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Abonomy on the march

The victory in the elections allows the Prime Minister of Japan to continue his economic course

Abonomy on the march
Photo: RIA Novosti

Valery Kistanov

Head of the Center for Japanese Studies of the Institute of Far Eastern Studies
A convincing victory in early elections to the lower house of parliament on October 22 (about this see: https://www.eastrussia.ru/material/yaponiya-natselilas-na-referendum/) gave Japanese Prime Minister Shinzo Abe the opportunity to further pursue his economic course, called Abenomika. Its goal is to revitalize the Japanese economy, which has been stagnating for more than two decades. Since coming to power five years ago, Abe tried to accelerate economic development through the so-called "three arrows": aggressive monetary policy, flexible budgetary approach and a growth strategy focused on promoting private investment.

 The specified economic course provides for stimulating consumption and investment through an active policy of monetary easing. This should create jobs and increase wages. Higher wages, in turn, should push prices up. One of the main goals of Abenomics is to eliminate deflation, which has suppressed prices for the past 20 years, and to achieve inflation of 2%. This policy began to be actively implemented in April 2013, when the new chairman of the Bank of Japan, Haruhiko Kuroda, sharply increased the scale of purchases by the Bank of government assets.

This gave some of the expected results. Japan's GDP in the period July-September 2017 continued to grow for the 7th consecutive quarter. This is the longest continuous growth in 16 years. And the growth in nominal GDP, which does not take inflation into account, was even more impressive - in the third quarter of 2017, it was 11% higher than 5 years ago. This increase was the largest over the past 20 years.

Over the years of Abenomics, through the depreciation of the yen, exports have contributed greatly to the increase in GDP. After all, every dollar spent on the purchase of Japanese goods brought in an increased amount of yen. Private investment also rose 18% in nominal terms and 15% in constant prices.
Abenomics has created even more jobs than its initiators hoped. The number of employed people increased by 2,7 million people in five years, although the number of the working-age population decreased by 4 million over the same period.As a result, unemployment during 2017 was below 3%, and there were 1,5 vacancies for each job seeker. But despite these achievements, Abenomics is still very far from its most important goal - 2% inflation. Consumer prices increased by only 2017% by September 0,7.

One of the reasons for the weak inflation is that wages have not grown as fast as expected. Another reason is that the workforce was larger than anticipated. A large number of women and elderly people were attracted to the labor market. In addition, in 2016, the number of foreign workers exceeded 1 million for the first time. Ironically, however, the failure of efforts to raise inflation is being well received by Japanese consumers, who are wondering why the government is so keen to make everything more expensive.

The victory in the parliamentary elections of the ruling coalition led by Shinzo Abe caused an increase in the value of shares in Japanese companies and a further depreciation of the yen. On Monday, October 23rd, the day after the elections, the Nikkei 225 continued its rise for the 15th straight session on the Tokyo Stock Exchange. It climbed 1,11% or 239.01 points to reach 21 yen, its best since July 696, 65. The Japanese currency that day traded at 15-1996 yen per dollar, compared to 113,77-79 on Friday, and even dropped to 113,32 yen in the morning.

Abe's victory meant a continuation of the big budget spending and monetary easing policies that the prime minister has pursued since his re-election in December 2012. In five years, Abenomics drove the yen down more than 20%, and the Nikkei nearly doubled. According to Japanese analysts, the election results were good news for industries ranging from nuclear energy to weapons production. At the same time, they pose challenges to some other industries, such as retail.

The depreciation of the yen has become a "tailwind" for large Japanese manufacturing companies such as Toyota Motor and others. Corporate profits have skyrocketed thanks to a resurgence in Japanese exports. Corporations benefiting the most from the depreciation of the yen, which mainly sell their products in foreign markets.

Prime Minister Abe also saw early parliamentary elections as a chance to test public opinion on the consumer tax hike. When he raised that tax in 2014, the economy slipped into recession. Since then, Abe has postponed the tax increase twice. However, according to Japanese experts, the current signs of economic growth make it difficult to justify its further postponement. 

During the election campaign, Abe linked the planned increase in the consumer tax from 2019 to 8% in 10 with an increase in spending on education and support for young families. This can be beneficial for education companies. At the same time, retail-related companies could be hurt as higher taxes drive down consumer spending.

The Japanese business community welcomed the convincing victory of the ruling camp, led by the LDP, in the October 22 general elections to the House of Representatives. Chairman of the Federation of Japanese Economic Organizations (Keidanren) Sadayuki Sakakibara said in a statement, "Business warmly welcomes the election victory of the LDP and its ally Komeito." The election results strengthened the foundation of Abe's government and will help him "pursue policies without interruption and firmly," he said. The head of Japan's most respected business organization has expressed his readiness to fully cooperate with the Abe government in implementing his policies. Sakakibara named a way out of deflation, economic revival, improved social security, energy problems and national security among the main challenges. The question now is how long the government will continue its stimulus policy in an environment where inflation is still weak and wage growth is insignificant.

In general, Abenomics is still far from the goals and objectives set for it. During the Abe administration, the central bank actively fought protracted deflation through massive purchases of government assets, pumping trillions of dollars into the economy in its efforts to raise prices, according to the Japanese business mouthpiece Nikkei. However, companies raised wages and prices less than expected, slowing the achievement of Abenomics' goals.

Household consumption in September 2017 fell by an average of 0,3% compared to September last year, despite an increase in their average income by 2,1%. In addition, housing investment, the main source of consumer demand in Japan, is currently stagnant. As a consequence of these trends, the Bank of Japan decided to maintain its monetary policy of quantitative easing, but cut its inflation forecast, saying that growth is not yet robust enough to raise wages or boost consumer demand.

For fiscal 2017 ending next March, the Bank expects the economy to grow 1,9%, slightly more than it foreseen in its July forecast. But in 2019 fin. The Bank forecasts growth of less than 1%. And the forecast for inflation in FY 2017. he cut to 0,8% from 1,1% in the previous forecast. These data show the difficulties faced by the Central Bank in trying to achieve the inflation target of 2%. In assessing the economic outlook, the Bank of Japan pointed to the reluctance of companies to raise wages and consumers to spend money as key reasons for the economy's slow progress towards higher inflation.

To fulfill Prime Minister Shinzo Abe's campaign promises, the cabinet on December 8 approved a 2 trillion yen package to expand free education and childcare. According to Abe, this should provide an impetus for solving the problems of long-term economic development caused by the declining birth rate in Japan and the aging society. The government hopes that a package of measures of ¥ 1,7 trillion in tax revenues and 300 billion in corporate contributions will help overcome Japan's aging and maintain the country's global competitiveness. However, as experts point out, directing additional revenues from the planned increase in consumer tax to these goals can only complicate the solution of the problem of Japan's huge public debt, exceeding 200% of the country's GDP.

Shortly after the elections, a fourth cabinet was formed under the leadership of Shinzo Abe. The country's leader retained all 19 ministers of his previous government, which he called the "Cabinet of Figures with Political Experience". Thus, as is obvious, he emphasized the continuity of his policy. All the main functionaries of the ruling Liberal Democratic Party also remained in their places. 

Speaking at a press conference, Abe stressed: "Having received strong trust from the people, I will pursue a stronger economic policy." As Yomiuri Shimbun writes, it was about 5 years since the formation of his second cabinet in 2012. Now it is time for Abe to achieve results in the field of politics.

As the publication indicates, Abe constantly advocated "putting the economy in first place". Although business performance and the hiring situation have improved and there is a moderate economic recovery, the way out of deflation is still going on, and the majority of the population has not felt the fruits of economic progress. According to Yomiuri Simbuune, the Abe administration must comprehensively develop the growth strategy in such a way as to achieve this growth on the basis of domestic demand by means of increasing wages and other measures.

In June 2017, the government adopted a new economic development program, which became, in fact, the second phase of Abenomics. This program concentrates on increasing productivity, promoting innovation and trade, and further revitalizing Japanese companies. At this stage, in Abe's words, Japan must make a "revolution in labor productivity." The purpose of this "revolution" is to eliminate the negative impact on the economy of the problem of aging population and low birth rate in Japan.

However, it is difficult to say how successfully Shinzo Abe will manage to carry out his economic course. First, even with the proposed extension of his tenure as prime minister for a third term until 2021, he has little time left to pursue Abenomics' ambitious goals. Second, according to the Nikkei newspaper, the election victory of the ruling bloc of Prime Minister Abe opened the way for him to further advance his economic policy. But fears are mounting that the prime minister’s focus on revising Japan’s postwar constitution could impede urgently needed economic reforms.
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