‘Abenomics’ feared in trouble as challenges build

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FE Team | Published: September 03, 2014 00:00:00 | Updated: November 30, 2026 06:01:00

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TOKYO, Sept 2 (Reuters) : Prime Minister Shinzo Abe's plan for Japan's economy to generate self-sustained growth on the back of his three policy "arrows" of massive monetary easing, spending and reform appears to be faltering - but no magic solution is in sight.
Abe's aides and advisers are promising to forge ahead with painful structural reforms, while spreading the benefits of "Abenomics" to regional areas and drafting a long-term vision for addressing Japan's shrinking population.
But gloomy economic data suggests the plan is not succeeding as hoped and the only short-term contingency plans appear to be further central bank stimulus or delaying a second rise in the sales tax set for October 2015.
"Abenomics is in trouble - because it's not happening fast enough," said Robert Feldman, head of research at Morgan Stanley MUFG in Tokyo, who like many others says Abe must move faster on steps such as labour market reform to boost productivity.
Failure could leave Japan's economy stuck in a low-growth mode or worse, unable to begin to curb public debt already more than twice the size of a $5 trillion economy, the biggest burden in the industrialized world.
Abe's public support, now hovering around 50 per cent, depends heavily on the economy. Most voters favor delaying next year's sales tax rise to 10 per cent after an initial hike in April to 8 per cent from 5 per cent dented a fragile recovery.
"Will raising the sales tax a second time just when the economy is moving toward recovery really be a plus for the people's livelihoods?" Koichi Hagiuda, an aide to Abe in his Liberal Democratic Party, said in an interview.
"But there is also a risk to postponing it. Might not Japan lose the confidence of international society?" Hagiuda added.
The two-stage rise in the consumption tax is Japan's boldest move in nearly two decades to rein in government debt.
Abe will formally launch stage two of his administration on Wednesday when he reshuffles his cabinet, although key members are expected to stay on.
The new cabinet will take over after a slew of troubling data including an annualized 6.8 per cent drop in GDP in the April-June quarter.
Potentially more worrisome, real wages have fallen for 13 straight months as wage growth lags price rises, data on Tuesday showed.
That drop is casting doubt on a central tenet of Abenomics - that stimulus and higher prices would lift company profits and lead to higher wages, spurring consumption and making growth self-sustaining.
"In order for income effects to work, wages must increase," Etsuro Honda, a key architect of Abe's reflationary policies, told Reuters.
Honda said the sales tax rise should be delayed until 2017 and only imposed then if wage rises catch up with inflation and the BOJ's 2 per cent inflation target has been met.
Policymakers say that, unlike the initial round of Abenomics, when the Bank of Japan unleashed an intense burst of stimulus followed by public works and other government spending, the "third arrow" of deregulation and other structural reforms will take both time and political will.
"The growth strategy is not a single arrow. There are many things that must be done that were put off during 20 years of deflation," said one private economist who advises Abe's government on policies.