Japanese Prime Minister Shinzo Abe's bold economic stimulus plan, known as "Abenomics," has triggered a wave of optimism. Last week, the government reported that the country's $5 trillion economy enjoyed a growth spurt in the first quarter, expanding at an annualized rate of 3.5 percent. Sony, the beleaguered electronics powerhouse, returned to profit for the first time in five years, and the Nikkei stock average rose above 15,000 for the first time. Has Abenomics cured Japan's financial ills?
Abenomics has a hefty price tag — $1.02 trillion a year, with the government borrowing nearly 50 percent of every dollar its spends. And the aggressive attempt to boost Japan's economy has yielded results pretty quickly. Martin Fackler notes at The New York Times that Abe has injected Japanese consumers, especially wealthy ones, with a newfound exuberance. At a Tokyo financial district department store recently, $20,000 watches were flying off the shelves, and Fackler says Abenomics gets the credit for shoppers' willingness to spend.
[Abe's] plan, one of the world's most audacious experiments in economic policy in recent memory, combines a flood of cheap cash (doubling the money supply in two years), traditional fiscal stimulus, and deregulation of Japan’s notoriously ingrown corporate culture. The hope is that this will yank Japan from a debilitating deflationary spiral of lower prices and diminished expectations, stirring what Keynes called the "animal spirits" of investors and consumers.
And so it has. [New York Times]
But will it last? The quick payoff from Abenomics might help Abe gain strength ahead of elections scheduled for July, say the editors of the Financial Times, but it's probably just a sugar rush that won't turn around Japan's sickly economy in the long term.
Abe's policy cocktail is insufficient because Japan's growth challenge is structural at root, resulting from demographic change and a misallocation of investment. The ageing and shrinking of Japan’s population is a huge brake on growth. So is the country's wealth: Japanese manufacturers' outsourcing to lower-cost east Asian countries will and should go on despite a more favorable exchange rate. [Financial Times]
The bag of policies known as Abenomics, however, might only be the beginning. Anatole Kaletsky at Reuters points out that if the current plan does help Abe win a majority in the upper house of Japan's parliament, the Diet, he'll have newfound power to steamroll opposition and push through at least some of the structural reforms — such as greater international competition, higher female labor participation, employment deregulation, lower energy prices, and corporate taxation — needed to push the Japanese economy to the next level.
The reason is that Japan will have no choice. The fiscal and monetary expansion started in the first few months of Abenomics has been so extreme that there is no turning back. Unless Japan can achieve much faster economic growth, Abe's radical experiment with macroeconomic stimulus will create a debt and monetary overhang so huge that it will bankrupt the financial system and possibly trigger hyper-inflation.
In short, Abe has bet his country on the success of his economic program. He will now be forced to do whatever it takes to achieve strong growth, both through macroeconomic stimulus and structural reform.
The financial arithmetic of Abenomics means that tolerable stagnation is no longer an option for Japan. [Reuters]