The gamble that is Abenomics
- By Xu Changwen
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E-mail China Daily, June 7, 2013
Japanese Prime Minister Shinzo Abe on Wednesday fired the third arrow of "Abenomics" by promising to relax rules governing the sales of non-prescription drugs and allow selected cities to experiment with lower taxes and deregulation.
After being sworn in as prime minister at the end of 2012, Abe introduced "Abenomics" in an attempt to tide over the country's economic troubles. Abenomics includes "three arrows": quantitative easing, positive fiscal policies to stimulate demand and creation of sustainable growth.
The first two arrows, the depreciation of Japanese yen and a 2 percent rise in consumer prices index, have already been shot. The exchange ratio of the US dollar against yen increased from 1:80 to 1:101.52 on May 24, and then fell to 1:99.95 on June 5. Last year, the International Monetary Fund set the ratio at 1:100.47, while the Organization for Economic Cooperation and Development insisted that 1:103.9 was a more realistic ratio. So the ratio is close to Western economists' estimate.
The primary reason for the depreciation of the yen is the huge supply of banknotes. According to Bank of Japan data, the supply of money in the country will increase by 132 trillion yen to 270 trillion yen by the end of 2014.
The immediate impact of the yen's depreciation has been the increase in the value of some Asian countries' currencies against the yen. For example, the value of the Chinese yuan against the yen has increased by 18.5 percent. Likewise, the Indian rupee has risen by 17.12 percent, the Republic of Korea's won by 10.88 percent and the Thai baht by 20.17 percent.
This development may curb the economic recovery of these countries. Since more than 50 percent of the trade between these countries and Japan is settled in the Japanese currency, its depreciation has caused a decline in Japanese investment in these countries. Also, their exports have declined. For example, the ROK, one of Japan's main competitors, has seen a fall in the export of its oil products, automobiles and mechanical products.
The stock and debt markets of these countries, too, may come under pressure, because fears of the yen depreciating further could force more international short-term capital to flood their markets. That would not only cause their stock and debt prices to fluctuate, but also could lead to inflation.
The depreciation of the yen has had a negative impact on Japan too, and the country could enter a vicious circle of currency depreciation. Japan's trade deficit has been rising continuously. In 2011, it had a trade deficit of $32.28 billion for the first time in decades. The figure has increased to $87.11 billion last year, and the trade deficit could force Japan to increase its fuel imports, which, in turn, could lead to further depreciation of the yen.
Besides, the fiscal health of Japan has worsened. In 2012, Japan's budget deficit was 214 percent of GDP, the worst among the 31 OECD member countries. And it is expected to grow as the country increases its financial expenditure, which again could cause the yen to depreciate further.
Japan used to maintain a good balance of payments. But its international payment surplus has fallen rapidly since the 2008 financial crisis. In 2012, its trade surplus of current account ($4.7 trillion) was only one-fourth that of 2011. The trend is likely to continue, making Abenomics a gamble, the failure of which would trap Japan in the muddy pool of currency depreciation and recession.
Moreover, the three arrows are not an original concept, for many developed countries have tried out similar ideas. For example, after the 2008 financial crisis, the US Federal Reserve introduced three rounds of quantitative easing by lowering interest rates, stimulating the economy with $787 billion and taking measures to deal with bad bank loans to facilitate economic growth.
In the 1990s, Japan itself took measures to cut costs and lay off many workers to deal with its economic downturn. But since its action was confined to the fiscal and financial sectors, it could not solve the root problem. Not until 2002, when former prime minister Junichiro Koizumi introduced fiscal, financial and economic reforms, could Japan remove the biggest structural obstacles, such as bad bank loans, to economic growth. Experience shows that only structural reform can facilitate economic growth.
On Wednesday Abe finally shot the third arrow of his growth strategy by pledging to raise incomes by 3 percent annually and set up special economic zones to attract foreign businesses in order to boost economy. He also proposed to mobilize women in the workforce, boost private business and deregulate some sectors.
However, the third arrow will hit the target only if Abe can devise detailed policies and implement them, among which the economic structure reforms are the most difficult.
Abe has no choice but to shoot the third arrow, because Japanese bond, stock and currency markets have seen extreme volatility of late. Experts attribute the shockwave to the absence of a sound economic growth strategy.
Abe has to take more prescriptions in the third arrow, such as reforming the employment system to encourage labor flow, stimulating domestic investment to boost domestic demand, increasing rural and agricultural incomes, making trade more liberal and raising the contribution of free trade areas to the total trade volume from 19 to 70 percent by 2018.
These measures may have a radiant appeal to them and may cover almost all the problems Japan faces - from deflation and the outcome of Japan's entry into the Trans-Pacific Partnership to trade frictions and farmers' protests - but we have to wait to see whether they will be successful.
The author is a researcher at the Chinese Academy of International Trade and Economic Cooperation, affiliated to the Ministry of Commerce.
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