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A recovery in Japan’s economy will boost Indonesia

Publication Date : 26-02-2014


After many years of Japan seeming to matter less and less to the rest of the world, the country is making a comeback. There is much media focus on Prime Minister Shinzo Abe’s groundbreaking policies called “Abenomics”, the outlook for the yen and the prospects for Japan to make a decisive break with two decades of deflation and decline.

While the jury is still out on how successful Abenomics will be, the initial signs are encouraging. Japan is making a spirited return and this will be positive for Indonesia.

A more positive mind-set is beginning to take hold among corporate leaders and ordinary citizens since Abe took over as prime minister in December 2012. He has swiftly delivered on two parts of his “three arrow” strategy.

Monetary policy has been boldly transformed, with the Bank of Japan aggressively pumping money into the economy and moving away from its past hesitancy to tackle deflation. He has also introduced several large fiscal stimulus packages, the second arrow of his strategy.

Now Abe is beginning to push through structural reforms despite the political risks of doing so. This third arrow of his strategy has been criticized for being too timid but such a judgment is premature. A more reasonable interpretation is that Abe is introducing reforms steadily and at a pace that Japan’s conservative society can absorb. He has outlined a detailed plan for reforms and has already gone ahead with some of them.

The most important has been in agriculture, where 40-year old subsidies for producing table rice according to state-determined quotas will be abolished by 2019. Few had expected Abe to tackle such a sensitive issue as rice farming. Several other reforms have also been brought up in recent months on other touchy issues such as immigration (where highly skilled foreigners can now apply for permanent residence more easily), education (changes in entrance examinations) and policies to aid working women.

The Abe government has also encouraged firms to invest abroad, especially in Southeast Asia.

Reforms may be slow and cautious but the cumulative impact will become powerful over time.

Abenomics has delivered some important results. The yen has depreciated by about a quarter against the US dollar since late 2012, providing relief to Japanese exporters and boosting the profitability of Japanese companies. Exports
grew 9.5 per cent in January as a result. A critical improvement has been the turnaround in deflation - core consumer prices are now rising by more than 1 per cent annualized after years of decline.

Land values in more than two-thirds of major urban areas have started to rise as of the summer of 2013. The business sector is also much healthier - business failures fell 10.5 per cent in 2013 to the lowest level in 22 years as credit conditions eased as the central bank’s aggressive monetary policies boosted bank lending.

One area of concern has been the still-downbeat confidence levels of households. A recent survey showed that 73 per cent of respondents felt that they were not benefiting from Abenomics. That is why the decisive turnaround in the labour market is so important. With the ratio of job offers to applicants above one since November 2013, the excess labour that caused wages to fall 8 per cent from the 1998 peak is less of a drag. Indeed, large companies have been indicating that they are prepared to give wage increases this year - a vital step toward boosting consumer spending and the economy. If wages rise as we expect, the rise in the sales in April will not be as damaging to consumer spending as many fear.

Another reason to expect the improvement in Japan’s recovery to be sustained is that Japanese companies are likely to step up their capital spending. Service sector companies (about two-thirds of companies in Japan), in particular, are reporting a shortage of capacity requiring stepped-up investment. Once investment accelerates, the boost to employment and the multiplier effects on spending will allow economic growth to accelerate.
Japan’s return to economic vibrancy will offer tremendous benefits for Indonesia. Japan remains the third-largest economy in the world, accounting for about 8 per cent of world output. It is the sixth-largest source of foreign investment and the fifth-largest importing country in the world.

A turnaround will impact the world economy and Indonesia significantly.

Indonesia stands to be a major winner. First, a more confident Japanese corporate sector is indeed stepping up investment abroad in countries such as Indonesia, which offers a large domestic market that is growing rapidly. Indonesia is doubly attractive because China is less and less attractive to Japanese companies as the latter’s costs rise and political tensions erupt every now and then.

Second, stronger import demand from Japan will help Indonesia in two ways. Prices of commodities that Indonesia exports will be better supported if Japan recovers. The volume of demand for Indonesia’s commodity and manufactured exports will also rise.

Third, as the Bank of Japan steps up its monetary easing, Japanese portfolio capital will flow out in ever larger magnitudes. This is important at a time when the US Federal Reserve has started to reduce its monetary expansion, causing portfolio capital to flow out of countries such as Indonesia. Japan’s policies could thus offer Indonesia important protection against the sort of financial market volatility and pressures on the rupiah Indonesia had to endure last year.

Fourth, as an improving economy and easy monetary policies strengthen Japanese banks, they will be in a better position to help fund Indonesia’s massive infrastructure needs - in the way they did in the 1990s before Japan’s banking crisis and Indonesia’s financial crisis erupted.

Yes, there remain many risks for Japan given its aging society, high public debt and the many obstacles to structural reforms.

Still, it would be wrong to dismiss Abenomics as doomed to failure as some observers have done. The evidence of the past year shows that Abe and his allies are determined to press ahead with a revitalization of Japan.

Perhaps some of the measures needed will be too slow to materialize because of political or other hindrances. But the strong political will that is evident will over time overcome these challenges and eventually turn Japan around.
Such a turnaround in one of Indonesia’s most important economic partners can only be positive for Indonesia.

The writer is deputy chairman of the Indonesian Chamber of Commerce and Industry (Kadin) and chairman of the Indonesian-Japan Friendship Association (PPIJ).


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