Abenomics Return to Fiscal Lever Shows Failure to Hit Goals

Updated on
  • Growth remains far from Abenomics target of 2 percent
  • Labor market, immigration reforms conspicuously absent

What Does Abe's Stimulus Plan Hope to Do for Japan?

Prime Minister Shinzo Abe’s return to the fiscal-stimulus lever that he first pulled three years ago showed how far he remains from hitting ambitious targets for reviving Japan’s economy.

QuickTake Abenomics

The cabinet Tuesday approved a spending-and-lending package totaling 28 trillion yen ($275 billion), including 4.6 trillion yen in outlays this year and just under 3 trillion yen further out. The administration completed its plan days after the central bank adopted a modest boost to its own stimulus efforts.

Behind the government’s move: public concern that the Abenomics program isn’t working. While voters were happy to give Abe a resounding win in an election for the upper house of parliament last month, polls have shown at least half of respondents say a policy rethink is in order.

Consumers, who will get some of the largesse in the fiscal package set to be approved by parliament by October, have yet to recover from the wallop of a sales-tax hike Abe allowed to go through in 2014. That’s contributed to at least three years of growth below 1 percent -- a far cry from Abe’s 2 percent goal.

"We definitely need to see a revival of private consumption -- that’s the source of weakness for Japan’s economy," said Tomo Kinoshita, chief market economist at Nomura Securities Co. in Tokyo. With the program, the gain in gross domestic product next year should be somewhat higher than Nomura’s current 1 percent projection, he said.

To read about the history of fiscal packages that did little to change Japan’s trajectory, click here.

Investors found little to cheer from the announcement, after optimism spurred by the padded headline figure for the overall package last week. The yen advanced 1.5 percent by the end of the trading day. The Topix index of shares slid 1.6 percent.

It was the second time in recent days the currency appreciated after a stimulus announcement. On Friday, the yen climbed more than 3 percent after the BOJ opted against stepping up use of its main tools, instead increasing its purchases of exchange-traded funds.

"The marginal effectiveness of monetary policy has been reduced after three years" of BOJ Governor Haruhiko Kuroda’s unprecedented efforts, Kinoshita said. "Because of that, the administration wants to stimulate the economy through fiscal policy."

The package -- the second to be compiled in the current fiscal year -- will include cash handouts of 15,000 yen for people on low incomes, NHK reported. A full breakdown of measures may not be available until the legislation is presented to the parliament. What the government did say Tuesday was that there will be a total of 13.5 trillion yen in "fiscal measures," of which 7.5 trillion yen is spending and 6 trillion yen is low cost loans.

"The bulk of the funds are one-off spending that may help in the very short-term, but once spent, has a little-sustained impact," Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York, wrote in a note. "What ails Japan and the reason it struggles to maintain positive growth momentum and stable prices are not that its ports are not deep enough or that its does not have enough maglev trains."

Instead, policy makers need to focus on boosting productivity gains, Chandler said.

Second Arrow

Fiscal policy is the second of Abe’s "three arrows" that were designed to revive a long-stagnant and deflation-plagued economy, with monetary stimulus being the first arrow and regulatory reforms the third. The prime minister, who swept into office on his reflation platform in December 2012, within months introduced a 10 trillion yen plus fiscal package to dovetail with efforts by his pick to lead the BOJ, Kuroda. 

The idea was that policy stimulus would help buy time for structural changes to lift Japan’s potential growth rate, allowing an eventual pullback. The efforts got off to a good start, with GDP rising 1.4 percent in 2013 and a slide in the yen stoking corporate profits.

"To ensure that the expectations for the exit from deflation created by the ‘first arrow’ and ‘second arrow’ do not end up being temporary, the vast quantities of funds which lie idle in companies must be directed towards investments that generate future values," the government said in describing its growth strategy.

For a QuickTake explainer on Abenomics, click here

Trouble is, companies didn’t deploy their money in investment and wages as the government hoped. Corporate cash holdings have continued to hit records. And the narrative changed when Abe implemented the 2014 sales-tax rise that he had inherited from his predecessor.

Twinned with disappointment on the inflation front with an historic slide in oil prices, and limited moves to address long-standing laws limiting immigration and constricting employers from firing employees, initial optimism about Abenomics has waned. While it might have shed entrenched deflation, growth remains in the stop-and-go pattern that predominated before Abe took office.

"The fiscal package is also somewhat disappointing in that many of its components will not serve much to bring about the desired transformation of the economy," Kazuo Ueda, who served as a BOJ policy maker from 1998 to 2005, wrote in a note for Eurizon SLJ Capital Ltd. this week.

"Given the society’s reluctance to accept large-scale immigration, the average Japanese will have to work more efficiently to raise output," Ueda said. "The rigidity of the labor market, however, has been a major obstacle to this end."

(Adds analyst’s comment ahead of ’Second Arrow’ subheadline.)
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