BCCJ Event June 2015

Is Abenomics working?

 A look at debt, deflation and economic growth

The Japanese government is missing no opportunity to play up the successes of its sweeping Abenomics measures, with analysts agreeing there have been some positives to date including the Nikkei nudging a 15-year high, a move in the value of the yen, and unemployment figures going in the right direction.

Tom Jackson, first secretary and head of the Economic and Trade Policy Team at the British Embassy Tokyo, shared thoughts on Abenomics at a “Brown Bag Lunch” event for members of the British Chamber of Commerce in Japan (BCCJ) on 27 May.

Japan’s colossal national debt—standing at ¥1.053 quadrillion and a shade over 240% of GDP—is one key challenge Japan faces, Jackson said, adding that, “the issue is that this debt is structural rather than cyclical.

“Some degree of cyclical debt is a recognised part of the business cycle, but structural debt is more serious and can suggest there may be underlying long-term issues with the economy that are potentially serious”, he said, pointing out that Japan’s annual debt servicing costs alone are larger than the total GDP of Singapore.

Then there is the budget conundrum, he said. The government has set a target of balancing the nation’s books by 2020, “but this is enormously challenging and it’s not clear how Japan will meet its target”.

To make the situation worse, the population is shrinking and ageing, which has implications for tax revenue and expenditure. Raising the rate of consumption tax in April 2014 was designed to go some way to addressing that problem. However, it had an impact on consumption patterns in a way that introduced further challenges.

Undaunted, the government is going ahead with the second phase of the tax rate hike, scheduled for 2017.

The fight to overcome deflation has been a key element of the economic policies laid out by Prime Minister Shinzo Abe, with quantitative easing put forward as the cure. The Bank of Japan is currently injecting ¥80trn into the economy each year, with the aim of lifting inflation to 2%.

“We are just over two years in and inflation is still hovering around zero”, Jackson said. This has led some people to question if and when this approach might start to have the desired effect.

Given the nature of the Japanese economy, he asked if Japan’s 2% growth target is realistic. There is a school of thought that suggests a more realistic rate of growth for a mature economy like Japan might be in the region of between 0.5% and 1%.

Even the seemingly positive recovery of the Nikkei to levels not seen in 15 years needs to be viewed with an element of caution, Jackson said, pointing out that the growth is being driven in part by monetary expansion. So, is there a danger that this could create the seeds of a bubble?

Critically, the third of Abe’s much-vaunted economic “arrows” needs to strike the bullseye. Should it fall short, Japan “will face major challenges in reaching its targets”, Jackson believes. Unfortunately, it will probably be a few years before anyone can judge whether the structural reforms Abe has been promoting have managed to take hold.

Discussions with BCCJ members touched on the need for Japanese firms to overcome their aversion to risk and, at the same time, invest more of their money in the domestic market and raise wages. Together, these moves should have the effect of increasing consumption.

Womenomics was also a focus of debate, with members expressing their frustration at the opportunities that are available to female employees here. It is unsurprising, they added, that so many of Japan’s brightest and best young women go abroad for a career.

Concluding the session, Jackson expressed his appreciation for the insights provided by the British business community in Japan, which will be helpful in forming a detailed picture of the Japanese economy.

“There are lots of opportunities here and we want to keep Japan at the forefront of people’s minds in the UK”, he said.