Abenomics on trial as Japan teeters on brink of recession
Seven years on there is little to show for Shinzo Abe’s ‘three arrows’ of fiscal stimulus
In 2013, Japan’s new prime minister Shinzo Abe delivered his first policy address, vowing to revive economic growth and end two decades of on-and-off deflation. He planned to achieve this with the “three arrows” of Abenomics: bold monetary easing, flexible fiscal policy and a reform strategy to revive private investment.
Seven years on, he has little to show for it. Following October’s rise in value added tax, Japan revealed on Monday that gross domestic product shrunk at an annualised rate of 6.3 per cent in the final quarter of 2019. With the economy suffering a fresh shock from the outbreak of coronavirus, most analysts think a technical recession — defined as two consecutive quarters of declining output — is probable.
The big questions are whether a technical recession could turn into a deeper downturn; whether there is anything the government and the Bank of Japan can do about it; and where this leaves Mr Abe’s ambition to revive Japan’s economy as the prime minister’s own time in office draws to a close.
Masamichi Adachi, UBS chief economist, said the latest growth numbers were “very weak, dismal, shockingly bad” and showed that the economy was struggling even before the virus struck. “Japan will definitely suffer from a plunge in inbound tourism and from weaker goods trade given the level of activity in China is so low,” he said.
But Mr Adachi said he expected that Japan could avoid a deeper downturn, so long as the virus abated by the end of March, allowing for a rebound in China’s economy. “Moreover, I would argue the [Abe] government will definitely step up with more fiscal stimulus,” he said.
Mr Abe has repeatedly launched spending packages when the economy weakens, but the timing is a problem this time because the government’s last stimulus has only just been approved in the Diet. Even if the prime minister acted straight away, it would probably take months to compile and pass another round.
“So far, none of last year’s stimulus has taken effect. The first thing to consider is accelerating that spending,” said Harumi Taguchi, principal economist at IHS Markit in Tokyo.
That leaves any possible action to the Bank of Japan, where governor Haruhiko Kuroda has already cut overnight interest rates to minus 0.1 per cent, and has been reluctant to do more for fear of negative side effects on the banking system.
In an interview with FujiSankei Business, published on Tuesday, Mr Kuroda said the virus was “the biggest source of uncertainty for Japan’s economy” but insisted there was little chance of growth in 2020 falling far below 2019. He also repeated the central bank’s boilerplate phrase: it would launch further easing “without hesitation” should it prove necessary.
There is little doubt, however, that the latest slump in output is another blow to Mr Abe and Mr Kuroda’s plans for Japan to finally escape the “lost decades” of stagnation and falling prices that followed the bursting of a stock market bubble in 1990.
The idea was for monetary and fiscal stimulus to revive demand and inflation while structural economic reforms allowed for a higher level of growth. Initially, it worked as intended: the Japanese yen weakened and growth picked up. The economy has generally been stronger during Mr Abe’s term than in previous decades.
But a 2014 rise in consumption tax from 5 per cent to 8 per cent drove the economy into recession, and after last year’s increase to 10 per cent there is a danger of a repeat.
To many in Japan, the tax rises were necessary and appropriate given the fiscal deficit and need to pay for its ageing population, but they have also cancelled out any fiscal stimulus measures and resulted in overall fiscal contraction under Mr Abe.
Paul Krugman, the economist, described the tax rises as examples of “destructive austerity policies”. Consumption was barely any higher in the final quarter of 2019 than it was in the same period of 2012, when Mr Abe won the election, and inflation has never come close to the BoJ’s 2 per cent target.
“I hesitate to say that the VAT hike was a mistake,” said Mr Adachi, arguing that Mr Abe had little alternative given Japan’s long-term fiscal trajectory. Ms Taguchi spoke for those in Japan who think greater deregulation was needed when she said “the big failure of Abenomics was on structural reform”.
Mr Abe is expected to step down in the next couple of years and will leave behind a difficult challenge for his successor. This will be whether to mount one last stimulus or accept Japan’s current growth performance is as good as it will get, and that Mr Abe’s dream of economic revival is out of reach.