Fears and hopes loom surrounding ‘Abenomics’

The Japanese government's nominee for Bank of Japan (BOJ) governor Haruhiko Kuroda attends a hearings session at the upper house of the parliament in Tokyo March 11, 2013. Kuroda said the central bank should focus on influencing market expectations because there is "limited room" to lower interest rates further. <Reuters/Issei Kato>

Japan’s newly branded ‘Abenomics’ produces contradictory outlooks on its impact and the nation’s economic future. Abenomics, a buzzword Japan these days not only in Japan but also in global economic arena, refers to Prime Minister Shinzo Abe’s aggressive reflationary fiscal and monetary policies.

The equity market has been boosted by optimism surrounding Abenomics with the yen’s 10 percent decline against the dollar and 17 percent rally in Tokyo stocks this year. It is also having a strong effect on the IPO market which has jumped 67 percent from the beginning of 2013. Japanese mutual fund market enjoyed the largest monthly inflows in almost six years last February, raking in as much as $11 billion.

Since last November, Abe’s inflationary promises have helped drive the yen down about 20 percent against the dollar. A 1 percent decline in the yen typically boosts corporate Japan’s profits by about 1 percent. That’s why Japanese banks and big corporations said yes to Abenomics measures.

The other analysis is that Abenomics are doomed to fail and, at best, will turn out to be little more than a hope-fuelled rally and a somewhat weaker currency. A recent report by Reuters pointed out the fear is that Japan’s elder generation will revolt. If the prospect of higher inflation and taxes convinces them to start liquidating their roughly $7.4 trillion in assets, it could touch off a fiscal crisis that up-ends Abenomics before it gets a chance to work.

This view focuses on Japan’s demography, especially so-called ‘silver savers,’ elderly Japanese who helped build Japan into an export-driven industrial powerhouse in the 1970s and 1980s, and who are preparing to live off their savings and pensions. In the 20 years since Japan’s economic bubble burst, the economy has stagnated, but thanks to low-grade deflation the elderly’s purchasing power has steadily grown. Abe’s plan to revive inflation stands to reverse that trend by taxing the elderly to finance a bet on recovery.

Over the next 25 years, Japan’s per-capita gross domestic product tripled, thanks in part to policies similar in many ways to what Abe is prescribing today. Abe plans to spend 100 trillion yen over the next 15 months on infrastructure.

But Japan is much older and much more deeply in debt than it was in the 1960s. Japan’s government debt is proportionately the world’s largest at more than double the gross domestic product. Ninety percent of Japan’s debt is owed to Japanese investors, much of that either directly or indirectly to its silver savers.

Japanese over the age of 60 represent only about a quarter of the country’s 127 million people, but they own roughly 60 percent of its 1,156 trillion yen in household assets, according to Bank of Japan data – an amount roughly equivalent to the gross domestic products of Germany, France, Italy and the United Kingdom combined. Their ranks are only growing. By 2035, according to government estimates, 30 percent of Japanese will be 65 or older.

Much of their money is deposited in commercial banks, which faced with weak growth and low demand for loans, invest it in government bonds. The same goes for pension funds and life insurers, which tend to favor the security of low-yielding government bonds over the risk of assets in higher-growth economies abroad.

Abe’s initiative is that expectations of inflation will spur the elderly and their families to spend more, sparking a virtuous cycle of stronger domestic demand, job and income growth, resulting in higher tax revenues to whittle down debt. It is too difficult to estimate how much spending and tax revenue could rise. But inflation would lower the buying power of the money elderly Japanese earn on their bonds, and raise the amount they need to liquidate to fund retirement.

Abenomics consists of monetary policy, fiscal policy, and economic growth strategies to encourage private investment such as inflation targeting at a 2% annual rate, correction of the excessive yen appreciation, setting negative interest rates, radical quantitative easing and expansion of public investment. Fiscal spending itself will increase by 2% of GDP, likely raising the deficit to 11.5% of GDP for 2013.

Yuriko Koike, former Minister of Defence and National Security Adviser of Japan contributed an article to the Internet edition of Aljazeera giving an account on Abenomics. She said that the goal of Abenomics is a radical revitalisation of the Japanese economy that would end two decades of deflation and growing political and strategic uncertainty.

She put a grave emphasis on the replacement of the Bank of Japan(BOJ) governor. “While the world focuses on the gathering of cardinals in Rome to choose a successor to Pope Benedict XVI, a similar conclave is underway in Tokyo to choose BOJ’s next governor,” said the former Chairwoman of Japan’s Liberal Democrat Party.

Abe government has announced that Haruhiko Kuroda, the president of the Asian Development Bank and former vice-minister of Finance for International Affairs, will be its choice to succeed Shirakawa as BOJ governor. Abe’s nomination has been considered to promise to adopt much more aggressive money-creation measures in pursuit of growth.

Yuriko Koike’s explanation goes on to say that while the three arrows in Abenomics are fiscal spending, deregulation of cosseted sectors of the Japanese economy and monetary easing, the problem, from the start, was the third arrow.

The BOJ’s now former governor, Masaaki Shirakawa, holds very different views on fiscal and monetary policy from those on which Abe campaigned. It was Shirakawa who decided in March 2006 to end the quantitative easing that Prime Minister Junichiro Koizumi’s government had implemented at the beginning of 2004.

“Abenomics’ goal is to escape two decades of deflation. Its purpose is not to encourage the depreciation of the yen, despite complaints about the yen’s depreciation. With Europe’s economy showing no sign of recovery and growing concern about a Chinese slowdown, Japan cannot afford to continue to tread water. As a responsible international stakeholder, Japan must stimulate its economy to provide an additional catalyst for global growth,” she concluded.

The new BOJ governor has promised aggressive steps to raise inflation to 2%, sending Japanese shares higher.

But there are still fears that a prolonged and deliberate weakening of the Japanese yen could spark a currency war, if other countries that trade or compete with Japan were to also take steps to devalue their currency, in order to gain a trade advantage.