Tokyo, Aug. 1 (Jiji Press)–With a cloud of uncertainty hanging over the future of the Japanese economy amid the coronavirus crisis, the Abenomics economic policy framework launched by Prime Minister Shinzo Abe when he returned to power in late 2012 is on the brink of collapse.
The Cabinet Office officially confirmed Thursday that the Japanese economy reached a peak in October 2018 in the 71st month of expansion after its start in the month of the second Abe government’s inauguration, failing to renew its postwar record uninterrupted growth run of 73 months marked in the “Izanami” boom through February 2008.
Although the government aims to achieve economic growth in fiscal 2021, it is unclear whether the COVID-19 epidemic and the ensuing economic slowdown will be settled by then.
Growth Not Felt on Ground
When the second Abe administration was launched in December 2012, the prime minister declared that he would “forcefully advance economic measures” through the three arrows of bold monetary policy, flexible and timely fiscal policy, and growth strategy that spurs private investments.
The first arrow, unprecedented monetary easing by the Bank of Japan, drove the benchmark 225-issue Nikkei average up from around 10,000 yen at the start of Abe’s reign to 24,270 yen by October 2018.
The yen’s weakening, fueled by massive boosts to the money supply, helped companies including many in the manufacturing industry to log record earnings.
The retained earnings of corporations, excluding those in the financial sector, rose from 304 trillion yen in fiscal 2012 to 463 trillion yen in fiscal 2018.
But the strong corporate performance has not translated into a positive economic cycle of higher wages and stronger individual consumption as much as it was hoped.
According to Mitsubishi UFJ Research and Consulting Co., real wages adjusted for price changes rose by an annual average of 8.2 pct during the “Izanagi” boom from November 1965 to July 1970 and 1.5 pct during the “bubble” boom from December 1986 to February 1991. On the other hand, real wages during the most recent period of growth fell by 0.5 pct.
“It was an economic recovery that was not felt by many citizens,” Shinichiro Kobayashi, senior economist at the research company, said.
Fiscal Consolidation on Back Burner
Despite the long period of economic growth, which led to increased tax revenue, the Abe administration shied away from fiscal consolidation efforts. The government, fearful of triggering a premature end to the economic expansion, postponed raising the consumption tax from 8 pct to 10 pct twice until October 2019, after it first raised the tax rate from 5 pct in April 2014.
The growing cost of social security put a strain on the country’s finances, but frequent fiscal stimulus measures as part of the second arrow of Abenomics meant that the government was unable to whittle down its expenses.
The government response to the novel coronavirus crisis added to the fiscal woes, as it has launched economic stimulus packages totaling a record sum of over 200 trillion yen. The amount of outstanding Japanese government bonds is expected to soar from 705 trillion yen at the end of fiscal 2012 to 964 trillion yen at the end of the current fiscal year in March 2021, or 80 pct bigger than the size of Japan’s gross domestic product.
Sadayuki Sakakibara, chairman of the Fiscal System Council, which advises the finance minister, stressed the importance of pushing for fiscal consolidation during ordinary times, but by then it was too late.
Japan’s swift spiral of fiscal distress became apparent when international credit rating agency Fitch Ratings lowered on Wednesday the rating outlook for JGBs from “stable” to “negative.”
Third Arrow Flops
The Abe administration had initially planned to use the economic strength provided by the first two arrows of the Abenomics policy mix to push through a growth strategy and promote deregulation, in order to raise Japan’s potential economic growth rate, which reflects the economy’s long-term growth capacity.
But a financial market source suggests that “the expected third arrow did not fly,” as the government was unable to embark on necessary reforms.
The coronavirus crisis made apparent the sluggish speed at which Japanese society was adopting digital technologies, seen as one possible element of the third arrow.
According to a survey by the Japan Center for Economic Research, the average projection of real GDP for April to June this year among private economists showed a record annualized drop of 23.5 pct from the previous quarter.
In a meeting of the Economic and Fiscal Policy Council on Thursday, Abe said that bringing the struggling economy back on track for growth was of utmost importance for the government. Whether he can achieve the goal in such dire circumstances remains to be seen.