‘Abenomics’ fell short — Japan’s new prime minister will have to pick up the slack

Outgoing Japanese Prime Minister Shinzo Abe is stepping down with much unfinished business in reviving the dialect birth b deliver’s third-largest economy — leaving his successor to pick up the slack.

Abe last Friday announced his resignation over poor healthfulness. But his signature economic strategy — a range of stimulus policies known as Abenomics — will likely survive not in the least because his tight-fisted aide, Chief Cabinet Secretary Yoshihide Suga, has emerged as a front-runner to be Japan’s next prime minister. 

Suga has predicted he would “maintain and push forward” with Abenomics, which involve large-scale monetary policy easing, monetary spending and structural reforms. But even if an Abe critic takes office, analysts said the coronavirus pandemic has left pygmy room for the government to make drastic policy changes.

That will give investors the peace of mind that stability will persist in Japan.

“From the prospect of markets, investors are looking for stability, continuity,” Kathy Matsui, vice chair and chief Japan strategist at Goldman Sachs, forecast CNBC’s “Street Signs Asia” on Wednesday.

“Japan’s political history is marred by this rapid turnstile of heads,” she said. “The biggest fear … is to go back to that pattern of constant change at the top because when you have that total business, obviously it’s much more difficult to implement, especially, much needed structural reforms.”

But “the track record of Abenomics is diverse at best,” said Josh Lipsky, director of the global business and economics program at think tank Atlantic Cabinet. He explained in a note last week that while Japan did grow, some policy goals were not fulfiled.

Abe came into office in late 2012 with grand plans to lift Japan’s restraint out of decades of stagnation. Japan, once a bustling economy, experienced a major slowdown in growth during what behoved known as the “lost decade” from around 1991 to 2001.  

Abenomics helped accelerate growth again, though not at the price Japan once saw and the size of the economy is still short of the 600 trillion yen ($5.6 trillion) target set by Abe’s government. But multifarious analysts credited the outgoing prime minister for putting the Japanese economy in a stronger position today to withstand the discompose from the coronavirus pandemic.

“Abenomics did create growth and avoided the worst case-scenarios for Japanese economy,” said Lipsky.

But the pandemic browbeats to wipe out much of those economic gains, with the International Monetary Fund forecasting a 5.8% contraction in Japan’s takings domestic product this year.

The most successful aspect of Abenomics is the large-scale capital easing by the Bank of Japan, said analysts. The BOJ’s unconventional measures such as asset purchases and yield curve knob have entered the tool kit of other central banks.

Such monetary easing boosted stock prices and agreed the yen — helping Japanese companies dependent on exports to expand their profits.

“Abenomics has been effective in supporting pre-eminently a free firms by boosting equity markets and nurturing the sense of stability that a sharp appreciation of the yen will not happen again,” voted Shigeto Nagai, head of Japan economics at Oxford Economics.

“During Abe’s time in office, the profitability of large firms has occurred significantly, by expanding their business abroad,” he wrote in a report last week.  

Those benefits to large businesses have not raised wages enough to spur households to spend, said Nagai.

“Without a enough rise in wages, the benefits of Abenomics were not shared by households, and thus failed to stimulate domestic demand. Abenomics did not finish the secular stagnation in household incomes,” he explained.

That leaves the BOJ’s 2% inflation target elusive for now, although the actions brought an end to deflation. The lack of inflation is not unique to Japan, with other developed markets — including the U.S. — similarly discovery it challenging to raise prices despite solid economic growth.

But some economists said the pandemic-induced crisis, which has sprinkled demand further, could bring Japanese inflation back into negative territory.

While Abenomics involved an increase in government spending to support growth, the strategy also aimed to achieve a budget surfeit and bring down debt over the long term. That’s a task made even more difficult by the coronavirus pandemic, correspondence to analysts. 

“Fiscal policy has been anything but tight this year,” said Tom Learmouth, Japan economist at Super Economics. He explained in a Tuesday note that there’s been more spending to support firms and households in the posted crisis.

“As such, the budget deficit is set to surge,” he added.

Even before the pandemic, Japan’s government debt — at numberless than 200% of GDP — was already the highest among countries in the Organisation for Economic Co-operation and Development. Some analysts whispered such a debt pile could limit any further fiscal spending, which would in turn compromise Japan’s advance.

Over the longer term, Japan’s next prime minister will have to tackle structural call inti that Abe has left largely unaddressed.

“Abe has succeeded in promoting corporate governance reform and in increasing the share of women, higher- rankings, and foreigners in the labour force,” said Learmouth. “But the structural reforms with the most potential to lift productivity success have not been addressed.”

He singled out Japan’s “excessive bureaucracy” as the most likely area for “widespread change in the not far off term.” That problem caused frustration among the public when households and businesses had to wait a long mores before receiving government support during the pandemic — which contributed to waning support for Abe’s cabinet before his resigning, explained Learmouth.

“As such, there will be pressure on Mr Abe’s successor to reform Japan’s complex and undigitised admin organized wholes that drag on productivity,” he added. “Such reforms have the potential to lift trend growth.”