Far from dying, Abenomics may yet be coming up roses

Is Abenomics a busted flush? To sceptics it must certainly look that way. Japan’s growth has faltered. A downward revision this week showed the economy expanded at an annualised rate of 1.5 per cent in the fourth quarter. That may not sound too bad for a mature economy that has not exactly dazzled in recent years. However, it comes after two quarters of sharp contraction. Output actually shrank in 2014, albeit by a minuscule 0.03 per cent. Negative growth, however minor, is hardly the “escape velocity” economists say Japan needs to shake off 20 years of deflation.

Banishing deflation was supposed to be the core of Abenomics, introduced by Prime Minister Shinzo Abe in December 2012. Here again, news looks bad. Haruhiko Kuroda, the central bank governor, promised to hit 2 per cent inflation within “about two years” of April 2013. He is now fudging. In the language of central bankers, apparently, “about two years” can mean three years or more. So much for transparency. Core inflation, which includes energy, is running at just 0.2 per cent. Unless oil prices stage a sudden rally, Japan could soon find itself back in deflation. Abenomics without inflation is like Hamlet without the ghost.

Weak inflation puts pressure on the Bank of Japan to undertake yet more quantitative easing after its surprise second salvo last October. If it does not act, it could lose credibility both with markets and with a public that needs convincing inflation is here to stay. Low inflation stems in part from a policy blunder: last year’s three point rise in consumption tax just when consumers were being asked to spend. Instead, they snapped their wallets shut.

All this makes it hard to argue that things are going to plan. And yet the picture is more positive than it appears. The bigger reason for disinflation is the low oil price. That may present the BoJ with a quandary — but for the economy overall it is excellent news. Japan is a huge energy importer, more so since it closed its nuclear reactors after a tsunami struck the Fukushima plant four years ago. Cheap oil ought to do wonders for demand. It should also allay concerns about current account deficits. This year, Japan’s surplus should hit a robust 3 per cent.

Crucially, disinflation may be a prelude to demand-led inflation. How might this work? After Abenomics was launched, inflation rose quickly to about 1.5 per cent on the back of high oil prices and a weak yen. While economists celebrated, consumers wondered where their spending power had gone. This year, precisely the opposite should happen. Corporate profits have never been higher. Exports are strong. Even sunset industries such as shipbuilding are making a comeback. As a result, companies — under intense pressure from the Abe government — may raise base wages in this month’s annual pay talks by up to 2 per cent. Even before this basic pay in January — excluding bonuses — was up 0.8 per cent on the previous year, the steepest rise in 15 years. A combination of flat or falling prices and higher wages could produce a mini-consumer boom.

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Nor is that potentially rosy scenario just down to cheap oil. The labour market is the tightest it has been in years. That is partly because, in spite of last year’s two weak quarters, output has been rising at above trend rate for more than two years.

Demographics are also playing a part. As the workforce shrinks, by about 300,000 each year, businesses from builders to care homes find themselves short of staff. Since Abenomics started, nearly 1m women have joined the workforce. Most have taken on lower-paid work but even this may be changing. There are tentative signs that companies are starting to put contract workers in better-paid full-time jobs, says Jesper Koll, director of research at JPMorgan. Japan, he adds, could be the only wealthy nation that is actually increasing the size of its middle class.

None of this means Mr Abe can breathe easily. There is still a looming debt problem even if, largely thanks to booming tax revenues, bond issuance has been cut below Y40tn for the first time since 2009. Even If a shrinking workforce provides a short-term fillip, in the medium term Japan will have to grapple with how to finance the needs of an ageing population. Those who put their faith in structural reforms also complain that “third arrow” of Abenomics has not yet left the quiver.

Yet, for all these concerns, the economy may well defy the pessimists this year and next. Certainly, it would be premature to declare victory. But neither is Abenomics dead and buried just yet.


David Pilling


Fonte: FT