Tokyo, Japan – Bank of Japan Governor Haruhiko Kuroda recently demonstrated his flair for the dramatic by massively boosting purchases of Japanese government bonds to about $724bn a year in an effort to kick-start the world’s third-largest economy.
Stock markets reacted with a handsome rally after last week’s announcement, and the value of the Japanese yen fell against the US dollar to levels that haven’t been seen in about seven years.
It was Kuroda’s second big attempt to inflate the sagging Japanese economy. The first came in April 2013, shortly after he was picked to lead the Bank of Japan by Prime Minister Shinzo Abe in order to launch the recovery programme now widely known as “Abenomics”.
“In order to completely overcome the chronic disease of deflation, medicine should be taken until the end,” Governor Kuroda said Wednesday of the central bank’s latest bold move. “Half-baked medical treatment will only worsen the symptoms.”
|Haruhiko Kuroda, governor of the Bank of Japan [AP]|
Abenomics, at its heart, attempts to restore sustained growth to the Japanese economy.
Last year, Abenomics grabbed the world’s attention with its imagery of the “three arrows” – consisting of a large increase in government spending to put money in people’s pockets; printing massive amounts of yen to create inflation and encourage spending; and, finally, numerous structural reforms that would make the Japanese economy more efficient, rational, and ready to compete in the 21st-century marketplace.
‘Wake everybody up’
Martin Schulz, senior research fellow at the Fujitsu Research Institute, described Abenomics as the effort at “providing a boost, a push to the economy first, to wake everybody up”.
By almost all accounts, Abenomics was a political success at its start. Successive Japanese governments had tried to boost the economy many times before in recent decades through massive increases in public spending, but with Abenomics this was matched with additional printing of money, a clear inflation target, and a degree of political clarity that often seemed missing in the past.
But Abenomics is also dogged by two recurring challenges it may not ever be able to successfully face down.
One is the precise meaning of “structural reform” is contested and almost certainly involves politically unpopular measures. Another challenge is that all efforts to stimulate the Japanese economy are done in the shadow of awesome public debt, which now amounts to about 240 percent of the nation’s GDP, and the servicing of which absorbs about half of the nation’s tax revenues.
Economists consulted by Al Jazeera had sharply different opinions on whether or not Prime Minister Abe is serious about implementing such structural reforms.
Jesper Koll, head of equity research at JP Morgan Securities in Tokyo, has been a notable optimist about Japan’s economic prospects. He said he sees Abe moving along the right path.
“This really is about deregulating all the industries where old-style oligopolies have been very entrenched, whether that’s energy, healthcare, or agriculture,” Koll told Al Jazeera. “These industries are on the table and there is a deregulation drive going on.”
Takuji Okubo is chief economist at Japan Macro Advisors who doesn’t see the Abe government’s commitment to structural reform. “It’s basically all ‘growth strategy’. All sweet candy, but no whip.”
The overshadowing public debt no doubt made Abe feel obliged to follow through with the main legislative achievement of his predecessor, former prime minister Yoshihiko Noda, to hike the national consumption tax to boost government revenues.
Japan's problem is not a shortage of demand problem ... the point is that from here on our problem will be a shortage of labour.
However, raising the sales tax was precisely the sort of measure that would cause consumers to spend less, rather than spend more, as Abenomics aims for.
The consumption tax hike from five percent to eight percent did, in fact, hit consumer spending in Japan considerably more heavily than government officials had previously advertised. As a result, mid-2014 saw Abenomics lose much of its political lustre.
Spending instead of saving
Moreover, the signature policy of raising the inflation rate to the two percent level by 2015 was also looking like a rather doubtful prospect. While at one point earlier this year it had reached 1.5 percent, lately inflation was dropping back to about the one percent level.
This was a central concern to the Japanese government because Abenomics operates on the theory that citizens will be more willing to spend their money now instead of save it if they know that their cash will gradually lose purchasing power by simply holding on to it. This consumer spending, in turn, should boost demand for products and help industry with wealth creation as a whole.
Never mentioned by any Abe administration official in the public sphere, but definitely in mind, is a second “virtue” of inflation for government planners: that it silently reduces the real value of pension payments to senior citizens – a potentially crucial factor in light of Japan’s remarkably ageing society and its vast public debt.
On the whole, then, Abenomics was showing signs this autumn that it was actually failing to wake people up. After a sustained period of hopes and expectations, the economic eyelids were again looking distinctly heavy and tired.
And that explains why Bank of Japan Governor Kuroda decided to administer his new shot of monetary adrenaline now: To snap the nation back to attention and to signal his absolute resolve to meet his stated goal of two percent inflation in the Japanese economy.
The timing was also likely dictated by a difficult decision that Abe is expected to make at the end of this year, whether or not to raise the consumption tax rate from eight percent to 10 percent in October 2015. Such a move is permitted under legislation passed in 2012 by the Noda administration.
|Haruhiko Kuroda at a gathering of G20 leaders in Washington [AP]|
Not everyone is pleased with the Bank of Japan’s latest gambit. Kuroda even had difficulty receiving the consent of his colleagues on the central bank’s policy board, who approved the new monetary measure only on a 5-to-4 vote.
Banri Kaieda, leader of the largest opposition Democratic Party of Japan, was harshly critical, calling it “an extremely risky decision [that would] accelerate the selling of Japan”. He added printing so much additional money was “a forbidden move that would negatively impact the livelihoods of the people”.
Few economists see any real hope that Abenomics can actually return the nation to anything remotely resembling the high-growth era of the 1960s or ’70s.
Considering the accelerating reduction in the size of the Japanese workforce, sustained economic growth at even a rate of one percent annually would be a considerable achievement.
As much as the conservative Abe would be loathe to hear it, there is probably only one policy measure that could be a true game changer for growth in the Japanese economy, as highlighted by Hiromichi Shirakawa, chief economist at Credit Suisse in Tokyo.
“Japan’s problem is not a shortage of demand problem – of course demand is weak – the point is that from here on our problem will be a shortage of labour,” said Shirakawa, who added an open immigration policy holds the key to future growth in Japan.
“Compared to that, other reforms are much less important.”
But importing foreign workers to this island nation of 127 milllion people remains politically sensitive, and almost no analyst expects anything more than baby steps during the era of Abenomics.
Follow Michael Penn on Twitter: @ShingetsuNews