Abenomics deserves our vigilancePrime Minister Shinzo Abe has refueled his campaign to end decades-old deflationary malaise by adding specific plans for structural reforms to promote growth. He pledged to create tax-friendly special economic zones for foreign investors, reduce red tape in the medical sector and invest in the utility industry. The recent package may be the last in his aggressive and vociferous campaign to break the Japanese economy’s 20-year-old recessive cycle that has included an unprecedented scale of monetary and fiscal easing since he took office late last year.
The market, however, lost interest in the last act, with stock prices on the Tokyo exchange slipping more than 3.8 percent immediately after Wednesday’s announcement. The U.S. dollar also retreated to under 100 yen. Investors lost their initial euphoria over Abe’s enthusiastic aim to fix the economy and instead chose to cash out on earlier bets, dubious about his plans to boost national per capita income to more than $60,000 in 10 years. The latest growth outline in essence included reform initiatives more or less recycled from the past and left out what is most needed: corporate tax cuts, easing of labor regulations and deregulation in the agriculture and medical sectors. The government is keen, yet neither willing nor bold enough in its policies.
Optimism over the first part of Abe’s economic campaign - unlimited quantitative easing and expansionary fiscal policy - is also fizzling. Yields on Japanese government bonds rose amid prospects of the U.S. Federal Reserve scaling down its own quantitative campaign. Stock prices on May 23 fell more than 7 percent and the yen strengthened, falling below the psychologically important 100-yen threshold. The growing skepticism shows that liquidity flooding cannot boost the economy without restructuring and strengthening the fundamentals. It is too early to proclaim the defeat of so-called Abenomics. The plunge in stock prices and slowdown in devaluation of the yen may be a temporary correction after steep gains in recent months. But what is certain is that Abe may not generate the expected results from his high-risk experiment with the economy.
A stabilizing yen is good news for Korean companies. But if the overall Abenomics economic package fails and the economy falls back into slump and gloom, it would not only be disastrous for the heavily indebted Japanese economy but also for the global economy. If Japan’s public finances are wrecked, it would spill over to the private sector and send shockwaves to financial markets worldwide. The government, corporate and financial sectors should watch the Japanese economy closely. We must be vigilant and prepared to respond to both the successes and failures of Japan’s economic campaign.