Abenomics and usI was in Tokyo last week when a 7.3 percent plunge in the Nikkei index on May 23 - the steepest fall since the Fukushima nuclear plant disaster - deeply disturbed the island nation. There were growing voices of concern about the lasting effects of “Abenomics,” the current government’s shock therapy against deflation. They began doubting its bold tenants: That monetary easing, yen weakening and stock price gains would prop up asset prices and consumer spending to finally end the country’s decades-old deflationary malaise.
Hedge funds drawn by potentially juicy returns from Abe’s high risk strategy were the party crashers riding on the yen’s weakening and rising equity gains, according to local business reports. The Asahi Shimbun pointed out that the essence of Abenomics was in the psychological lift it produced, which could go down as quickly as it went up. Some already worry about the curse of such an artificial therapy for the economy. But Abenomics is no simple policy mix that can be done or undone that easily.
The motive behind the drastic expansionary monetary policy is the triple psychological shock the country suffered last year. The biggest blow came from China when it took over Japan’s long-held ranking as the world’s second-largest economy. Moreover, the Japanese for the first time since the end of World War II came close to military skirmishes with China over a territorial dispute over a group of islets in the East China Sea.
What also hurt their pride was a trade deficit. Except during the period of the global oil shock, Japan enjoyed fat surpluses in its trade account since the 1960s. Japanese pride, which was pinned to a robust economy during peacetime, was devastated.
The Japanese economy has long been lethargic, dogged by stagnation and deflation that lasted for two decades. The young are scared of getting married. When they do, they put off having children. With insecurity, people have shut their wallets. Dreams were lost, drained by an endless and stale hopelessness.
Prime Minister Shinzo Abe - a die-hard conservative preparing a political comeback - sold Abenomics as a magical potion that promised hope and restored pride. Instead of a political agenda, he placed top priority on the economy and delivered on his promise by pumping out yen and flooding the market with easy liquidity. Riding on a wave of popularity, he rode in a tank and hollered at his people to shake off their defeatism and be strong again. Banzai!
In order to inflate domestic morale and asset prices, Abe doesn’t mind annoying neighbors. He raised his thumb seated in the cockpit of an air force jet marked with the number 731 - a horrendous reminder of the notorious Unit 731 that ran chemical and biological warfare experiments on Asian and Russian prisoners of war in China during the war. (Officials downplayed the numbers as an unfortunate coincidence.)
In another coincidence, the prime minister strode onto the field at the Tokyo Dome Stadium during a televised baseball match in a jersey emblazoned with the number 96, a reminder of his campaign promise to revise the Japanese constitution’s Article 96, the post-war pacifist clause that bans Japan from maintaining a normal military. The media-savvy prime minister again made light of the coincidence and said the number signified that he was the country’s 96th prime minister. For Abe, not number of coincidences are too many.
The expansionary monetary policy is actually no special experiment. The Bank of Japan carried out quantitative easing for five years from 2001. But this time the scale is of a different dimension. Japan won a pardon for its exceptional monetary easing from U.S. and European authorities as bold measures to reverse its persistent deflationary cycle.
Of course, the U.S. and Europe are hardly in a position to criticize Japan, as they were ahead in resorting to quantitative easing to prop up their own economies. Despite the beggar-thy-neighbor effect of a cheaper yen, however, the Abe government is unlikely to stop its aggressive campaign. The government’s foundation would shake if it surrenders its belief in Abenomics. With no Abenomics, there is no Abe.
Abenomics basically works to artificially inflate asset bubbles. The prescription, however, carries two fatal risks. First, long-term interest rates could shoot up on inflationary expectations, which could deter corporate investment and dampen economic recovery. Ballooning interest could wreak havoc on public finances. Second, it also could be self-destructive. Because of alarmingly low factory operation rates, Japanese manufacturers will concentrate on running their factories at full capacity and raising profitability instead of making new investment.
When wages remain flat and import prices shoot up due to the cheaper yen, it will hurt consumers and small manufacturers or businesses. A populist economic policy will then backfire with the public. To prevent the worst case scenario, the central bank would certainly spend widely to repurchase government bonds.
On the night of the Nikkei crash, Abe attended a dinner hosted by the Nihon Keizai Shimbun. There, he promised to put the Japanese economy back on a solid path. Hiromasa Yonekura, chairman of the Keidanren, the most influential business lobby group, raised a glass toward him and promised the corporate sector will do all it can to make Abenomics work. The government, political and corporate sectors are on the same bandwagon in this high-risk campaign. Banzai!
Whether it succeeds or fails, South Korea will be affected. If it succeeds, our domestic companies will have a hard time competing with Japanese rivals that benefit from a cheaper yen. If the policy flops and takes a toll on Japan’s sovereignty credit rating, Japanese financial institutions could begin to pull back their overseas assets, including those in Korea.
The political agenda of Abe aimed at winning the July Upper House election is not our immediate threat. Its economic one is a far bigger one.
*The author is an editorial writer of the JoongAng Ilbo.
by Lee Chul-ho