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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 win in the early elections to the lower house of parliament 22 October (see this: gave the Prime Minister of Japan Shinzo Abe the opportunity to continue to pursue his economic course, called Abenomika. His goal is to revive the Japanese economy, which has been undergoing a period of stagnation for over two decades. When he came to power five years ago, Abe tried to accelerate economic development with the help of the so-called “three arrows”: aggressive monetary policy, flexible budget approach and growth strategy focused on promoting private investment.

This economic course provides for the stimulation of consumption and investment through an active monetary easing policy. This should create jobs, and increase salaries. Higher salaries, in turn, should push prices up. One of the main tasks of Abenomics is to eliminate the deflation that has been suppressing prices during the last 20 years, and to the inflation rate of 2%. This policy began to be actively implemented from 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 expected results. Japan's GDP in the period July-September 2017 continued to grow 7-th quarter in a row. This is the longest continuous growth for 16 in recent years. And the increase in nominal GDP, which does not take into account inflation, was even more impressive - in the third quarter of 2017, it was 11% higher than 5 years ago. This increase was the largest in the last 20 years.

During the years of Abenomics, due to 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 an increased amount of yen. Private investment also rose 18% in nominal terms and 15% at constant prices.
Abenomics created even more jobs than its initiators had hoped. The number of employees for five years increased by 2,7 million people, although the number of working-age population decreased during the same period by 4 million. As a result, unemployment during 2017 was below 3%, and for each job seeker, there were 1,5 vacancies. But, despite these achievements, Abanomics is still very far from its most important goal - 2% inflation. Consumer prices by September 2017 increased by only 0,7%.

One of the reasons for the weak inflation is that salaries did not grow as quickly as expected. Another reason is that the labor force turned out to be more than expected. A large number of women and elderly people were involved in the labor market. In addition, in 2016, the number of foreign workers for the first time exceeded 1 million people. Ironically, however, the failure of attempts to raise inflation is positively perceived by Japanese consumers, who wonder why the government is so eager 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 of Japanese companies and a further depreciation of the yen. On Monday 23 October, that is, the day after the election, on the Tokyo Stock Exchange, the Nikkei 225 index continued its growth 15-th session in a row. It went up to 1,11% or 239.01 point and reached the level in 21 696, 65 yen - the best result from 15 July 1996 year. The Japanese currency traded at the level of 113,77-79 yen that day for one dollar compared to 113,32-32 on Friday, and in the morning it went down to 114 yen.

Abe's victory meant continuation of the policy of large budget expenditures and monetary easing, which the prime minister had been conducting since his re-coming to power in December of 2012. For five years, Abomonomics has led to a depreciation of the yen by more than 20%, and the Nikkei Index has almost doubled. As noted by Japanese analysts, the election results have become good news for industries ranging from nuclear power to weapons production. At the same time, they conceal calls for some other industries, such as retail.

The depreciation of the yen has become a "fair wind" for major Japanese manufacturing companies such as Toyota Motor and others. The profits of corporations soared through the revival of Japanese exports. The most benefited from the depreciation of the yen of the corporation, which basically sell their products in foreign markets.

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

In the course of the campaign, Abe linked the increase in the consumer tax planned in 2019 from 8 to 10%, with an increase in spending on education and support for young families. This can benefit the companies involved in education. At the same time, companies associated with retail sales may suffer, as higher taxes reduce consumer spending.

The Japanese business community was pleased with the convincing victory of the ruling camp led by the LDP in the general election to the House of Representatives 22 October. Chairman of the Federation of Economic Organizations of Japan (Keidanren) Sadayuki Sakakibara said in a statement: "Business warmly welcomes the victory in the elections of the LDP and its ally Komeito." According to him, the election results strengthened the basis of Abe's government and will help him "pursue a policy without interruption and firmly." The head of the most authoritative business organization of Japan expressed readiness to cooperate fully with the Abe government in implementing its policy. Among the main challenges Sakakibara called the way out of deflation, the revival of the economy, the improvement of the social security system, energy problems and national security. The question now is how long the government will continue its policy of stimulating the economy in an environment where inflation is still weak and wage growth is insignificant.

In general, Abenomics is still far from its goals and objectives. As the speaker of the Japanese business circles, the Nikkei newspaper notes, under the Abe administration, the Central Bank was actively struggling with protracted deflation through massive purchases of state assets, pumping trillions of dollars into the economy in its efforts to raise prices. However, companies raised wages and prices less than expected, slowing the achievement of Abenomica's 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, investment in housing construction, which is the main source of consumer demand in Japan, is currently experiencing stagnation. As a consequence of these trends, the Bank of Japan decided to keep the monetary policy of quantitative easing, but reduced its inflation forecast, saying that growth is not yet stable enough to raise wages or sharply increase consumer demand.

In the 2017 fiscal year ending next March, the Bank expects the economy to grow by 1,9%, i.e., slightly more than it had foreseen in its July forecast. But in 2019 fin. The Bank predicts growth is already less than 1%. And the forecast for inflation in 2017 fin. he reduced to 0,8% compared to 1,1% of the previous forecast. These data indicate the difficulties that the Central Bank faces in trying to achieve targeted inflation in 2%. Evaluating the economic outlook, the Bank of Japan pointed out the reluctance of companies to raise wages, and consumers to spend money as the key reasons for the slow progress of the economy towards higher inflation.

In order to fulfill the pre-election promises of Prime Minister Shinzo Abe, the Cabinet of Ministers 8 December approved a package of measures worth 2 trillion yen to expand the scope of free education and childcare services. According to Abe, this should give an impetus to solving the problems of long-term development of the economy, caused by a decline in the birth rate in Japan and the aging of society. The government hopes that the package of measures, consisting of 1,7 trillion yen tax revenue and 300 billion corporate contributions, will help overcome Japan's aging and support the country's global competitiveness. However, as experts point out, directing the additional revenues received from the planned increase of the consumer tax to these purposes can only hinder the solution of the problem of Japan's huge public debt exceeding 200% of the country's GDP.

Soon after the elections, the fourth Cabinet of Ministers was formed under the leadership of Shinzo Abe. The leader of the country left in his posts all 19 ministers of his former government, which he called "Cabinet figures with political experience." Thus, as is obvious, he stressed the continuity of his policy. All the main functionaries of the ruling Liberal Democratic Party also remained in their seats.

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 in fact became the second stage of Abenomics. This program focuses on increasing productivity, developing innovation and trading, as well as further activating Japanese companies. At this stage, in the words of Abe, Japan must make a "revolution in the sphere of labor productivity." The goal of this “revolution” is to eliminate the negative impact on the economy of the problem of population aging and low birth rates in Japan.

However, it is difficult to say how well Shinzo Abe will be able to implement his economic course. First, even with the expected prolongation of his stay in the prime minister's chair for a third term up to 2021, he does not have much time left to realize Abenomica's ambitious goals. Secondly, as the newspaper Nikkei writes, the victory in the election of the ruling bloc of Prime Minister Abe opened the way for him to further advance his economic policy. But growing fears that the focus of the Prime Minister on the revision of Japan's post-war constitution may impede the implementation of much-needed economic reforms.
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