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Abenomics is in poor health after Nikkei slide – and it may be terminal Abenomics is in poor health after Nikkei slide – and it may be terminal
(7 months later)
Not long ago, Shinzō Abe was being heralded for the early success of his grand design to bring Japan out of a deflationary spiral that had haunted the world’s third-biggest economy for two decades.Not long ago, Shinzō Abe was being heralded for the early success of his grand design to bring Japan out of a deflationary spiral that had haunted the world’s third-biggest economy for two decades.
Soon after Abe became prime minister in December 2012, the first two of the three tenets of his “Abenomics” programme – monetary easing and fiscal stimulus – were having the desired effect.Soon after Abe became prime minister in December 2012, the first two of the three tenets of his “Abenomics” programme – monetary easing and fiscal stimulus – were having the desired effect.
In the first year of the programme, the Nikkei index jumped nearly 60%, and the strong yen, the scourge of the country’s exporters, finally ceded ground to the US dollar.In the first year of the programme, the Nikkei index jumped nearly 60%, and the strong yen, the scourge of the country’s exporters, finally ceded ground to the US dollar.
Related: Japanese stock market plunges 5% as global rout gathers pace
And in April 2013 came the appointment of Haruhiko Kuroda, a Bank of Japan governor who shared Abe’s zeal for deflation busting through ever looser monetary policy.And in April 2013 came the appointment of Haruhiko Kuroda, a Bank of Japan governor who shared Abe’s zeal for deflation busting through ever looser monetary policy.
But by Friday, at the end of a dismal week for the Nikkei share index, market volatility caused by renewed fears over the health of the global economy has left Abe’s prescription for economic recovery in jeopardy.But by Friday, at the end of a dismal week for the Nikkei share index, market volatility caused by renewed fears over the health of the global economy has left Abe’s prescription for economic recovery in jeopardy.
While, as some suggest, it is too early to read the last rites for Abenomics, few would disagree that its symptoms are in danger of becoming terminal.While, as some suggest, it is too early to read the last rites for Abenomics, few would disagree that its symptoms are in danger of becoming terminal.
There is damning evidence for that claim; enough, in fact, for Abe to reportedly summon key economic advisers on Friday to discuss a way out of the impasse.There is damning evidence for that claim; enough, in fact, for Abe to reportedly summon key economic advisers on Friday to discuss a way out of the impasse.
Japanese shares registered their biggest weekly drop for more than seven years after shedding 4.8% for the Nikkei’s lowest close since October 2014. That took the index below the 15,000 level investors regard as a psychological watershed, and erased all the gains made since the Bank of Japan made the shock decision in October 2014 to inject 80tn yen into the economy.Japanese shares registered their biggest weekly drop for more than seven years after shedding 4.8% for the Nikkei’s lowest close since October 2014. That took the index below the 15,000 level investors regard as a psychological watershed, and erased all the gains made since the Bank of Japan made the shock decision in October 2014 to inject 80tn yen into the economy.
To compound the problem, another pillar of Abenomics – a weak yen – is also crumbling, with the Japanese currency rising to its strongest level for more than a year on Friday.To compound the problem, another pillar of Abenomics – a weak yen – is also crumbling, with the Japanese currency rising to its strongest level for more than a year on Friday.
The intention was for a weak yen to push up corporate earnings and help generate inflation by raising import prices; instead, companies are now cutting earnings forecasts as speculation mounts that Japan will again intervene to rein in the yen’s surge.The intention was for a weak yen to push up corporate earnings and help generate inflation by raising import prices; instead, companies are now cutting earnings forecasts as speculation mounts that Japan will again intervene to rein in the yen’s surge.
In recent weeks, slumping oil costs and soft consumer spending – the driving force behind 60% of Japan’s economic activity – have brought inflation to a halt. Official data released last month showed that Japan’s inflation rate came in at 0.5% in 2015, way below the Bank of Japan’s 2% target, as the government struggled to convince cautious firms to usher in big wage rises to stir spending and drive up prices.In recent weeks, slumping oil costs and soft consumer spending – the driving force behind 60% of Japan’s economic activity – have brought inflation to a halt. Official data released last month showed that Japan’s inflation rate came in at 0.5% in 2015, way below the Bank of Japan’s 2% target, as the government struggled to convince cautious firms to usher in big wage rises to stir spending and drive up prices.
In response, the Bank of Japan extended the deadline for achieving its 2% inflation target to the first half of the fiscal year 2017, from its previous estimate of the second half of fiscal 2016.In response, the Bank of Japan extended the deadline for achieving its 2% inflation target to the first half of the fiscal year 2017, from its previous estimate of the second half of fiscal 2016.
Related: Tokyo: the city that came out of the shadows
In fairness, Abe is partly the victim of factors beyond his control, namely China’s slowdown, weak overseas demand and plunging oil prices.In fairness, Abe is partly the victim of factors beyond his control, namely China’s slowdown, weak overseas demand and plunging oil prices.
The problem for Abe and Kuroda is that they are quickly running out of options: witness how the market boost from last week’s surprise decision to adopt negative interest rates ended after a couple of days with barely a whimper.The problem for Abe and Kuroda is that they are quickly running out of options: witness how the market boost from last week’s surprise decision to adopt negative interest rates ended after a couple of days with barely a whimper.
By the time Japan hosts G7 leaders this summer, Abe could be forced to concede defeat in his principal aim of dragging Japan out of deflation and boosting growth.By the time Japan hosts G7 leaders this summer, Abe could be forced to concede defeat in his principal aim of dragging Japan out of deflation and boosting growth.
But higher share prices and a weaker yen were only part of the scheme.But higher share prices and a weaker yen were only part of the scheme.
He has barely started to address the structural reforms comprising the “third arrow” of Abenomics: a shrinking and ageing workforce and the urgent need to boost the role of women in the economy.He has barely started to address the structural reforms comprising the “third arrow” of Abenomics: a shrinking and ageing workforce and the urgent need to boost the role of women in the economy.
Next year, he is expected to introduce a highly controversial increase in the consumption tax – a move that will help Japan tackle its public debt and pay for rising health and social security costs, but which could also dampen consumer spending, the driving force behind 60% of the economy.Next year, he is expected to introduce a highly controversial increase in the consumption tax – a move that will help Japan tackle its public debt and pay for rising health and social security costs, but which could also dampen consumer spending, the driving force behind 60% of the economy.
He may be inclined to disagree after a month of upheaval that also saw the resignation of his economics minister, but Abe’s troubles may be only just beginning.He may be inclined to disagree after a month of upheaval that also saw the resignation of his economics minister, but Abe’s troubles may be only just beginning.