Abenomics Not Likely to Lift Japan Out of Sluggish Growth

Abenomics Not Likely to Lift Japan Out of Sluggish Growth

Statistics released Wednesday showed Japan recorded better-than-expected economic growth numbers in Q-1 of the year. However, economists said the real picture may not be as rosy as it looks to be based on preliminary statistics.

The reform plans championed by Prime Minister Shinzo Abe, known as Abenomics, are not likely to lift Japan out of sluggish growth, they said, citing the persistent deflationary risks and weak investment growth.

Abenomics, featuring aggressive monetary easing including the unprecedented and controversial negative interest rates, started off with much fanfare and pushed inflation into positive territory despite weak Crude Oil prices.

Then confidence in it failed dramatically over the last year or so.

Data released by the Cabinet Office showed that Japan’s real economic growth was 0.4% Q-Q in the 1st 3 months of the year, translating into an annualized growth of 1.7%.

That enabled Japan to barely escape a technical recession, defined as 2 consecutive Quarters of Q-Q contraction.

In particular, domestic personal consumption, accounting for around 60% of GDP, rose 0.5% Q-Q in real terms, an apparent improvement from the previous Quarter’s decline of 0.8%.

Things are not as good as they appear. In nominal terms, domestic personal consumption in Q-1 fell by 0.1% from the previous Quarter, indicating ongoing weak consumer confidence.

This is also confirmed by a Q-Q decline of 0.9% in the consumer confidence index in the month of April. The latest statistics showed that enterprises were not willing to increase their investment, which the government had hoped would function as the leading driver of an envisaged economic recovery.

In Q-1 of this year, investment by Japanese enterprises dropped 1.4% from the previous Quarter.

Economists said the initial signs of success of Abenomics may have been partly due to a weak Yen as the USD had been rising at that time. However, Japanese exporters have faced strong headwinds recently as the USD had been largely weak.

Abenomics failed to lift Japan out of deflationary risks, too. The central bank had repeatedly postponed the date for fulfilling the target of pushing the inflation rate up to 2%.

Abenomics has been used to galvanize corporate investment at the cost of domestic consumers as the Yen weakened Vs foreign currencies.

The Japanese government’s gamble of aggressive monetary easing has not been successful so far.

Even large enterprises were unwilling to increase their investments, partly due to their lack of confidence in Japan’s economic growth as the Yen is not expected to be persistently weak against the USD.

Statistics showed that they are sitting on cash.

The cash held by large Japanese enterprises in Y 2015 rose by 32.4% from 10 years ago, whereas their fixed asset investments increased by only 16.3%.

Japanese consumer confidence was affected by the weak Yen.

Abenomics consists of 3 pillars (arrows):

1. monetary easing
2. fiscal stimulus
3. structural reforms.

But economists say Japan has relied too much on monetary easing and less on fiscal measures and structural reforms. The extremely aggressive monetary easing has prompted other economies to voice their concerns over the potential spillover from such moves.

By Han Yang

Paul Ebeling, Editor