Abe Declares Deflation End as Growth Plan Confronts SkepticsBrian Fowler, Isabel Reynolds and Toru Fujioka
Prime Minister Shinzo Abe said the deflation that wiped out much of Japan’s growth the past 15 years and so stunted the economy that it slipped to No. 3 behind China, has ended and will be thwarted by new government policies designed to encourage business expansion.
“Through bold monetary policy, flexible fiscal policy and the growth strategy we have reached a stage where there is no deflation,” Abe, 59, said in an interview yesterday at the prime minister’s official residence in Tokyo. With the first sales tax rise since 1997 that took effect in April, “this was an extremely difficult time for management of the economy, but I believe we were somehow able to overcome it.”
Abe was speaking before his cabinet endorsed the most specific measures yet to deliver on his growth strategy -- the third part of a campaign to end declines in consumer prices and stoke investment. The government plans corporate-tax cuts, trade liberalization, reduced barriers for agricultural land consolidation, special zones of lighter regulation and the study of casinos as a way of spurring record numbers of tourists.
The steps are part of Abe’s strategy to restore Japan’s influence in a region where China is the dominant power. A strengthened economy would boost Japan’s appeal to nations from the Philippines to India as a counterweight to China, which caused concern among neighbors pressing its claims on disputed territories.
Eighteen months into office, the first two pillars of Abe’s platform -- monetary and fiscal stimulus -- have succeeded in kindling inflation, while failing to raise longer-term growth estimates. Unless companies unleash record cash and increase salaries and capital spending, the danger is that Abenomics ends up hurting purchasing power without reviving the economy.
“This may be the last chance for Japan to get out of stagnation -- Abe can’t afford to fail,” said Nobuyasu Atago, principal economist at the Japan Center for Economic Research in Tokyo, who previously worked at the central bank. “A difficult aspect of the growth strategy and regulatory change is that it will take a few years for them to clearly lift the economy.”
What’s now the world’s third-largest economy is 3.5 percent smaller than when Abe took office for the first time, in September 2006, when unadjusted for changes in the price level. The contraction eroded the tax base for a nation with the world’s largest public debt burden at an excess of 240 percent of gross domestic product, prompting Abe’s predecessor to enact a two-step rise in the consumption tax.
The change in the levy put the economy on a roller-coaster in the first half of 2014, with GDP jumping at an annualized pace of 6.7 percent in January-to-March from the previous quarter, when adjusted for inflation. The median estimate of economists surveyed by Bloomberg News is for a 4.4 percent contraction in the quarter through June.
“There was no other way to achieve an escape from deflation at the same time as restoring fiscal health,” Abe said in the interview, referring to what he calls his three-arrow strategy of reflation along with the sales-tax increase. “We want to achieve fiscal health by escaping from deflation and achieving economic growth.”
Abe said that among his policy initiatives he will aim to lower the corporate tax rate to 20 percent to 29 percent over a few years, from about 35 percent now. The rate is currently the second-highest in the Group of Seven, after the U.S., and compares with 23 percent in the U.K. South Korea’s rate is 24 percent.
“Abe has new momentum for reforms,” Robert Feldman, head of Japan economic research at Morgan Stanley MUFG in Tokyo, wrote in a report today. “The autumn focus in growth policy will be the extent and timing of corporate tax cuts.”
The ruling Liberal Democratic Party also wants a vote in the next session of parliament, which typically begins in September or October, to legalize casinos as part of a plan to boost tourism. Abe said in the interview that integrated resorts “can be one of the key elements” of the growth strategy.
His remarks on the end of deflation compare with past comments by government officials that Japan was in the process of escaping from deflation.
The prime minister’s comments yesterday came more than a year after a May 2013 roll-out of the outlines of his first growth-strategy approach. While investors initially applauded Abe’s plans, a lack of fast-track implementation, and the omission of bolder ideas such as allowing large-scale immigration to counter Japan’s population drop, or nationwide labor deregulation, has undermined confidence in the stock market.
The Topix index of stocks dropped 0.6 percent today, down about 3 percent for this year, after marking its fourth-biggest advance on record in 2013. The benchmark gauge traded at 1.2 times book value, compared with 2.7 for the Standard & Poor’s 500 and 2.2 for the MSCI World Index on June 23.
“We see a lot of funds, a lot of hedge funds, starting to take profits on the Japanese market,” Patrick Legland, head of research at Societe Generale SA, said in an interview with Bloomberg Television yesterday. “Gradually, maybe the economy is slightly picking up. Maybe salaries are also slightly picking up. But it’s far, far far below from what people expect to have a structural change in this economy.”
The International Monetary Fund projects less than 1 percent GDP gains each year from 2015 through 2017, with an estimate of 1.125 percent for 2019 -- an expansion less than the pace it recorded in the half decade before the 2008 global credit meltdown.
Bank of Japan Governor Haruhiko Kuroda said this week that while the government’s goal of 2 percent GDP gains on average over the decade through 2022 is ambitious, it’s not impossible to meet. Kuroda, picked by Abe to run the central bank last year, said in Tokyo June 23 that raising the nation’s growth potential is “mainly the responsibility of the government” and companies.
Kuroda’s BOJ fired Abe’s first arrow in the form of a pledge to double the monetary base in two years to achieve 2 percent inflation. The expansion of the bank’s balance sheet, mainly through purchases of government bonds, sent the yen tumbling 18 percent against the dollar last year.
The weaker yen, combined with the shuttering of nuclear reactors after the 2011 Fukushima meltdown, has pushed up energy import costs, contributing to inflation. The BOJ’s main gauge of consumer prices, which excludes fresh food, rose 3.2 percent in April from a year earlier. Kuroda said the pace of gains is expected to slow toward 1 percent through the summer, before accelerating to 2 percent during the fiscal year that starts April 1, 2015.
“Japan seems to be exiting deflation,” said Masaaki Kanno, chief Japan economist at JPMorgan Chase & Co. in Tokyo. “Even so, it’s mainly monetary policy that has led to the breakthrough, weakening the yen and generating inflationary pressures.”
Kanno, who previously worked at the central bank, said that monetary stimulus “bought time” for government officials and corporate leaders to make structural changes to lift Japan’s trajectory.
“Unless the government and companies really try hard to strengthen the economy, the BOJ’s massive easing will, in hindsight, be called morphine before the death,” Kanno said.
Japan’s exporters have seen profits climb with a more competitive exchange rate, contributing to the accumulation of a record 232 trillion yen ($2.3 trillion) in cash as of the end of March.
Seiko Epson Corp., a maker of communications equipment and electronic devices, has gained more than any other company on the index since Abe came to office on Dec. 26, 2012, rising more than 530 percent. Mazda Motor Corp, which makes about three-quarters of its vehicles in Japan, has climbed more than 200 percent as the yen declined against the dollar.
“To revitalize the economy, companies must strengthen their profitability,” Abe said in yesterday’s interview. “If they can regain vitality lost amid deflation, that will be reflected in the market.”
Abe, who resigned from his first term as prime minister in 2007 after illness and a loss for his party in elections to the upper house of parliament, said “innovation and corporate governance are extremely important to improve the profitability of Japanese companies and encourage them to increase wages, capital spending and dividends.”
Wages are still lagging behind inflation. Base salaries, which exclude overtime and bonuses, fell in April for a 23rd straight month.
Business leaders praised Abe’s strategy, while highlighting the importance of implementation.
“We want the government to complete legislation and have the budget for every measure that the government compiled,” Yasuchika Hasegawa, chairman of the Japan Association of Corporate Executives and chief executive officer of Takeda Pharmaceutical Co., said in a statement yesterday.
Sadayuki Sakakibara, chairman of Toray Industries Inc. and of the Keidanren business lobby group said “this growth strategy includes ground-breaking and varied polices, which will promote companies innovation, contribute to improved competitiveness and increase the nation’s living standards.”
Ultimately, boosting Japan’s potential may also require adding workers to an economy with a shrinking population. Abe has embraced the potential for increased numbers of working women, and a limited expansion of immigrants, tied to labor needs ahead of the 2020 Olympics in Tokyo.
“The easiest way is raising the female labor participation rate, considering that immigration is politically a difficult topic,” said Atago at the JCER. “Abe is tackling this, but we still have more room for women to enter into the labor market.”
Daiwa Securities Group Inc. and Goldman Sachs Japan Co. see Abe’s goal of having women in 30 percent of management position as difficult to achieve.
“Diversification is important,” Keiko Tashiro, who is set to become the first female employee on Daiwa’s board, said at a briefing in Tokyo today. “We need different people in our companies, on our boards and in our management because we need as a country to thrive and be a more attractive place to invest and do business.”
An incident in the Tokyo assembly this month highlighted how far Abe has to go in changing even his own party’s perception of the role of women. Ayaka Shiomura, a lawmaker, was subjected to sexist taunts in the Tokyo city assembly last week. She emerged as a national figure after male colleagues barraged her with insults at a legislative session where she spoke about the need to aid infertile women and single mothers.
The prime minister yesterday also underscored his goal of reducing limits imposed on his nation’s military, a move that would help strengthen its assistance for allies. While public support for Abe’s economic platform helped sweep him to office in 2012 and has seen him become Japan’s longest-serving head of government since Junichiro Koizumi, voters have been unsupportive of his efforts to bolster the military.
Approval of Abe fell to 43 percent, the lowest since he took office, with more than half of respondents opposing his push to allow a broader role for the defense forces to defend Japan’s allies, according to an opinion poll published this week by the Asahi newspaper. That’s down from a peak of more than 60 percent in the early months of his administration.
Pressed by a more assertive China and seeking to strengthen ties with the U.S., Abe has called for reinterpreting the country’s pacifist constitution -- imposed by the U.S. after World War II. The nationalist impulse could pay dividends in time, according to Nobel laureate in economics Robert Shiller, whom Abe has consulted on defeating what he calls his country’s “shrunken mindset.”
“There is evidence that patriotism drives animal spirits and maybe Japanese people need this,” Shiller said in an interview earlier this year. Abe “incited controversy with his patriotic statements, that, while basically harmless, annoy Chinese and Koreans -- and further present him as someone to be reckoned with,” he said.