By TOMOKO IWAKAWA
Ever since Shinzo Abe took office as the Japanese prime minister in December last year, he has embarked on unprecedented and bold economic policies, prompting optimism and praise. The Nikkei Index has risen by a whopping 70%, and the Japanese yen (JPY) has weakened by 25% since a year ago.
Political stability has been established now that the Liberal Democratic Party (LDP) has a majority both in the upper and lower houses. Abe’s recent go-to catchphrase is “Japan is back!”
Abenomics consists of “three arrows” with the sole focus on ending 15 years of deflation. The first arrow is “monetary easing.” This was achieved when Bank of Japan Governor Haruhiko Kuroda announced in April that it would expand its asset purchase program by $1.4 trillion in two years. This amount is unprecedented and is expected to double the money supply, also signing up to an inflation target of 2%.
The second is “fiscal stimulus.” This was achieved when the government revealed it will be spending $2 billion over the next 10 years on public works and measures to improve disaster preparedness. The spending cap on the annual budget that had been placed by the previous Democratic Party of Japan (DPJ) government was scrapped, and Abe’s LDP can go on a spending spree through its ultra-loose fiscal policy.
The first two arrows have been successful. The third and the most difficult one is “growth strategies within the private sector.” Policies in the third arrow include deregulation to become more business-friendly and welcoming to attract foreign capital into the country. But the recent focus has been on how to align both corporate and consumption taxes to international levels. The government wants to lower corporate taxes from 35% to 30%; this still compares to 25% in China and 17% in Singapore.
To offset this, they have increased the consumption tax from 5% to 8% in April of 2014, and then 10% in October of 2015. This created hot debates of whether it would stale the economic recovery with the all too fresh memory of 1997, when they prematurely raised the sales tax from 3% to 5% and consumer spending plummeted by 13% in the following quarter, followed by a recession. BOJ Governor Kuroda recently supported the PM to go ahead with the sales-tax hike, stating that if the economy stalls, he will back it up with further monetary stimulus. The Nikkei rallied and the JPY weakened immediately after this news.
My take: The first two arrows are a temporary adrenaline, but the third is where long-term structural changes need to happen. Japan already runs a budget deficit of 230% of GDP, the largest in the world, so fiscal discipline is extremely important to maintaining market confidence. A sales-tax hike to 10% is still cheaper than that of Europe. Now is the time for Japan to proceed with bold, even unpopular policies so that the third arrow hits the bull’s-eye!
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Tomoko Iwakawa is a vice president and senior foreign exchange advisor in City National Bank’s International department and has more than 25 years of experience in the financial services industry. Opinions expressed are not necessarily those of The Rafu Shimpo.