How has Japan fared in its economic experiment-'Abenomics'? 
Inflation v/s Wage Growth
Bank of Japan has been successful in meeting its intermediate inflation targets , however the long term inflation expectations have remained below the target of 2%. The key concern is that people are still uncertain about Japan's commitment to maintaining high inflation.
Another concern is that the increase in inflation has offset the increase in the nominal wages, thus signalling that the real wages have not really risen. OECD has warned that Japan’s economy could face a slowdown if inflation goes up without wage expansion as OECD cut down its projections for the country’s economic growth in 2014 from 1.6% in November to 1.2% in their last bi-annual meeting.
Rising Business Confidence
On one front where the policy has definitely scored well is business confidence. It has successfully boosted confidence in the economy which has played a major role in stimulating growth above the sub 1 level. Shinzo Abe, supporting his policy framework , while addressing the OECD in Paris recently, highlighted that his economic policies have been successful in lowering down the unemployment rates and the job offer ratio now stands at 1.07 per jobseeker. He also mentioned that corporations are optimistic of Japan's revival and many of them have raised salaries of employees by up to 2%. The real question that the Prime Minister needs to answer is whether the real wages have actually risen or is he conveniently ignoring the ill-effects of his policy?
A major concern at this point is that though the corporate profits are increasing , desired amount of productive investments have not been seen which shows that until further reforms are undertaken, the first two arrows of Abenomics might not be able to sustain growth in the economy.
Fighting fiscal imbalance
One major area where Abenomics as a policy is likely to falter is the heavy reliance on government spending to increase demand and start the virtuous cycle of growth. With the government debt staggering at 230% of GDP, the sustainability of the plan is highly unlikely. The government can no longer infuse demand in the economy at the cost of their precarious fiscal health.
A positive step towards fiscal consolidation taken up by the government in Japan is to increase the consumption tax from 5% to 8% in April 2014. According to estimates the rise in consumption tax would lower the fiscal deficit by close to 1% of the GDP in Japan. However, the increase in tax is contradictory to the entire approach of Abenomics. The consumption tax increase is likely to reduce demand in the economy with the households cutting down on their expenditure. This would further heighten the central problem with Abenomics, eroding household wealth even more as inflation exceeds the increase in nominal wages (as mentioned above).
Increased exports but a worsening Balance of Trade
The rapid weakening of the currency has added pressure on the cost of imports and thus the value of imports has been rising over the months (barring a few exceptions). The rise in exports has failed to overcome this as reflected in the balance of trade which shows a downward trend despite Japan's latest efforts.
There is no denying that Japan's long stagnant economy has picked up in the past with the economic reforms in the name of 'Abenomics'. Demand has increased, increasing prices to corporate houses, business confidence and returns in the stock market. However it has not been a win-win situation. Consumers have been hurt by the price hike beating the hike in wages. The much desired spill-over from increased corporate income to household wealth has not been completely achieved. If Japan's has to revive the economy three things need to be targeted- Increasing expectations of inflation and growth; increased private investment and fiscal consolidation(controlled budget) ; and proper implementation of the structural reforms.
- Jasmine Makkar
Jasmine Makkar is a first year PGDM- Finance Student at SPJIMR. She has completed her graduation in Economics(H) from Lady Shri Ram College, DU. She enjoys writing, dancing and is a theatre enthusiast.
Follow Jasmine at jasminemakkar.insideiim.com
Inflation v/s Wage Growth
Bank of Japan has been successful in meeting its intermediate inflation targets , however the long term inflation expectations have remained below the target of 2%. The key concern is that people are still uncertain about Japan's commitment to maintaining high inflation.
Another concern is that the increase in inflation has offset the increase in the nominal wages, thus signalling that the real wages have not really risen. OECD has warned that Japan’s economy could face a slowdown if inflation goes up without wage expansion as OECD cut down its projections for the country’s economic growth in 2014 from 1.6% in November to 1.2% in their last bi-annual meeting.
Rising Business Confidence
On one front where the policy has definitely scored well is business confidence. It has successfully boosted confidence in the economy which has played a major role in stimulating growth above the sub 1 level. Shinzo Abe, supporting his policy framework , while addressing the OECD in Paris recently, highlighted that his economic policies have been successful in lowering down the unemployment rates and the job offer ratio now stands at 1.07 per jobseeker. He also mentioned that corporations are optimistic of Japan's revival and many of them have raised salaries of employees by up to 2%. The real question that the Prime Minister needs to answer is whether the real wages have actually risen or is he conveniently ignoring the ill-effects of his policy?
A major concern at this point is that though the corporate profits are increasing , desired amount of productive investments have not been seen which shows that until further reforms are undertaken, the first two arrows of Abenomics might not be able to sustain growth in the economy.
Fighting fiscal imbalance
One major area where Abenomics as a policy is likely to falter is the heavy reliance on government spending to increase demand and start the virtuous cycle of growth. With the government debt staggering at 230% of GDP, the sustainability of the plan is highly unlikely. The government can no longer infuse demand in the economy at the cost of their precarious fiscal health.
A positive step towards fiscal consolidation taken up by the government in Japan is to increase the consumption tax from 5% to 8% in April 2014. According to estimates the rise in consumption tax would lower the fiscal deficit by close to 1% of the GDP in Japan. However, the increase in tax is contradictory to the entire approach of Abenomics. The consumption tax increase is likely to reduce demand in the economy with the households cutting down on their expenditure. This would further heighten the central problem with Abenomics, eroding household wealth even more as inflation exceeds the increase in nominal wages (as mentioned above).
Increased exports but a worsening Balance of Trade
The rapid weakening of the currency has added pressure on the cost of imports and thus the value of imports has been rising over the months (barring a few exceptions). The rise in exports has failed to overcome this as reflected in the balance of trade which shows a downward trend despite Japan's latest efforts.
There is no denying that Japan's long stagnant economy has picked up in the past with the economic reforms in the name of 'Abenomics'. Demand has increased, increasing prices to corporate houses, business confidence and returns in the stock market. However it has not been a win-win situation. Consumers have been hurt by the price hike beating the hike in wages. The much desired spill-over from increased corporate income to household wealth has not been completely achieved. If Japan's has to revive the economy three things need to be targeted- Increasing expectations of inflation and growth; increased private investment and fiscal consolidation(controlled budget) ; and proper implementation of the structural reforms.
- Jasmine Makkar
Jasmine Makkar is a first year PGDM- Finance Student at SPJIMR. She has completed her graduation in Economics(H) from Lady Shri Ram College, DU. She enjoys writing, dancing and is a theatre enthusiast.
Follow Jasmine at jasminemakkar.insideiim.com