fresh food prices, fell slightly to 1.3 per cent in June. That is better than the deflation in which Japan was trapped for 15 years. But it is not enough to ensure the central bank reaches its target of 2 per cent inflation by next spring. Employment data are strong, but wages are not picking up much. Many of the jobs being created are low paid. Growth, which had a promising start when Abenomics was launched in December 2012, has tailed off. The economy raced upwards as consumers front-loaded spending before this April’s increase in consumption tax, but then headed down to earth just as fast in the subsequent quarter.
Even with the benefit of massive monetary stimulus, Japan’s economy has fared no better than Germany’s in the past six quarters in real terms. During the past 12 months it has barely grown at all. Still, in nominal terms, all important for the moment, the economy has had its best run in decades.
The export machine, however, has stalled. Despite the fact that the yen is 20 per cent weaker than 18 months ago, shipments have not budged. Companies have taken profits rather than building market share. Many have shifted production abroad. A persistent trade deficit has opened up as a post-Fukushima Japan imports more oil and gas.
Yet those who have written off Abenomics on the basis of these numbers have jumped the gun. If we confine the goal to reaching 2 per cent inflation and modestly increasing the economy’s potential growth rate, success is still not out of reach.
What should be done? Broadly, there are four areas that can make a difference. The first is monetary policy. Haruhiko Kuroda, the governor of the Bank of Japan, will need to do more. For the most part, he has put a brave face on the weak economic statistics. Yet sooner or later he will have to fire off another round of monetary stimulus, either by buying yet more government bonds or, preferably, by increasing the purchase of other assets such as equity and real estate funds.
Second, Shinzo Abe, the prime minister, should face down the finance ministry and postpone the next scheduled increase in consumption tax from 8 to 10 per cent. His decision to go ahead with April’s three-point rise to 8 per cent was brave. It may also have been foolhardy. Precious momentum has been lost. Japan will have to watch nervously over the next several months to see whether consumer sentiment recovers.
Third, the government should pursue structural reforms. More must be done to close the gap between permanent and casual workers, who now make up nearly 40 per cent of the labour force. It is not enough to make it easier for big companies to lay off workers, though this could conceivably encourage them to hire more full-time staff. The wages of part-time staff must be improved. Increasing the minimum wage might be one option. Women are pouring into the workforce, but too often they are taking part-time jobs. As a matter of urgency, the tax system should be altered so that married women are not penalised for working full-time.
Finally, Mr Abe needs to be keenly aware that Abenomics hangs in the balance. He must stick to policy and not get bogged down in politics. That means expending less political capital on pet projects, such as changing the interpretation of Japan’s pacifist constitution.
It also means resisting, as far as possible, factional infighting as he prepares for his first cabinet shuffle and a possible challenge for the party leadership next year. Abenomics was always going to be a risky business. The man who gave the bold policy its name cannot afford to be distracted now.
(The Financial Times Editorial August 28, 2014 Japan’s economic recovery hangs in the balance)