Abe under pressure to revive Japan\'s struggling economy

Missing market forecast, data showed last Monday (August 15) that Japan's economy has stalled during the second April-June quarter of 2016. It has also rekindled worries about the government's unsuccessful bid to revive the economy. Contrary to economists' expectations for a modest 0.2 per cent expansion, the world's third largest economy was flat 0-0 per cent in the second quarter because of weak exports and negative business expenditures.
However, the report also pointed out that on an annualised basis, the economy expanded by a slight 0.2 per cent during the latest quarter under report compared to expectations for a 0.7 per cent rise and an actual 1.9 per cent growth rate achieved in the first quarter of the year. This came as quite a shock.
Early this month, Japanese Prime Minister Shinzo Abe reshuffled his cabinet and said that he has put top most priority on lifting the economy out of deflation.
Abe came to power in 2012 when his country was suffering from a long period of deflation. He promised to lift the economy out of deflation with a three-pronged formula - monetary stimulus, fiscal stimulus and structural reforms - to boost growth, push inflation to two per cent and tackle public debt.
The formula failed to meet those objectives. The next three years of reflationary monetary, fiscal and reform policies - known as Abenomics - have not been able to do the trick. However, reports pointed out that on measures such as growth in nominal output or the labour market, the economy did perform better than before.  
After reshuffling the cabinet, Abe told a press conference: "While facing up to risks posed by the global economy, we'll use all policy tools to accelerate the escape velocity out of deflation to the maximum."
Abe has been sounding the alarm about global growth for some time. In fact, while hosting the Group of Seven (G-7) in Tokyo in May this year, he asked the fellow global leaders to mount a new stimulus.
Analysts say Japan's economy was not performing well since 2014 largely because of sluggish consumption, prolonged weakness in exports to China which aggravated with further shock of Brexit. Inflation dripped back to below zero.
JAPAN RETURNS TO LOOSE FISCAL POLICY: Meanwhile, in an apparent bid to absorb the shock of Brexit - after Britain's vote to quit European Union in June  - Tokyo recently announced a large 28 trillion yen ($276 billion) stimulating package to kick start growth and also stem a yen rally sparked by Brexit. Analysts have suggested that investors tend to buy Japan's currency yen as a safe bet in times of turmoil and uncertainty.
Some observers have raised a question that when the initial three-pronged formula of reflationary monetary, fiscal and reform policy did not work, why has then the Abe government once again undertaken such a stimulating package to revive the sagging economy? Will it work this time? There is no direct answer to it but useful explanation is available in support of the move.
One of the major reasons why the so-called Abenomics did not work was Abe's decision to raise consumption tax to eight per cent in 2014 which proved to be disastrous as it plunged the economy into recession. This also led to the dropping of his approval ratings. Now, perhaps with hindsight, Abe is putting robust growth ahead of any attempt to fix the country's public finance.
Explaining his fresh stimulus plan, Abe told newsmen that the government and the Bank of Japan (BoJ) would work together to defeat deflation and hoped the central bank would take firm policy steps to achieve its two per cent inflation target. He also said: "I trust (BoJ) Governor (Hiruhiko) Kuroda's ability (and) specific policy steps should be left to BoJ to decide."
Market reaction in Tokyo was reportedly mixed. Even after Abe's statement expressing his firm commitment, the central bank disappointed markets by keeping its bond purchase plans steady. Besides, traders became more nervous after the BoJ announced that it will reevaluate its policies in September. Meanwhile, when the government bond yield showed a rise, Governor Kuroda declined to comment but stated that the planned review in September won't lead the BoJ to weaken its stimulus.
Markets in Japan still look worried because the BoJ had announced in late July that it would stick to its annual plan of a whopping 80 trillion yen worth of bond-buying. This expansion, traders apprehend, could spark volatility in the country's debt markets. Analysts said, the latest growth data are likely to mount pressure on the BoJ to act when it meets next month.
WHAT IS REALLY NEW? Abe reshuffled his cabinet on August 02 and the next day his cabinet approved a 13.5 trillion yen ($133.25 billion) package to revive the economy. Of this new "fiscal measures", 6.0 trillion yen will involve government borrowing and lending the money on to finance infrastructure such as a new maglev (magnetic levitating) railway line from Tokyo to Osaka. According to details of the plan announced, the new spending known as "fresh water" comes to 7.5 trillion yen: out of this 6.2 trillion is from the central government and 4.6 trillion yen is for the current fiscal year.
According to JPMorgan's Tokyo-based economist Hiroshi Ugai, the details were "slightly supportive" relative to his growth forecasts of 1.1 per cent for 2016 and 0.8 per cent for 2017.Those forecasts are higher than Japan's long-run growth potential, suggesting an ever tighter job market, and upward pressure on inflation. Much will depend on the details of how the money is spent.
Meanwhile, the Japanese currency yen's rise against the US dollar and other currencies for Japan's exporting firms like the car giant Toyota and electronic goods manufacturers like Panasonic makes a sizeable dent for their operating profits. For example, one yen rise against the dollar can cost as much as 40 billion yen ($400 million) for Toyota and one billion yen for Panasonic. This year Toyota has already cut its full-year operating profit forecast by about $1.0 billion.
A news agency has reported from Tokyo that many Japanese corporations have already shifted chunks of their manufacturing abroad, and a survey at the end of last year found that barely any were considering moving production back to Japan even when the yen was below 120 to a dollar. This week, market disappointment has pushed the yen to up to 101.8 against the dollar and this keeps changing in a volatile market.
Marcel Thieliant from a research outfit called Capital Economics said that Japan's "economic stagnation added deflationary impact of the strong yen, underlying inflation should moderate further in coming months, increasing the pressure on the Bank of Japan to provide more monetary easing." What is happening now is totally a guessing game.
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