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Is Abenomics losing steam?
Publication Date : 04-08-2014
Last month, I visited a large Japanese company that has long been a global household name in consumer products.
Speaking to its executives about the business outlook, I asked what they thought of Abenomics, the much-discussed economic stimulus policies introduced by prime minister Shinzo Abe towards the end of 2012.
They replied that while they had seen little direct benefit to their company, they had noticed one clear difference in Japan's economy over the past year: Consumers' attitudes had changed.
"People are willing to pay more for better products," they said, attributing this to more upbeat expectations for inflation and income growth due to Abenomics.
They cited one of the firm's flagship products, a high-end brand of watches sold mainly in Japan. Now that shoppers are flocking to premium labels, the top watches in that range are priced three times more than they were during the brand's launch 10 years ago, they said.
This perk-up in consumer sentiment was one of Abe's ultimate aims when he cast the "three arrows" of Abenomics soon after taking office.
His combination of monetary easing, government spending and proposed structural reforms was hailed as a potential game-changer for Japan's economy after two decades of stagnation. Rival Asian exporters eyed the sliding yen warily, but generally welcomed the boost that a revived Japan would give to the global economy.
But Abenomics' first flush of success - propelled mainly by a significant drop in the yen, whose strength was hurting Japanese exporters - seems to be fading.
Recent data has reflected this waning optimism, as well as the pain of Abe's move in April to raise the sales tax from 5 per cent to 8 per cent in a bid to bring Japan's huge public debt under control.
The hike has taken "a heavy toll on household consumption, residential investment and corporate capital expenditure," said Credit Suisse economists Hiromichi Shirakawa and Takashi Shiono in a report last week.
As a result, they have cut their economic growth estimates for the April to June period, ahead of the official figures due out next Wednesday.
Meanwhile, HSBC economist Izumi Devalier noted last week that weak domestic demand had contributed more than expected to the fall in manufacturing output in June.
"There are increased risks that private consumption will continue to be sluggish in the third quarter," she said.
Still, economists believe the impact of the tax hike will be temporary. More worrying are the persistent weakness in exports and the lack of a convincing rise in wages so far.
If they do portend a failure of Abenomics, that would deal a severe blow to Japan's efforts to restart its economy - all the more so now that both consumer and corporate sentiment have gained some momentum, which could signal the start of a virtuous circle of higher prices, wages and economic growth.
The oft-cited reason for why Abenomics has lost steam is that Abe has not followed through with the structural reforms needed to address Japan's demographic problems and market inflexibilities.
The International Monetary Fund (IMF) is the latest to echo this sentiment. In a report on Japan's economy last month, it said more "forceful" reforms are needed, such as boosting the labour supply and deregulating the agricultural and services sectors.
"As long as Japan continues to proceed with its reforms, incomes will rise and fiscal risks decline, which will be positive for the global economy," the IMF said.
Abe is surely feeling the pressure. The Nikkei stock index is down 4 per cent to date this year, and his popularity ratings have dipped below 50 per cent, the lowest since his election nearly two years ago.
To be fair, he has made some headway with reforms and is now reaching out beyond Tokyo to revitalise rural economies, many of which face dwindling populations as workers move to big cities.
But it will be a long slog yet to ensure that Abenomics solidifies the early gains made, rather than backsliding into a failed experiment.
- See more at: http://www.stasiareport.com/the-big-story/asia-report/japan/story/abenomics-losing-steam-20140804#sthash.JUr1Uwfv.dpuf