Abenomics in Peril

Prime Minister Shinzo Abe is running out of time to prove that Abenomics is more than just a series of monetary and fiscal adrenaline shots that will quickly wear off. Improving wage growth and increasing consumer demand, to give companies a reason to invest at home, are essential to his turnaround plan, meant to lift Japan’s economy out of its two-decade-plus funk. Consumers have cut their spending sharply in the wake of a three-point hike in the sales tax to 8 percent, and wages have failed to keep up with inflation, which rose after the higher tax increased the price of goods and services.

On Nov. 17, Japan announced a 1.6 percent drop in third-quarter gross domestic product. The decline followed a 7.3 percent contraction in the previous quarter. Two consecutive quarters of decline mean that Japan has entered its fourth recession since 2008. “Japanese households couldn’t withstand April’s sales tax with their real income falling with inflation,” says Masamichi Adachi, senior economist at JPMorgan Chase in Tokyo. The tax increase was designed to reduce the budget deficit, which is 9 percent of GDP, and the public debt, which is $8.5 trillion.