Abenomics struggles to lift Japan out of economic doldrums

The bubble era when Japan, with its brisk exports and automobile dominance seemed poised to conquer the world economy, is a distant memory, and now the operative symbols for pulling Japan out of two decades of stagnation are three arrows.

Those arrows represent the three main goals of Abenomics — the policies of Prime Minister Shinzo Abe designed to revive growth and conquer deflation in a country that has been in the economic doldrums since the bubble burst in the late 1980s.

While a period of deflation might not give another country much pause, Japan has endured 15 years of declining prices — playing havoc with the balance sheets of companies that have taken out loans and putting the brakes on investment.

Not only is the world’s third-largest economy still suffering the after-effects of the devastating 2011 tsunami and the nuclear disaster at the Fukushima power plant, but it is carrying massive debt, the yen is weak, exports are still sluggish, there are labor shortages in some areas, and an April increase in the consumption tax has depressed consumer spending far longer than the government had expected.

“We recognize that this year is critical for Abenomics,” Vice Economy Minister Yasutoshi Nishimura told the Miami Herald.

The International Monetary Fund recently lowered its estimate of Japan’s economic growth this year to 0.9 percent, citing the stronger-than-anticipated contraction after the consumption tax hike.

Next year, the Japanese government is targeting economic growth at 1.2 percent, but the IMF projects the economy will grow just 0.8 percent.

During the go-go years of the 1980s, Japanese investors were snapping up properties in the United States, including residential real estate in Florida, and Japan ran huge trade surpluses with the United States. Protectionist sentiment grew in the United States, and then faded in step with the Japanese economy.

Now, Nishimura said, such trade frictions “seem to be a distant memory.” Japanese companies are still among the top foreign investors in Florida, and last year Enterprise Florida opened an office in Tokyo to encourage further investment.

The consumption tax hike remains the center of attention in Japan. Before the government increased it to 8 percent from 5 percent, consumers went on a spending binge. But after it took effect, there was a sharp drop in consumer spending that stretched through the summer, resulting in a 1.7 percent decline in Japan’s gross domestic product during the second quarter — 7.1 percent on an annualized basis.

“The dip in consumption was deeper and longer than the government expected,” said Kyohei Morita, chief economist at Barclays Securities Japan. Still, he thinks third-quarter growth will be sufficiently strong that the government will go for another tax hike next year.

Nishimura said first-quarter growth was enough to offset the disastrous second quarter and that the economy still performed better during the first six months of 2014 than it did during the same period last year.

The government will analyze third-quarter figures, which are due out Nov. 17, and decide in December whether to increase the consumption tax to 10 percent in October 2015, he said.

Bad weather in June and July depressed consumer spending and exaggerated the negative impact of the tax hike, Nishimura said. Another reason for lower consumer spending, he said, is that wages haven’t caught up with consumption.

“Those who are paid less are mainly the ones who are suffering,” said Morita.

Political maneuvering on the tax hike has already begun, with foes saying the fragile economy cannot handle another increase now and proponents arguing it is necessary to help offset ballooning debt and the social security needs of Japan’s graying population — the oldest in the world.

The three arrows of Abenomics are monetary easing, fiscal stimulus and structural reforms aimed at shoring up Japan’s finances. Hitting a bull’s-eye with that third arrow, which includes deregulation of services, agriculture and the labor market, is expected to be the most difficult goal of all.

“Delay in implementing the ‘third arrow’ of Abenomics could lead to lower growth and an over-reliance on monetary policy, thereby hurting regional trade and growth prospects,” the IMF warned in its latest Asia and Pacific Regional Economic Outlook Update.

The IMF has urged Japan to undertake “more forceful” structural reforms to uncork growth. That is key to reducing Japan’s heavy national debt, which is more than 200 percent of its gross domestic product — the highest level in the world. The U.S. Treasury Department also warned this week that Japanese monetary policy alone cannot substitute for “necessary structural reforms.”

“We need to deregulate the labor market and change the labor-contract law,” said Morita. “Large companies are quite reluctant to fire people and, therefore, to hire people because of concerns they’ll be charged with unfair firing. There’s a real lack of mobility in the labor force.”

But Japanese officials say the country is now on a moderate recovery path.

While Nishimura said progress has been made in slowing deflation, he conceded the Bank of Japan would not meet its inflation target of 2 percent by 2015.

Nevertheless, he said, “We have started to see results. We’ve started a good cycle ... companies are increasing wages and there is more spending and investment by companies.”

Another new measure that Japan hopes will boost spending is granting visitors from Indonesia, Vietnam and the Philippines five-year unlimited visas. Last year, Japan received more than 10 million foreign visitors, and the 2014 tally is running 25 percent over 2013’s.

Nishimura said the consumption of every 10 foreigners equals the consumption of one Japanese citizen.

While big companies may be reaping some benefits from Abenomics, that is not necessarily the case for small businesses.

“I don’t think any of the small companies think deflation is over,” said Hideko Tanaka, president of Hakusui-Sha, a Tokyo manufacturer of cocktail mixes that employs 20 workers. “The prime minister is at the forefront of Abenomics, and he can’t really go back, but sometimes we wonder if this economy will make it to the Olympics.”

Japan is scheduled to host the 2020 Summer Games.

Adding to Japan’s woes is the slumping yen, which has been at six-year lows against the dollar. That should have pumped up exports, but Nishimura said, “Exports haven’t increased as much as we expected.” Among the reasons, he said, are that many large Japanese companies have moved their production facilities overseas and that Japan has lost its competitiveness in small electric appliances.

Meanwhile, not one of the more than 50 nuclear reactors in the country has been operating since the Fukushima disaster. The process of restarting 48 reactors is underway, but none will resume operations until they have received regulatory clearance.

Companies such as Tokyo Electric Power Co. (TEPCO), which has held a regional monopoly on the generation, distribution and sale of electricity for more than six decades, have had to import natural gas for thermal power plants, resulting in significant cost increases and rate hikes.

“We are now more dependent on energy imports and, in that way, the disaster is still a negative for the economy,” Morita said.

But the government is trying to encourage competition among Japanese power companies in an effort to reduce electricity prices.

At the same time Japan is taking on short-term challenges, it also must deal with longer-term problems, such as its declining population and a dwindling workforce of younger workers who must support Japan’s huge aging population.

This story was originally published October 16, 2014 at 8:00 AM with the headline "Abenomics struggles to lift Japan out of economic doldrums."