Since Shinzō Abe was an archery player in college, it is apt that his plan for turning the Japanese economy around is described as encompassing three arrows. Last December, when it became clear that the Liberal Democratic Party would emerge victorious in lower house elections and return Abe as prime minister, “Abenomics” sparked confidence in a public hungering for reforms.
Indeed by spring, there was growing belief that the economic reforms might just beat deflation and lift Japan out of its doldrums. The Nikkei 225 stock average had climbed some 80 percent by May from its November lows and the yen‘s value had greatly depreciated, encouraging exporters. In addition, there was evidence that inflation was starting to creep back into the economy.
But after five months in office, the market began to get nervous about the lack of details in a key part of Abe’s plans: the restructuring of the economy, the “third arrow.” This nervousness soon translated into volatility in the Japanese market, creating further uncertainty. The third arrow would always be the hardest to push through because it encroaches upon Japan’s vested interests.
Monetary policy, the first arrow, consisted of persuading the central bank to raise its inflation target from 1 to 2 percent so it could print more money. Haruhiko Kuroda surprised no one when he complied after taking over the reins at the Bank of Japan in March.
The second arrow was largely a reprise of previous government policies of pumping borrowed money into the economy. Abe promised that ¥10.3 trillion ($116 billion) would be directed for bridges, highways and other infrastructure.
The main act was Abe’s plan for restructuring the economy. Japan needs to open up to foreign competition, not only for the sake of Japanese consumers and producers themselves but also if the country intends to join the Trans Pacific Partnership free-trade area, something it said it wanted in December of last year.
Early this month, in a bid to calm the market, Abe gave a speech about his restructuring plan. He pledged to raise incomes by 3 percent annually to protect purchasing power when the Bank of Japan achieves its inflation target and raise per capita income by ¥1.5 million ($15,000) in in ten years’ time. He also called for greater renewable energy expenditures.
Abe’s proposals were dismissed as timid. The speech fell flat. The market had expected something more substantive and sold off 20 percent of its value, thereby entering bear market territory.
The whipsaw action marks the return of volatility in Japanese politics which has seen a new prime minister introduced almost every year. Abe’s honeymoon has clearly ended.
However, with upper house elections due next, there was slim chance that Abe would lay out painful reforms and jeopardize the ruling party’s chances. As it is, the Liberal Democrats are expected to win.
It seems Abe is biding his time until after the elections when he will also be able to restructure his cabinet and give the reforms a better chance of succeeding.
The reforms are extensive and needed. Unequal gender compensation and government layoff restrictions on the private sector need to be addressed. Women do not earn equal wages with men nor do they receive the same opportunities for advancement. Many of Japan’s companies are forced by government edict to remain overstaffed and therefore a drag on the economy. The agricultural sector is uncompetitive, reliant on state protections and subsidies.
First quarter results released two weeks ago, covering the January to March period, showed the economy expanding at a 4.1 percent annualized rate. Growth was driven by the weaker currency which benefited exporters while global demand for Japanese products is increasing.
Abe’s strategy of delaying the details of his reform plan until after the elections risks causing further damage to the markets in the meantime. Consumer confidence could erode and yet prevent the Liberal Democrats from taking control of the upper house in July. If they lose the election, Abe’s entire reform effort could end before it even began.