No more than a quick fix
The Japanese economy is on a roller-coaster ride. The gross domestic product grew at an annualized rate of 6 percent in the first quarter and then sank 7.1 percent the following quarter. The national sales tax increase in April from 5 percent to 8 percent was a damper, but that alone cannot explain the dramatic reversal in an economy that appeared to be on the recovery track. The dollar that was at 102 yen in early August is 110 yen today. Volatility in the Japanese economy has increased. Much-hyped Abenomics - a mix of all-out fiscal and monetary stimuli to stir inflation and spending led by Prime Minister Shinzo Abe - is drawing more criticism and wrath.
Abenomics was designed to end the deflationary cycle and finally shake the economy out of depression. With a buyback plan and printing press liberty, the central bank aimed to raise inflation to 2 percent within two years. Consumer prices in December 2012 - the early stage of Abenomics - that fell 0.2 percent year-on-year rebounded to positive growth from June 2013. After remaining in the low 1-percent range, inflation rose above 3 percent. Even without tax hikes and import price factors, consumer prices will likely hit the target level of 2 percent growth this year.
Does this mean an end to depression? Consumer spending that slowly recovered from the 0.7 percent fall in December 2012 jumped to 7.2 percent in March, shortly before the sales tax hike. However, retail sales fell sharply after April. The problem is that household income growth could not keep up with the rise in consumer prices, eroding real income. Capital investment also returned to positive territory starting in the second quarter of 2013, but growth remains marginal at 1 percent to 2 percent. Investment merely takes place in infrastructure, pork-barrel projects and a few energy areas benefiting from heavy fiscal spending. Automobile output fell as much as 6.9 percent in August, and it’s hard to see any beefed-up corporate spending yet.
Architects of Abenomics believed monetary easing would weaken the yen, boost exports, corporate profitability and stock prices, which would increase corporate investment and employers’ salaries and eventually boost consumer spending. The prescription only partly worked. Liquidity easing and the weakening of the yen helped corporate profits and stock prices. But they did not help boost exports, investment, wages and consumer spending. Exports in yen value grew 9.5 percent in 2013, but in dollar exchange fell 10.2 percent. In terms of volume, they were down 1.5 percent. In the second quarter of 2014, exports in dollars decreased 3.6 percent and rose 0.1 percent in yen value. In volume, they fell 1.0 percent.
The biggest fallout from Abenomics was the small improvement in exports turnover despite more than 30 percent devaluation in the yen. Policymakers did not factor in structural changes in the Japanese economy. Japan incurred a trade deficit in 2011 for the first time in 31 years. Currency depreciation at a time when imports outpace exports only widens the trade deficit. Authorities believed that better price competitiveness from the weaker currency would help bolster overseas sales. But Japan’s brand reputation overseas is not what it once was. The electronics industry incurred a trade deficit from 2013 because there are more imports of smartphones and TVs despite an increased exportation of parts.
The weak yen also helped little on the auto-making front, as about 70 percent of output is from overseas factories. The yen factor no longer can save the economy amid increasing outsourcing and manufacturing overseas and decreased industrial competitiveness. Instead, the weak yen only raised import prices and burdened both consumers and manufacturers. Rising raw material prices have also fanned consumer prices and eaten into the profits of small and midsize companies that rely on raw material imports. Only large export manufacturers benefited from the weak yen.
The success of Abenomics hinges on the third arrow of structural reform and new growth engines. The Abe administration is investing in the clean energy industry and health care sector. However, without solving structural problems like rigid regulations, these endeavors will result in only peripheral improvements.
Most of all, the spending plans are financed by debt. Japan’s national debt is 230 percent of the GDP, double that of the United States. Japan cannot go on with its debt-driven stimulus policy. Abenomics, therefore, cannot have a lasting effect. The government plans to raise the sales tax again - from 8 percent to 10 percent - in October 2015 to reduce its deficit and debt. But if the economy keeps moving at its current pace, the plan may have to be scrapped.
Japan’s economy is expected to grow 0.4 percent this year, below its potential growth rate of 1 percent. Its growth in 2015 is estimated at 1.5 percent under the assumption that consumption, investment and exports improve. But the goal may be hard to attain with another sales tax hike.
With its emphasis on quantitative easing and a weak yen, Abenomics had been criticized as a beggar-thy-neighbor policy. But we no longer hear hypercritical voices. Despite a weaker yen, South Korea’s exports rose 2.1 percent and 2.5 percent in the first eight months of 2014. The Japanese central bank is considering another round of quantitative easing. The yen could dip below 110 against the dollar. Korean authorities and companies need not worry too much about the yen’s movement and instead concentrate on improving product competitiveness. The Japanese case clearly shows that what matters more is a loss in competitiveness in products, not prices.
Translation by the Korea JoongAng Daily staff. JoongAng Sunday, Oct. 5, Page 18
*The author is an adviser to the Korea-Japan Cooperation Foundation for Industry and Technology.
by Lee Woo-kwang, Shinzo Abe
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