Abenomics faces confidence vote in Japan

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As Japanese Prime Minister Shinzo Abe heads to the polls next month, the success of his war on deflation hinges on convincing people to shrug off fears about the future and start spending to kickstart the world’s number three economy. Duration: 02:23

Abenomics faces confidence vote in Japan

Japan’s war on deflation faces its toughest battle

/ Tokyo (Japan) – 26 November 2014 12:01 – AFP

As Japanese Prime Minister Shinzo Abe heads to the polls next month, the success of his war on deflation hinges on convincing people like 24-year-old Ryo Tatemichi to shrug off fears about the future and start spending.

That’s a tough sell when young workers like Tatemichi are struggling with insipid wage growth and declining job security, and as the economy slips into its fifth recession since 2000.

“If things keep going like they are, salaries could drop. That’s why people need to save now,” said Tatemichi, an information technology worker who puts aside as much as one-third of a 200,000 yen ($1,700) a month salary before overtime pay.

“It would be good if people who do have money spend it… But all we hear about is economic gloom. People are scared of spending their cash.”

Japan’s economy shrank between July and September, the second consecutive quarterly contraction, in the wake of an April sales tax rise that was designed to help pay down one of the world’s largest public debt mountains.

The levy hike delivered a body blow to Abe’s efforts to rev up growth, just as the world’s number three economy appeared to be turning a corner.

The weaker-than-expected figures convinced Abe to put off another sales tax hike, due in 2015, and call a snap election that he described as a referendum on his policies, dubbed “Abenomics” — although observers said it was a strategic move to fend off party rivals ahead of a leadership vote next year.

The move set off a flurry of speculation about whether Abe’s grand economic experiment had died on the operating table, and sparked questions about what Japan’s struggle with falling prices means for the eurozone as it teeters on the edge of deflation.

“The lesson for Europe is that what counts most is not to fall into deflation” in the first place, said Atsushi Nakajima, chairman of Japan’s Research Institute of Economy, Trade and Industry.

– Spread the wealth –

While many economists say it is still too early to judge the success or failure of Abenomics, changing Japan’s so-called “deflationary mindset” has proven to be a Herculean task for Abe and his hand-picked Bank of Japan chief Haruhiko Kuroda.

“The narrative is this: the government wants to eradicate deflation, which has long-term, structural costs,” said Marcel Thieliant from Capital Economics.

So “the BoJ has provided aggressive stimulus, which has weakened the yen. This has boosted corporate profits, but has undermined household purchasing power.

“The key question is how to ensure that the benefits to the corporate sector are eventually passed on to consumers.”

Japan Inc., which once led the world in innovation, is facing stiff competition from emerging nations including China, while a falling number of working age Japanese is shrinking its tax base even as soaring ranks of seniors strains the public purse.

It’s a demographic conundrum that exacerbates caution among the public, two decades after a stock and property price bubble popped, sending the economy into years of stagnation.

“Many Japanese save a lot because they worry as more and more people (hit) retirement age, and fewer (people) join the workforce, that public pensions and possibly private pensions as well will not be able to guarantee them the standard of living today’s retirees are enjoying,” said Robert Dujarric, the director of Asian Studies at Temple University’s Tokyo campus.

Abe’s much-touted plan consisted of “three arrows”: big government spending — such as infrastructure projects — as well as massive central bank monetary easing and an overhaul of the highly regulated economy.

The cornerstone is a 2.0 percent inflation target designed to reverse price drops that gave consumers an incentive to delay purchases knowing that goods would be cheaper down the road.

– Deflation ‘not so bad’ –

But the battle to end deflation isn’t welcomed by seniors such as 69-year-old Eiji Shimojima, who worry that higher prices will erode their retirement income.

“Deflation might not be good for the economy overall, but from an ordinary citizen’s perspective it’s actually not so bad because you can afford more things,” Shimojima said.

Niigata University economics professor Ivan Tselichtchev added in an e-mail: “If the BoJ reaches its two-percent inflation target (which is doubtful), it will not necessarily be a good news for the Japanese economy, especially for households. The major task should be growth, not inflation. “

Abe has made some progress on growth-oriented reforms — the “third arrow” of his plan — such as trying to cut farm subsidies and deregulating the electricity sector, but his ambitious blueprint has also put him on a collision course with the politically powerful agricultural lobby, among others.

“Japan desperately needs drastic structural reform to exit from deflation — the first and second arrows of Abenomics are phony,” said Satoru Madono, a Reitaku University economics professor.

Tags : japan, vote, confidence, faces, Abenomics

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