The Economist
Abe agonistes
A party comes back from the dead, but still remembers where to find the switch for
the printing presses
Dec 22nd 2012 | TOKYO |From the print edition
SHINZO ABE, who will become Japan’s new prime minister on December 26th, is wasting little time in
offering the goodies. The leader of the Liberal Democratic Party (LDP), which staged a remarkable return
to power in elections on December 16th, has made reviving an economy sapped by deflation the central
goal of his “crisis-beating” cabinet. It is likely to start with pressure on the central bank to reflate the
economy. A big dollop of public spending may follow (smothering the country in concrete is an old
speciality of the party). As for Japan’s trade-damaging tensions with China, the hawkish Mr Abe wants to
put them to one side for now.
His startling victory brings back a prime minister whose previous year in office, in 2006-07, was a
shambles. It also brings back a party crushed in the general election of 2009. Mr Abe acknowledges that
voters gave him a decisive victory not out of love for his party or ideas, but out of despair at the outgoing
Democratic Party of Japan (DPJ) which, at war with itself, struggled to make policy. With a dozen parties,
the election field was crowded, dividing the anti-LDP vote. One newspaper columnist described the LDP
win as like choosing a plate of Japanese-style curry rice on a menu where nothing appeals: it was the least
bad option. Meanwhile, the party’s formidable powers of organisation also counted for something.
With 325 seats, the LDP and its coalition partner, New Komeito, have a “supermajority” in the 480-seat
lower house of parliament: that is, more than the two-thirds of seats necessary to override a veto by the
upper house, which the opposition controls. Amazingly, the LDP achieved this despite notching up almost
4m fewer votes than when it was routed in 2009. Support for the DPJ collapsed, in other words. It was the
third election in a row in which voters swung savagely against the incumbents. Given such volatility, it is
too early to expect a comfortable LDP victory in an election for the upper house next July. Voters swinging
like weathervanes are now the norm. But if offered decisive leadership—markedly absent for several
years—they may yet prove more constant.
Mr Abe promises to put his energies into fixing the economy. As well as an even looser monetary policy to
end Japan’s fifth recession in 15 years, he also calls for a burst of public spending of perhaps {Yen}10
trillion ($120 billion). It would be financed by more borrowing on the part of a state that already has debts
of over 200% of GDP.
Japan’s big-business lobby, Keidanren, is underwhelmed by all this. It wants Mr Abe to boost productivity,
for instance, by deregulating farming and medicine, both sources of LDP support. Still, presumably
because investors bet that Mr Abe’s views may prevail upon the Bank of Japan, on the day after the
election the stockmarket hit its highest level in more than eight months. A strong yen has reacted to
“Abenomics” by skidding to a 20-month low of nearly {Yen}85 to the dollar.
Mr Abe is pressing the central bank to set a hard target for inflation, of 2%. At present the bank has no
target, but rather a more loosely defined inflation goal, of just 1%. Feathers flew during the campaign as the
Bank of Japan hotly defended its independence. But as T he Economist went to press, its board members
were believed to be discussing an inflation target.
This suggests that the central bank wants a truce of sorts. It is not yet in the clear, however. Mr Abe has
floated the idea of rewriting the central-bank law, which may curb its independence. He has toyed with the
idea of issuing public bonds underwritten by the bank. Even if Mr Abe chooses not to carry out his
threats—such “fiscal financing” is highly unorthodox—he may still seek to appoint a more like-minded
central-bank head when the term of the governor, Masaaki Shirakawa, expires in April.
Mr Abe does not unveil his full cabinet until December 26th, though key figures are already known. One is
72-year-old Taro Aso, another former prime minister, and fan of manga comics, who led the LDP to defeat
in 2009. Mr Aso is rumoured to be the next finance minister. He will want to ensure economic growth that
both helps the LDP win the next upper-house election and allows the consumption (sales) tax to be raised
in 2014—a crucial step towards plugging the budget deficit.
Yoshihide Suga, a confidant of both Mr Aso and Mr Abe, is expected to have the crucial role of chief
cabinet secretary and government spokesman. Some fear that the new leader may pick a cabinet of friends,
as he did in 2006, with disastrous results. Yet Mr Abe has also retained a pragmatic former rival, Shigeru
Ishiba, as the party’s secretary-general. It may be a sign of tolerance for those outside his clique.
Hanging over Mr Abe are two questions. One has to do with the physical and mental strength of the 58year-old. Mr Abe stepped down in 2007 under immense strains. He says he is now taking proper
medication for his long-standing bowel disorder, which is affected by stress.
The other question is Mr Abe’s nationalism and his tendency to gloss over or even deny the worst of
Japan’s wartime misdeeds. At a time of heightened tensions over territorial disputes, he has it in his power
to undermine Japan’s standing with China and South Korea, while putting off ordinary Japanese at home.
Tomohiko Taniguchi, a former foreign-ministry official now at Keio University, says Mr Abe will seek to
strengthen relations with America, after a rocky patch under the DPJ. Closer relations with Asian
democracies, including Australia and India, will follow. But although improving ties with China and South
Korea will be a lower priority, Mr Taniguchi says, Mr Abe has learned from the “painful failure” of his
earlier term in office, when all his talk about “patriotism” and “righteousness” carried little weight with
voters.
He has not said whether he wants to take Japan into the Trans-Pacific Partnership (TPP), an American-led
free-trade grouping. The Keidanren is strongly for it. Farmers and other LDP backers are against. Mr Abe
seems privately to be in favour.
Whether or not Japan’s neighbours let him brush off tensions with them over territories and history may
depend on their new leaders. The attitude of China’s Communist Party chief, Xi Jinping, is unclear:
pragmatism may trump dislike for Mr Abe’s views. As The Economist went to press, South Korea was
electing a new president. Mr Abe, who is the grandson of a former prime minister once accused of war
crimes, has refused to say whether or not he will visit Tokyo’s Yasukuni shrine, which honours convicted
war criminals among Japan’s war dead. If he does go, he can expect a backlash from neighbours.
Should Mr Abe refrain and set about reviving the economy instead, however, it would do wonders for
Japan’s standing abroad. It would also be an unexpected thank you to the voters who cheerlessly put him
into office this week.
Japan's election
DPJ, RIP?
Dec 17th 2012, 14:13 by D.M. | TOKYO
NEVER known for hyperbole, Japan's outgoing leader, Yoshihiko Noda, was characteristically understated
last night as he digested his party's crumbling vote. "It's a very stern verdict," he admitted to the state
broadcaster, NHK. In fact, the result in the lower house of the Diet, Japan’s parliament, is an outright
disaster for the Democratic Party of Japan (DPJ). It lost two-thirds of its seats, leaving it only marginally
stronger than the Restoration Party, a right-wing upstart that did not even exist till this year. No fewer than
eight of the DPJ’s cabinet members lost seats, including the party's top spokesman and its finance minister,
making theirs the highest-ranking electoral casualties since the second world war.
That's a vertiginous fall for a party that delivered a political volcano just three years ago (recall our cover,
to the right), ejecting the Liberal Democratic Party from power for the first time (with one brief exception)
since the time of the Eisenhower administration in America. The DPJ pledged to wrest control from Japan's
powerful bureaucracy, rein in wasteful spending on public works and redirect about 10% of the national
budget towards building a social safety net, including a children's allowance of roughly $250 per head, per
family, which was intended to boost the nation's plummeting birthrate. Party leaders said they would
revolutionise the half-century-old alliance with America, closing foreign bases and ending Japan's supine
role in the relationship.
Japan's electorate must have felt yesterday they were voting for—or against—a different party, this time
round. Most of the DPJ’s left wing had already bolted, alienated by the party’s drift from its 2009
manifesto. Its prime minister, Yoshihiko Noda, has made little progress taming the bureaucracy, now
strongly supports the alliance with America and wants to cut welfare spending. He lost a great deal of
support by backing the return of nuclear power after the disaster at Fukushima, and then more by working
with the LDP to pass a controversial sales tax. His hapless predecessor-bu-one, Yukio Hatoyama, botched
the party's big showdown with American and Japanese diplomats over the relocation of an American
Marine Corps base in Okinawa prefecture. Many feel Mr Noda handled Japan's bitter territorial dispute
with China badly; this clearly drove some voters into the arms of the nationalist right.
It’s too early to say that the DPJ has flatlined—the party does, after all, still have 57 seats. But in some
ways that bald figure understates the magnitude of Sunday’s collapse. The key architects of the party’s rise
to power in 2009 have been humbled. A former prime minister, Naoto Kan, lost the race in his own
constituency on Sunday (though he managed to keep a seat, due to proportional representation), his
successor Yukio Hatoyama is retiring and Ichiro Ozawa, once the party’s biggest hitter, has been badly
wounded by scandal and a relentless hounding from prosecutors and the popular media. Perhaps more
importantly, after three years of infighting and flip-flopping, the DPJ are rudderless and adrift, lacking the
policy glue that might hold them together through the coming political storm.
The LDP’s leader, Shinzo Abe, is then surely entitled to look smug: just three years ago Mr Ozawa and
company thought they had driven a stake through the heart of his party. On closer examination, however,
this LDP victory looks rather less impressive. The turnout for Sunday's poll was the lowest since the 1996
general election, with 11m fewer voters turning out than in 2009. Underwhelmed by the stale political
smorgasbord on offer, millions of young people simply never bothered. This favoured older, conservative
voters, who typically vote for the LDP. Mr Abe won his election with less than 30% of the vote—a victory,
but hardly a mandate.
It has been a clear swing to the right, but not for Mr Abe. The Restoration Party took 54 seats, a solid result
but well below the 100+ that had been predicted by its architect, Toru Hashimoto. The conservative, probusiness Your Party won 18 seats. Mr Abe was candid in discussing the electoral verdict the day after,
acknowledging that it was less a vote of trust in his party than an expression of despair at their
predecessors. “It's [the voters’] answer to the past three years of political confusion,” he told NHK. “Now
we have to show we have earned that victory.” Mr Abe promises to undo some of the damage: reviving the
economy, repairing the alliance with America and rebuilding ties with China. His own party’s record in
office offers little room for hope. Regardless of Mr Abe’s prospects for success, his once high-flying rivals
face a very long climb back to power.
The Economist
Business in Japan
Appraising Abenomics
Things are looking up under the new prime minister
Apr 6th 2013 | TOKYO |From the print edition
IN A typical year Natume, a car showroom for the well-heeled in Tokyo, sells 300 Bentleys, Ferraris and
other posh rides. “This year we expect to sell 400-450,” beams Kenichi Oguma, the manager. He credits the
economic policies of Shinzo Abe, Japan’s new prime minister.
Japan’s stockmarket has risen by over 40% since November, when it became clear that Mr Abe’s Liberal
Democratic Party (LDP) would return to power. An eye-popping ¥10 trillion ($107 billion) fiscal-stimulus
package has cheered Japanese construction firms. On April 4th the Bank of Japan said it would try to
double the monetary base within two years, to end deflation once and for all. A weaker yen (talked down
by Mr Abe) has made exports cheaper, helping struggling manufacturers. The first Bank of Japan Tankan
survey of business sentiment under the prime minister’s watch shows the mood improving among
manufacturers for the first time in three quarters (see chart).
It is too early to conclude, however, that Mr Abe will revive the animal spirits that Japanese business has
lacked for so long. A survey by Reuters in February found that 85% of companies planned to keep wages
static or cut them this year. Bonuses, a crucial part of take-home pay, are at the lowest since records began
in 1990. Corporate reluctance to invest or raise pay could damage Mr Abe’s plans to end over a decade of
falling prices and re-inflate Japan’s economy by 2%. Figures released last week showed factory output
unexpectedly slowing in February, mainly because of falling demand from a sluggish Chinese economy.
Even this week’s Tankan survey found most companies still pessimistic about the future. On April 1st, the
day it was published, stocks in Tokyo fell by 2%.
The next day, however, Mr Abe’s cabinet approved an ambitious plan to reform Japan’s power industry.
The country’s electricity market is divided into regional monopolies, which keep prices high. Mr Abe
hopes to split these firms’ generating arms from their transmission arms, and allow competition in retail
sales of electricity.
If approved by the Diet (parliament), this would be the first serious reform of the power sector since the
1950s. Businesses and consumers have much to gain. Electricity costs three times as much in Japan as in
neighbouring South Korea. However, the reform is expected to meet obstacles. The power monopolies
lobby hard.
“There is a lot of expectation in this government but we’re waiting to see if recovery is self-sustaining,”
says Hiroshi Nishijima, area manager at Nishijimax, a supplier of precision tools to the car industry.
Thanks to Mr Abe’s yen-bashing, his products are now cheeper abroad. But Mr Nishijima says the prime
minister has little control beyond Japan. “There is a lot of uncertainty in the world economy now, so we’ll
keep our plans unchanged,” he says.
Worryingly for Mr Abe, that sentiment seems widely shared—and is unlikely to improve before an upperhouse election expected in July, says Shuichi Kawamura, president of DHL Supply Chain, a logistics firm.
The election could see the LDP in control of both houses of parliament.
“I think many of us are surprised at Abe; he’s better than we thought. But the economy can’t really get
going with parliament pulling in different directions,” says Mr Kawamura. He says many Japanese
businesses are also waiting to see if the prime minister can take Japan into the Trans-Pacific Partnership
(TPP), a free-trade zone. Farmers, a key LDP voting block, are digging in for a fight against the pact, along
with a reported 200 LDP lawmakers.
Afraid to harm a farmer
Japan’s cabinet office says the TPP could boost GDP by ¥3.2 trillion over a decade, or 0.7%. Defeating the
farm lobby and winning the election would help show that “Abenomics” is here to stay, predicts Hiroshi
Mikitani, the boss of Rakuten, Japan’s biggest online retailer. He praises Mr Abe for his fiscal stimulus and
monetary easing, but says the real test will be creating a “national growth strategy”.
By that he means reforms and deregulation, along with government-led industrial policy. He wants Mr Abe
to allow more drugs and other products to be sold online, a move that would create “huge efficiencies”, he
says. (And perhaps be of some benefit to online retailers such as Rakuten.) However, it would pit the prime
minister against Japan’s powerful medical lobby, another traditional LDP supporter.
A further worry is that Mr Abe, a staunch nationalist, has hinted that he might backtrack on war apologies
and visit the Yasukuni Shrine, where Japanese war criminals are deified, in August. That would provoke
China, Japan’s biggest trading partner. Bilateral trade has already suffered thanks to a dispute over some
small islands. Mr Mikitani predicts that Mr Abe will bury his nationalist instincts in the interests of
business. “He’s more diplomatic and smart than that.” And reforms? “I think he will succeed. How much
compromise he will have to make is the question. There are always compromises.”
NYT
Global Financial Leaders Avoid Public Rift With Japan Over Monetary Policy
By STEPHEN CASTLE and JULIA WERDIGIER
Published: May 11, 2013
Finance ministers from leading global economies on Saturday avoided a public rift with Japan over policies
driving down the value of its currency, while keeping up pressure on Germany to help lift growth in
Europe.
Related
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Times Topic: Group of Seven
At the end of two days of talks among the Group of 7 finance ministers outside London, other nations
appeared to accept — at least for now — Japan’s explanation that its new monetary efforts were meant to
stimulate its domestic economy, rather than to drive down the yen on international currency markets.
The chancellor of the Exchequer in Britain, George Osborne, said on Saturday that ministers from the G-7,
made up of the United States, Germany, Japan, Britain, Italy, France and Canada, had reaffirmed earlier
commitments on exchange rates and agreed to make sure policies are “oriented towards achieving domestic
objectives.” Other officials described the talks as in-depth and positive. Last week, the dollar breached the
100-yen mark for the first time in over four years.
The two-day meeting, in Buckinghamshire, also focused on efforts to stem tax avoidance and on banking
reform, and Mr. Osborne said it was “important to complete swiftly our work to ensure that no banks are
too big to fail.” The officials discussed efforts to create a European banking union, which have slowed in
recent months.
“We agreed on the importance of ensuring banks’ balance sheets are adequately capitalized to enable them
to play their role in supporting the economy,” Mr. Osborne said.
The talks took place against the background of growing austerity fatigue in Europe, and concern that the
Continent’s focus on reducing deficits and debt risked driving some economies into a downward spiral.
One United States Treasury official, who spoke on the condition of anonymity, said there was a recognition
that, because of the economic weakness in southern European nations like Greece, Portugal and Spain, it
was “more important than ever” to have higher private demand in the euro zone countries that are
performing better. Germany has the most room to lift demand, although the Treasury official did not
identify it or other countries by name.
The official added that recent, positive suggestions that France and Spain should have more time to reduce
their budget deficits would be helped by “a greater contribution of private demand” from better-performing
European countries.
But a German official, who also spoke on the condition of anonymity, disputed any consensus on that
point, noting that there was no official statement on the matter after the meeting. As planned, no
communiqué was issued after the event. The idea of stimulating domestic demand is contentious in
Germany, in part because of the risk of stoking inflation.
Nevertheless, the German finance minister, Wolfgang Schäuble, seen as one of the main architects of the
euro zone’s austerity policies, has shown some signs of greater flexibility and said, before the meeting, that
he supported the European Union’s move to give France and Spain more time for deficit reduction.
Slow growth in much of the developed world, and particularly in Europe, provided an uncertain backdrop
to the meeting, despite efforts by several central banks to stimulate economic activity.
“The question for global policy makers — and investors — is what will replace the austerity narrative,”
said David Bowers, managing director of Absolute Strategy Research. “Will we see — as America has
done — an increased emphasis on lowering unemployment to levels that eventually allow real wages to
rise?”
“Finance ministers may all be patting one another on the back as last year’s ‘black swans’ appear to have
all flown away,” Mr. Bowers added. “But instead maybe they should be thanking the Bank of Japan for its
radical shift in monetary policy. This is proving supportive for markets in the short term, though it is almost
certain to generate some unintended — and possibly undesirable — consequences in the medium term.”
Janet Henry, chief European economist at HSBC, said, “While the general mood is shifting towards one of
less emphasis on austerity, it is clear that there are still divergences of views between finance ministers,
particularly the European ones. Germany in particular still sees the need for ongoing fiscal consolidation to
be undertaken while the likes of France and Italy seem to be pressing for a marked easing of austerity.”
The Economist
Japan and Abenomics: Once more with feeling
The Shinzo Abe shaking up Japan’s economy seems a different man from the one
whose previous premiership was marked by nationalistic posturing. He isn’t
May 18th 2013 | TOKYO |From the print edition


IN “SOAPLAND”—Sopurando, a Tokyo red-light district—the price of a basic half-hour “massage” has
recently gone up for the first time since 1990. Demand for the top-end, “highly technical” massage service,
costing ¥60,000 ($600) a go, has also been soaring, according to Akira Ikoma, editor of My Journey, which
covers the sex industry. He says it is all thanks to the surging stockmarket.
In Sopurando they are cheekily calling this reinvigoration “awanomics”, from awa, meaning bubble or
lather. Elsewhere in Japan they call it Abenomics in honour of Shinzo Abe, elected prime minister in
December 2012. Japan, Mr Abe declared as he took office, was back, and he lost not a moment in proving
it. Having quickly assembled his cabinet, in January he announced a ¥10.3 trillion fiscal stimulus.
This was the first of three decisive steps. Mr Abe went on to launch what amounted to a hostile takeover of
a central bank unwilling to undertake bold experiments in monetary policy, clearing out the bank’s staid
leadership and installing as governor Haruhiko Kuroda, a former finance-ministry official who had been
serving as head of the Asian Development Bank. Mr Kuroda had long called for a more activist approach to
falling prices. Lastly, Mr Abe unambiguously committed himself to the sort of thoroughgoing structural
reform that has eluded Japan’s politicians for years. He signalled his seriousness by saying that he wanted
Japan to join the Trans-Pacific Partnership (TPP), an American-led effort to liberalise trade in the region.
Membership would require big changes to some of Japan’s most protected industries.
Three arrows of desire
Co-ordinated shifts in policy on such a scale would be striking in any country. They are staggering in the
context of Japan, where a famously consensual style of doing things long ago ossified into political
paralysis. The gentle people of a once powerful country stared weak-eyed at a future of apparently
inexorable decline, shaken by natural disasters, slumping stockmarkets, falling prices, a shrinking
population, and growing irrelevance—even scorn—abroad. Mr Abe’s dramatic rata-tat-tat of policy shifts
has excited and enthused them. His approval ratings, like the stockmarket, are booming.
Mr Abe refers to his monetary, fiscal and growth strategies as his “three arrows”. The reference, understood
by all, is to an old legend from Yamaguchi, the southern part of Honshu and the region from which Mr Abe
hails. Yamaguchi’s leaders have played a big role at key moments in Japan’s history, notably in the
overthrow of the Tokugawa shogunate in the mid-19th century, when imperial rule was restored and the
country was launched on a breakneck rush to secure economic and military might. The legend has it that a
lord asked his three sons to snap an arrow, which each of them duly did. He then produced three more
arrows and told the boys to snap all three at once. None of them could. One arrow, the father said, can
easily be broken. Three arrows together, like a bundle of birch rods, cannot. It was an exhortation to work
together for the good of the clan.
Thus Mr Abe’s dramatic reforms are dressed in traditional garb. And the conjunction provides a key to
understanding his project. In his brief and rather clueless first sojourn in the prime minister’s office six
years ago, Mr Abe presented himself as a traditionalist and nationalist, one prey to the often disturbing
historical obsessions of those who have never really come to terms with the defeat of their country in 1945
and the settlement subsequently imposed on it. Today’s Mr Abe presents himself as looking forward, not
back. But he is still animated by thoughts of a Japan that was. His goal is at least in part a revenant of what
he holds dear and lost: a Japan comfortable in its traditional values and bolstered by military prowess and
the international respect he sees as his nation’s due.
Well begun is half not done
The first of the three arrows to make a dramatic mark was the monetary one. In early April Mr Kuroda,
under orders to adopt an inflation target of 2% as a way to rid the country of its 15-year bout of deflation,
announced plans whereby the goal would be achieved within two years. His measures—doubling the
monetary base through an unprecedented programme of quantitative easing—exceeded everyone’s
expectations, and their daring was played up by Mr Abe’s advisers. They are convinced, and have
convinced their boss, that getting Japan out of its deflationary funk is less about policy details than
perception—in particular, about shaking people out of a deflationary mindset. The approach, one says, is a
kind of “shock and awe”.
It has, in the short term, worked awfully well, at least for investors. From peak to trough, Japan’s
stockmarket fell by four-fifths after the bubble burst in 1990. Now the stockmarket is up by over 70% in
just the past six months (see chart 1)—that is, since the time that an election victory for Mr Abe and his
Liberal Democratic Party (LDP) started to seem likely. Mr Abe’s administration has talked down the yen,
which has fallen from a high of ¥77 to the dollar last autumn to ¥101.8 this week. That has helped exporters
and cheered the stockmarket further. For the first time in years, Japanese savers are playing the market. Mrs
Watanabe, the archetypal small-time punter, is back.
Promoters of Abenomics say that changing perceptions will create a virtuous circle. Bigger company
profits will engender wage rises, which will boost consumption, which will lead to renewed business
investment, which will lead to profits. They will be overjoyed by preliminary figures, released on May
16th, showing an annualised GDP growth rate of 3.5% in the first quarter of 2013, though it is hard to see
how policies only then being announced can take all that much of the credit. In truth, the transmission
mechanisms that link monetary policy to economic outcomes remain fragile.
The animal spirits returning to the stockmarket have helped create a wealth effect, thanks to which people
feel better off. The slick, on-message selling of the new policies by ministers and their spin doctors has
built consumer confidence, too. Retailers are posting their biggest gains in sales in nearly a decade. There is
a palpable buzz in the after-work bars and restaurants of Tokyo. But it is essential to Mr Abe’s plans that
the monetary and fiscal stimulus should boost aggregate demand and raise prices more broadly. Nominal
GDP determines the level of tax revenues—and, astonishingly, persistent deflation has left it where it was
1991 (see chart 2). This has depressed tax revenues, a chief reason why the gross national debt has widened
to about 240% of GDP. Revived revenues are desperately needed.
Yet if the Bank of Japan succeeds in ending deflation, a fresh problem could arise. The bank’s purchases of
long-term government bonds and other assets through its programme of quantitative easing are designed to
depress their yield, and thus to spur banks, companies and institutional investors into seeking higher returns
elsewhere—either by investing in the real economy or by investing abroad (helpfully driving the yen down
further). But success in raising inflation expectations could lead to investors, uncertain as to how far such
success may go, demanding a higher risk premium for holding government bonds. The bond market has
recently become a lot more volatile.
Whatever the bond market does, a boost to aggregate demand is not enough to solve Japan’s budgetary
problems. Robert Feldman of Morgan Stanley MUFG, a financial-services company, highlights the stark
fiscal picture. In the budget for the year that ended in March, and across central and local governments,
total government spending on pensions, health care, nursing care and family benefits was ¥124.5 trillion, or
26.1% of GDP. But government revenue amounted to only ¥59.2 trillion, or 12.5% of GDP. Borrowing
largely made up the difference. Stabilising Japan’s national debt, Mr Feldman judges, requires moving
from a deficit before interest payments of 8% to a surplus of 3.2%. A doubling of the consumption tax, to
10%, is planned for 2014-15. But with a shrinking workforce having to support a growing number of
elderly, the necessary swing is simply too big for any plausible mix of tax hikes and spending cuts to deal
with.
All change
So Japan desperately needs a sustained increase in the long-run rate of economic growth. Hence the third of
Mr Abe’s arrows: sweeping reforms designed to invigorate the supply side of the economy. Mr Abe talks
of ending the protection enjoyed by Japan’s farmers, doctors and pharmaceutical companies; breaking open
the labour market’s rigidities; improving education; cutting through boundless regulation; opening utilities
up to competition; encouraging innovation and spurring business investment.
In pursuit of these ends Mr Abe has re-energised the bureaucracy. He has set up committees where cabinet
members sit beside bureaucrats, academics and business folk to come up with plans for the reform of the
regulatory system, industrial competitiveness, scientific and technological innovation, and so on. Mr Abe
himself chairs the most crucial committees, notably the Council on Economic and Fiscal Policy. They will
present proposals in June.
Farming has emerged as a priority. Some sectors are highly inefficient, with sky-high tariffs on rice and
dairy products, a superabundance of elderly part-time farmers, and land laws limiting the size of farm plots.
Joining the TPP will force big changes on the industry. Yoshimasa Hayashi, the farm minister, wants to
consolidate land into bigger plots to make it attractive for young entrepreneurs to get into farming and
market gardening, which will help food processing and restaurants, too.
In medical care, the government wants drugs to be more easily sold over the internet, and approved faster.
(Mr Abe’s backers have made a parable out of this: had he had access sooner to a wonderdrug for his bowel
disease, they say, he would not have suffered the breakdown which led him to resign in 2007.) Energy has
its own particular urgency following the nuclear accident in March 2011 at Fukushima Dai-ichi plant,
leading to the closure, if only for now, of nearly all Japan’s nuclear power stations. The government wants
to encourage competition in supply and investment in renewable energy as well as in a national
infrastructure for imports of natural gas.
The vim with which Mr Abe has loosed this third arrow is perhaps the biggest of all the surprises he has
sprung since returning to power. His staunchest supporters, including his chief cabinet secretary, Yoshihide
Suga, told him that committing to the TPP beforehand would endanger the LDP’s chances in July’s
elections for the Diet’s upper house. The farm lobby is, after all, an important plank of the party’s support.
Yet the prime minister insisted on doing it when he went to Washington in February. Delay, he thought,
would show a want of leadership.
Grandpop psychology
He seems to have been right. Mr Suga now calls TPP “the biggest pillar of reform”. He is the chief
defender of Mr Abe’s decision, and no wonder. Mr Abe’s poll ratings continue to climb; he enjoys support
of over 70%, unparalleled for a recent leader. The LDP looks set for a landslide in the upper house to match
the one it achieved in the lower house in December. After years of parliamentary gridlock, a Japanese
prime minister is set to have a governing mandate to do nearly anything he wants.
For those who followed Mr Abe’s brief and inglorious first term in office both the substance of the policy
pronouncements and the slickness of their delivery are something of a puzzle. The first Mr Abe showed
little commitment to bold economic change. He presided over a shambolic cabinet that made an art form
out of gaffes. Mr Abe himself got embroiled in a pointless row with neighbours and America over a pet
historical theme, claiming that wartime Japan did not enslave the women of conquered nations in militaryrun brothels. (The testimony of many women shows conclusively that it did.)
One explanation for the difference, put forward by several who know him, is that Mr Abe is a man who
learned better. They say his years in the political wilderness transformed him. He educated himself,
especially about economics. He resolved to avoid needless historical distractions. Residual displays of
nationalism are just tokens of gratitude to old friends who held faith with him after his resignation.
Economics trumps all now.
Others paint a slightly different psychological portrait. They say that two separate personalities exist within
the same man. One, the traditionalist, is the nationalist grandson of Nobusuke Kishi, who oversaw the
development of Japanese-occupied Manchuria in the 1930s, who was imprisoned as a suspected Class A
war criminal, and who later served as a notable conservative post-war prime minister. This nationalist Mr
Abe resents suggestions of Japanese war guilt and dislikes Japan’s “apology diplomacy” over its wartime
atrocities. He is of a similar mind to a cabinet colleague who calls the years since the war a “history of
Japan’s destruction” (never mind that the LDP was a chief beneficiary of the post-war decades, during
which Japan spread peace and prosperity). These were the beliefs that shaped his first premiership.
The other, very different, character dwelling in Mr Abe is the economic moderniser, who is also—witness
the TPP—an internationalist. The two are united in wanting a strong Japan. But whereas the moderniser is a
radical the nationalist is a reactionary. He is the Mr Abe who talks about overturning the “post-war regime”
and recreating a “beautiful Japan”. He insists Japan must project a strong image, not just through
strengthened armed forces, but by promoting patriotism and by harking back to an imperial idyll where the
country had both might and right.
The worry voiced by one senior LDP figure is that the internationalist’s beliefs are not as deep-seated as the
traditionalist’s. The LDP man worries about the traditionalist Abe gaining the upper hand, and with good
reason. Last month, in a meeting with Diet members, Mr Abe questioned whether Japan was really the
aggressor during its wars of 1931-45. The senior LDP figure lays his hopes in Mr Suga keeping Mr Abe’s
focus on the economy. “Not having a Mr Suga—this is what I am most concerned about,” he says. “An
Abe cabinet without Suga—it doesn’t bear thinking about.” It is hardly a ringing endorsement from a man
who was one of Mr Abe’s principal backers when he ran for his party’s leadership.
Japan stretches its sea legs
Yet a third interpretation of Mr Abe—one that looks to the external world rather than inner psychodrama—
is perhaps the most plausible. It is that his concerns about Japan’s economic weakness and his concerns
about frailties in its national defence have been strengthened, and made mutually reinforcing, by the rise of
China. China loomed on the agenda in 2006-07, but did not dominate it as it does today. China overtook
Japan as the world’s second-biggest economy in 2010. Its growing assertiveness suggests that it is out to
reclaim its centuries-old centrality in East Asia, a position which Japan usurped in the late 19th century and
occupied, in various ways, for much of the 20th. The most obvious instance of Chinese assertiveness is
around the waters of the Senkaku or Diaoyu islands, where China is openly challenging Japanese control.
In this context Mr Abe sees economic and national security as all of a piece—and would do so even if he
did not hang out with right-wing pals in a weird historical theme park of the mind.
Yet choosing backward-facing patriotism as a model for modern strength has consequences for how Mr
Abe is likely to govern after the upper-house elections. For all the current emphasis on structural reform—
continued work on which is vital if the fiscal stimulus and monetary expansion are to lead to long-term
growth—Mr Suga and other colleagues make it clear that constitutional change will be a priority for Mr
Abe in the Diet’s autumn session.
The emperor’s new constitution
Some amendments to the 1947 constitution, such as one acknowledging Japan’s clear right to a standing
army, navy and air force, are now broadly popular. But it is becoming clear that Mr Abe and the
traditionalists, pining for an imperial era from which most of the country has moved on, aim to go further
than that. They want, among other things: the emperor to be restored as head of state; collective duties
emphasised over individual rights; and veneration for the family unit. As a precursor to such changes, the
LDP plans to make it easier to amend a constitution which so far has never been altered. The current
process requires a two-thirds majority in each house, plus a national referendum.
At best, all this could prove a distraction at a time when some structural-reform initiatives already appear to
be running into the sands. At worst, it could endanger all reform by eroding the government’s popularity, at
the same time increasing tensions with Japan’s neighbours. Far from having banished the ghosts of his past,
as some of his advisers claim, the prime minister is in danger of summoning them up again.
Japan’s New Optimism Has Name:
Abenomics
Ko Sasaki for The New York Times
Kaori Nirei, in mirror, tried on a dress as her mother and daughter looked on at the Takashimaya
department store in Tokyo’s financial district. “I can’t believe all the people shopping,” she said.
By MARTIN FACKLER
Published: May 20, 2013
TOKYO — After years of grinding malaise, Japan suddenly has some of its bling back.
Related


Japan’s Economy Growing at 3.5% Annualized Rate (May 17, 2013)
News Analysis: As Japan Courts Growth, Europe Keeps Up Its Love Affair With
Austerity (May 17, 2013)
Prime Minister Shinzo Abe, whose economic shock therapy has had early successes.
A humbled Sony — once a titan of Japan Inc. — recently sprang back into the black for the first year in
five years, courtesy of a plunging yen. Honda, another corporate icon, triumphantly announced a return to
Formula One racing, rejoining an exclusive club of high-performance carmakers after having slinked away
when cash ran low.
Even some of Japan’s wary consumers are beginning to indulge. At the plush Takashimaya department
store in Tokyo’s financial district, a clerk reported that $20,000 watches had become hot sellers. And a cutrate sushi chain, which flourished in difficult times, just started a line of upscale restaurants for customers
newly able to afford “petite extravagances.”
The reason for the exuberance? Early — and some say deceptive — signs that new Prime Minister Shinzo
Abe’s economic shock therapy, called Abenomics, might just be working.
His 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. The stock market has soared more than 60 percent over the past year, and the yen has lost
more than a quarter of its value, lifting corporate earnings in a country that is dependent on exports.
Last week, Abenomics got an early report card. Japan’s $5 trillion economy grew at a robust annualized
pace of 3.5 percent in the first quarter, and — most important for Mr. Abe’s notion that consumer
confidence is key — household consumption accounted for the lion’s share of that growth. Although there
were some signs of weakness, most notably a drop in business investment, the numbers were a promising
sign that the good news was not confined to financial markets.
“Young people even in their 40s don’t remember Japan’s good times,” said Hiroshi Sato, a 64-year-old
executive treating himself to one of Takashimaya’s fancy watches. Choosing one from a black velvet tray,
he explained his purchase as a bet on Mr. Abe’s success after two decades of his predecessors’ failures.
“I’m hopeful,” he said, “that this one is finally the real recovery.”
So far, that optimism appears to be largely limited to the nation’s well-to-do, including its tiny stockholding class, and the weakening of the yen is creating tensions with its Asian neighbors. But if the
optimism spreads, Japan will have taken a crucial first step toward recovery, persuading its famously
cautious savers to spend their money to help revive the economy.
“This is Japan’s best chance in 20 years to escape from its deflationary mind-set,” said Hajime Takata,
chief economist at Mizuho Research Institute in Tokyo.
That Japan would try such a seemingly radical policy path after years of political paralysis reflects a
newfound feeling of urgency. With China’s economy and territorial ambitions growing, the Japanese have
begun to see the potential dangers of resigning themselves to what many have called a “genteel decline.”
The fear has given Mr. Abe, who took office in December, some room to maneuver, even as he promises to
take on entrenched interests through deregulation and to raise inflation. A pickup in the inflation rate would
cause pain for Japan’s legion of politically active retirees, but nudge people to spend before their money
loses value — reversing the deflationary psychology of delaying purchases in anticipation of ever-lower
prices.
It has also thrust him into an unusual role for a Japanese prime minister, a generally colorless bunch who
make decisions behind closed doors. Mr. Abe, 58, has become his country’s cheerleader in chief,
proclaiming to audiences that “Japan is back” and even sharing personal details most Japanese politicians
eschew. Referring to his own humiliating departure from his first term as prime minister, brought on by a
stress-related illness, Mr. Abe tells people that they, too, can recover.
“It is my job to awaken Japan from the spell of prolonged deflation and lost confidence,” he declared in a
recent speech to business leaders in Tokyo.
Despite the signs of success for Abenomics, skeptics abound.
Many economists say it will be impossible to judge Mr. Abe’s performance until he shoots the other two
economic “arrows” in his quiver, particularly the politically divisive structural changes they say are
necessary to shake up Japan’s sclerotic business interests and encourage entrepreneurship and competition.
They also warn that unless the new wealth is more widely spread — through rising wages, for example —
the current revival could fizzle like earlier ones or, worse, plunge Japan into the painful stagflation of
runaway prices without growth.
“Without a revival of the real economy, this is all just voodoo economics,” said Yukio Noguchi, a
professor of finance at Tokyo’s Waseda University.
Many Japanese, in fact, complain that their wages continue to fall even as prices have started rising.
“The only people benefiting from this boom are foreign money managers and the rich,” said Yuichi
Magata, a taxi driver who waited for a fare on a recent weekend night in Tokyo’s upscale Ginza bar district.
More people are indulging in after-work dinner and drinking, but he groused that they still refused to
splurge on a cab home as they had a decade ago, during a similarly buoyant but ultimately short-lived rally.
Still, Mr. Abe has enviable approval ratings as high as 70 percent. And after years when Japan seemed only
to be a hard-luck story, the foreign financial media have begun to gush again, with one declaring that Japan
had its “mojo” back.
Some business leaders have even picked up Mr. Abe’s hopeful, “we’re all in this together” tone. In a scene
reminiscent of Japan’s bubble-economy years in the 1980s, Honda positioned three Formula One racing
cars in front of its headquarters in downtown Tokyo before the announcement that the company was
rejoining the sport.
“We hope our re-entry in F-1 helps Japan become vibrant again,” said Honda’s president, Takanobu Ito.
Koshin Yamada, a 31-year-old hairstylist, is also hopeful. Strolling down Ginza’s boutique-lined main drag
with a kimono-clad woman on each arm, Mr. Yamada said he made so much money in the stock market
that he could buy a new sport utility vehicle and treat his friends to a performance at the nearby Kabuki
theater.
“Stock prices suddenly started going up for the past few months thanks to Abenomics,” Mr. Yamada said.
“I hope they keep going up.”
In other signs of optimism among the well-heeled, the JTB travel agency has reported surging numbers of
reservations for its $10,000 business-class tours to London. And sales of condominiums in Tokyo are up by
nearly 50 percent from a year earlier, according to the Real Estate Economic Institute, with units priced
over $1 million proving popular.
“With the price hikes coming, consumers feel it’s time to buy,” said Tadashi Matsuda, the institute’s chief
researcher.
At the Takashimaya department store, the signs of renewed confidence are palpable. Kaori Nirei, 52, out
shopping with her mother and 23-year-old daughter, spent $4,000 on dresses, shoes and jewelry.
“The bill was twice as much as what I’d plan to spend, but I don’t mind,” Ms. Nirei said. “I can’t believe
all the people shopping. And not just shopping, but buying.”
Even some who are not doing as well acknowledge the changes Abenomics has brought. Minoru Kimura,
who sat alone in a corner of an electronics store in Ginza last week drinking canned coffee, said he
regretted missing out on the current rally.
“I wish I had bought stocks,” said Mr. Kimura, 61, who retired last year. “My friends who did look so
happy, going abroad and all.”
NYT
So Far, the Battery Charger Is Working in Japan
By JEFF SOMMER
Published: May 18, 2013
A GENERATION ago, Japan was a colossus on any investing map of the world.
Shinzo Abe, Japan’s prime minister, taking a spin on a rice planter. His economic plan has cheered
investors.
Envious foreigners called its export-driven economy a “miracle.” Its real estate and stock markets seemed
to defy gravity, and its financiers were so flush with cash that they bought skyscrapers, golf courses and
corporate empires far from Japan’s shores.
Then the bubble burst. In 1990, Japan began more than 20 years of stagnation and deflation. Invest in
Japan? For most foreigners, it was wiser to avoid it. At the end of 1989, the Topix, a k a the Tokyo Stock
Price index, reached 2,881. Now it’s less than half that.
It’s possible, at least, that those lost decades are finally over. Japanese markets have become turbocharged
again, and are beginning to move markets worldwide. This year alone, the Topix has risen more than 22
percent in dollar terms, far exceeding the gain of the Dow Jones industrial average and nearly every other
major stock market. The yen has weakened sharply, trading at more than 100 to the dollar for the first time
in four years. That exchange rate should make many Japanese companies more profitable and more
competitive. It may also inject inflation into the Japanese economy, encouraging consumers to spend and
companies to invest.
“What is happening in Japan is revolutionary,” said Mohamed El-Erian, the chief executive of Pimco, one
of the world’s largest bond managers. “Nothing they’ve done since the Second World War comes close in
terms of economic experimentation,” he said.
It’s far too soon to judge whether “Abenomics” — the new policies of Prime Minister Shinzo Abe and
Haruhiko Kuroda, the Bank of Japan governor — will be successful. But they have already begun to
change expectations within Japan and around the world.
Most crucially, there are signs that the policies may be breaking Japan’s debilitating spiral of deflation. In
April, Mr. Kuroda declared that Japan would achieve an inflation target of 2 percent within two years — an
ambitious goal that he said he would achieve by doubling the country’s monetary base.
The central bank, which has already been holding short-term interest rates near zero, is making direct
purchases of long-term bonds and other securities. That program of quantitative easing is enormous, Mr.
El-Erian said: “It is much bigger than the Federal Reserve’s in the United States, when you consider the
size of the two economies.”
Is the new monetary policy working? It hasn’t been in place long, and no up-to-date inflation data is yet in
hand. The latest government figures show that in March, Japan’s consumer price index fell 0.5 percent,
annualized, a deflationary reading. But Japan’s bond prices imply that expectations for inflation two years
from now have already jumped to well above 1.6 percent.
“It’s not quantifiable yet, but the psyche of the Japanese consumer may actually be changing,” said Taizo
Ishida, lead manager of the Matthews Japan fund, a stock mutual fund for American investors.
“Anecdotally, you can feel it,” he said. “People are beginning to put money into equity mutual funds in
Japan, and consumers are buying luxury goods. But we’ll have to see where this ends up.”
MR. ABE, who faces elections in July in the upper house of the Diet, Japan’s parliament, has not unveiled
all the details of his policy, which comprises “three arrows”: monetary easing, fiscal policy and structural
reform. Monetary easing is the only one of the three that is substantially under way. It appears to be largely
responsible for the yen’s weakening and could have a sharp impact.
Forced for many years to adjust to competitive pressures from overseas, Japanese companies said in a
government survey last year that they were profitable at an exchange rate of 84 yen to the dollar, a big
change from 1986, when they said they needed a rate of 175 yen to the dollar.
The current rate of more than 100 yen to the dollar will make many export-oriented companies much more
profitable, said Eileen Dibb, a portfolio manager and Japan specialist at Pyramis Global Advisors, the
institutional arm of Fidelity Investments. Her portfolios include Toyota and Fuji Heavy Industries, and both
should benefit from the yen depreciation, she said. While the cheaper yen could heighten trade frictions,
Mr. Abe says he would like Japan to join the negotiations for the Trans-Pacific Partnership, an Asia-Pacific
free trade pact supported by the Obama administration.
Ms. Dibb is bullish on the Japanese stock market, saying it is still quite reasonably priced even after its
recent run. In 1988, for example, the Topix traded at a price-to-book ratio of 6.5, compared with only 1.4
today, yet current earnings are attractive and strengthening. For the first time in years, she says, the outlook
is extremely positive. “It’s as though Japan has turned the lights back on,” she said.
Mr. Abe has adopted a stimulative fiscal policy. It may give the economy a short-term boost, but in a
speech in April, Christine Lagarde, managing director of the International Monetary Fund, warned that
Japan’s fiscal policy “looks increasingly unsustainable,” saying its debt-to-G.D.P. ratio is now nearing an
extraordinarily high 245 percent.
Japan has some factors in its favor, however, making it quite different from debt-burdened countries like
Greece, said M. Campbell Gunn, portfolio manager of the T. Rowe Price Japan fund. Japan’s debt is
overwhelmingly financed by its own citizens, he noted; it is denominated in its own currency, and Japan
runs a steady current-account surplus, all of which insulate it from bond market pressure.
Furthermore, he said, Japan can reduce debt by privatizing or more efficiently operating billions of dollars
worth of state-owned assets, like the nation’s ports and its postal system, which doubles as a gigantic
savings bank. “Japan now is in some ways like the U.K. before Margaret Thatcher,” he said. “There is
much that could be done if the government wanted to do it.”
Structural problems, however, are major impediments to economic growth. Japan’s population has been
aging and declining in size, said Roger Aliaga-Díaz, a senior economist at Vanguard. Unless Japan permits
enough immigration to offset this, he said, demographic constraints are likely to trim gross domestic
product by 1.3 percentage points a year. “That’s a big hurdle for Japan,” he said.
Shifts like raising the retirement age and removing impediments to work force participation by women
could improve matters, but improvements are likely to be slow in coming, he said.
Still, Japan’s markets have awakened, its economy may be reviving, and the flood of yen is certainly
flowing into other markets around the world, Mr. El-Erian said. “This is an ambitious effort,” he said. But,
he added, “Japan’s mounting debt load and difficult structural problems make this program a very high-risk
and high-reward one.”
Bank of Japan vows market steps to curb
bond turbulence
Reuters – 3 hours ago
The Bank of Japan building is pictured in Tokyo, March 29, 2013. REUTERS/Yuya Shino
By Stanley White
TOKYO (Reuters) - The Bank of Japan vowed on Wednesday to take necessary steps to reduce volatility in
bond markets that has threatened to jeopardize the government's fight to end deflation and revive growth.
The central bank upgraded its assessment of the economy for a fifth straight month, saying it "has started
picking up," as Prime Minister Shinzo Abe's policy prescription of aggressive fiscal and monetary stimulus
has boosted sentiment and a weaker yen has halted a decline in exports.
As expected, the policy board voted unanimously to stick with April's massive quantitative easing, in which
it pledged to vanquish 15 years of entrenched deflation by doubling its Japanese government-bond holdings
in two years as it expands the supply of money at an annual pace of 60 trillion ($583 billion) to 70 trillion
yen.
While the government's aggressive policies have sent stocks soaring to 5-1/2-year highs and the yen
tumbling to a 4-1/2-year low against the dollar, turmoil in the Japanese government-bond market in recent
weeks has cast a cloud over the effectiveness of the BOJ's easing, a key element of "Abenomics" that is
showing early signs of lifting the world's third-largest economy from a two-decade funk.
BOJ Governor Haruhiko Kuroda vowed to take steps needed to reduce volatility in the JGB market, but he
disappointed some bond investors by sticking with the strategy of leaving it to BOJ bureaucrats to address
the problem by tweaking the bank's market operations.
Indeed, Kuroda played down any economic impact from the bond moves, where the benchmark yield
recently had its biggest three-day spike in a decade as investors struggle to cope with the overwhelming
impact of the BOJ's radical money expansion.
"I don't think the recent rise in yields is having a big impact on the economy," Kuroda told a news
conference after a two-day BOJ policy meeting.
"We will continue to monitor market moves and respond with flexibility in the pace and maturities of bond
purchases and in market operations."
Kuroda emphasized that these adjustments would not change the BOJ's commitment to buying about 50
trillion yen in government debt a year.
The purchases, running about 7.5 trillion yen a month, were intended to lower rates across the yield curve.
But despite the BOJ buying the equivalent of 70 percent of new government-debt issuance, the policy has
caused yields to rise erratically on worries that the purchases are distorting the market and sapping
liquidity, according to some analysts.
Kuroda said the higher long-term interest rates are due partly to growing confidence in Japan's economy,
but the volatility seen since the BOJ overhauled policy last month shows how difficult it will be for the
central bank to control long-term yields.
"It seems like Kuroda is essentially leaving the market as it is," said Ayako Sera, senior market economist
at Sumitomo Mitsui Trust Bank.
The recent surge in the 10-year JGB yield to a one-year high of 0.92 percent "does not seem to count as a
leap in long-term bond yields for Kuroda," she said.
"We still need to be wary of further rise in JGBs volatility."
Last week, in the midst of the market turbulence, the BOJ sought to cap the spike in yields by offering to
inject 2.8 trillion yen into the Tokyo money market, more than three times the size usually offered in a
single day.
Kuroda indicated that the BOJ could use this tool in the future by offering funds for one year at a fixed rate
to ease market jitters.
After he spoke, the central bank said it will meet with JGB-market participants on May 29 to discuss recent
market moves and operations. The BOJ will use this meeting to help it decide its schedule for JGB
purchases from June, a BOJ official said.
Bond prices turned negative after the BOJ announcement on disappointment that the bank didn't address the
market turbulence. Cash-bond prices later ended the day flat, with the 10-year yield at 0.880 percent, not
far from last week's high. Futures prices dipped slightly in evening trade on Kuroda's remarks.
INFLATION DOUBTS
The BOJ unleashed the world's most intense burst of stimulus last month, promising to inject $1.4 trillion
into the economy in less than two years to meet its pledge of achieving 2 percent inflation in roughly two
years.
Doubts have emerged over whether that time frame is realistic.
In the BOJ meeting, board member Takahide Kiuchi proposed loosening the commitment by making its
inflation target a medium- to long-term goal, and committing to intensive easing in the next two years. His
proposal was rejected in an 8-1 vote.
Indeed, the BOJ may be stuck pursuing its massive monetary easing for up to five years before it stokes
enough inflation to start unwinding its aggressive stimulus, a Reuters poll of BOJ watchers suggested on
Wednesday.
The prospect of a long wait before the BOJ can begin tightening stands in stark contrast to expectations in
global markets that the U.S. Federal Reserve could taper off its huge bond-buying campaign as early as this
year.
The BOJ, by gobbling up JGBs, hopes to nudge Japanese investors out of the safety of bonds and into
riskier assets like equities, encouraging more consumption, investment and employment in a virtuous circle
to revitalize growth.
But it is proving difficult to engineer a gentle rise in yields.
BOJ officials say they would accept a natural rise in long-term interest rates that reflect prospects of an
economic recovery and future inflation.
Japan's economy expanded at an annualized 3.5 percent in the first quarter, the fastest in a year, offering
more evidence that Abe's sweeping stimulus is beginning to work.
But the gains remain tentative. Abenomics got a reality check on Wednesday as April exports grew less
than expected and imports surged on expensive energy imports, blowing out the trade deficit to the biggest
April gap ever.
A sustained sharp rise in bond yields would hurt corporate capital spending, the soft spot of an otherwise
more robust economy, and strain Japan's already tattered finances by boosting the cost of funding its huge
debt pile. ($1 = 102.9750 Japanese yen)
WP
With ‘Abenomics,’ Japan catches a sense of revival
YURIKO NAKAO/REUTERS - Japanese economy is seeing signs of revival under Shinzo Abe, who took
office in December pledging not only to recharge Japan’s economy, but also to change the way Japan
thinks about itself.
By Chico Harlan, Friday, May 24, 6:44 AM E-mail the writer
TOKYO — After two decades of chronic recession, Japan again feels like a boomtown. Its biggest
companies are raking in money. It has the world’s best-performing stock market. The latest forecasts
suggest Japan, in the next year, could grow more quickly than any wealthy nation but China.
Consumers — especially the wealthy ones — have caught the spirit. They’re splurging at high-end
restaurants, department stores and auto showrooms. Ferrari sales this year are up nearly 50 percent,
according to media reports.
The revival is only months old, and its staying power remains very much up for debate. But already it has
surpassed what many Japanese thought was possible for an aging country whose decline had started in
recent years to feel inexorable.
The architect of this resurgence is Prime Minister Shinzo Abe, who took office in December pledging not
only to recharge Japan’s economy, but also to change the way Japan thinks about itself. “Japan is back,” he
frequently tells audiences. And he has deployed the most radical economic policymaking plan of Japan’s
20-year post-bubble era to make it so.
His strategy, commonly dubbed “Abenomics,” calls for a combination of monetary easing, government
spending, and economic reforms — “three arrows,” he says, in reference to a samurai teaching that three
arrows bundled together won’t easily snap.
None of the arrows, by itself, is revolutionary, but they reflect a breadth of vision and coordination that no
leader until Abe seemed interested in. His ambition for a more vibrant Japan fits with the zeitgeist. Regain
lost might, many Japanese think, and they’ll be better equipped to contend with an increasingly boisterous
China, which took Japan’s spot in 2010 as the world’s second-largest economy.
Abe’s chief goal is to end a 15-year period of deflation, the vicious cycle of falling profits, prices and
wages that squelches consumer appetite and slows economic growth.
So far, only the first two of Abe’s arrows have been fired. In January, Abe signed off on a 10.3 trillion yen
(roughly $100 billion) stimulus and, more significantly, pressured the central bank to overhaul its
conservative monetary policy. The bank complied last month, announcing a 2 percent inflation target and
saying it would nearly double the amount of money in circulation.
Dating back to their early 1990s, more than a dozen Japanese prime ministers have tried to grapple with the
nation’s economic woes. But none until Abe convinced the central bank to pursue quantitative easing on
such a mass scale. Economists now criticize the bank for its decades of excessive caution, failing to stir
investors, and abetting what people here describe as two “lost decades.”
The early returns on Abe’s approach are promising. Since November — the point when investors began
anticipating an election victory for Abe’s Liberal Democratic Party — Japan’s stock market has surged
some 60 percent. Car sales are increasing at their steadiest rate since 1985. And in the first quarter of this
year, the gross domestic product grew at an annualized rate of 3.5 percent.
“I think many Japanese feel this is the last chance for change,” said William Saito, a Tokyo-based
entrepreneur and venture capitalist. “After this, there are no more rabbits to pull out of the hat. If we hadn’t
lost confidence before this, boy, will we lose it this time if we screw this up.”
A recovery, or just a blip?
So far, Abenomics has worked even better than forecasted. The Bank of Japan’s monetary easing helped
devalue the yen, which in turn helped the nation’s export-dependent giants sell more (and cheaper)
products overseas. That meant inflated corporate earnings and an eye-catching stock market rally. Only one
in six Japanese people own stocks, but they still felt a psychological lift: Consumer spending is up in recent
months.
For now, shopkeepers aren’t certain whether to credit Abenomics, but they have noticed a difference in
recent months. Even in some stores that cater to middle-class customers, profits are up.
“People seem more willing to spend an extra 1000 or 2000 yen,” or $10 to $20, said Mami Tomino, owner
of a flower shop along a thriving shopping arcade in the Tokyo suburbs. “I have the same number of
customers, but more people are buying the higher-priced bouquets.”
But many economists still fear the pick-up could be brief. For Japan’s economic revival to last years rather
than months, companies need to spread their newfound profits by building factories, increasing investment
and boosting wages. Consumers need to maintain demand into next year, when the consumption tax is due
to increase, potentially dampening spending. The country’s tax base needs to expand, helping the
government trim its sky-high debt.
“But so far, not enough of this is happening,” said Yukio Noguchi, an economist at Waseda University in
Tokyo. “The real economy hasn’t changed.”
Abe’s speeches about the Japanese economy often sound like pep talks, and for a reason: A prolonged
revival depends on consumers and companies reconsidering their deep-seated pessimism about the
country’s direction. Those views have taken hold becaue of what’s happened since the collapse of the real
estate and financial bubble in the early 1990s. Since then, for many, land prices have been cut in half,
reducing the assets of homeowners. Job opportunities are down. Incomes have stagnated. Household
savings rates plummeted. And Japanese have become wary of any plan resembling a quick fix.
“Why is this dramatic change happening so quickly?” said Souichi Umehara, who owns a tea and seaweed
shop. “We have to be very careful we don’t get deceived.”
Meantime, corporations are skittish about pouring money into Japan; corporate spending has declined for
five quarters in a row. Some companies, including electronics giants Sharp and Panasonic, have been
chastened by earlier, sunken investments in a nation with high corporate taxes and towering energy costs.
Others are waiting to see whether Abe’s reforms — his third arrow — succeed in untangling regulations,
increasing free trade, or opening the workplace to more women.
Much as the weaker yen has helped Japanese manufacturers, it will also levy a toll, raising the prices of
imports — most notably the fossil fuels that power Japan in the wake of a near-total nuclear plant
shutdown. The weaker yen will also extend Japan’s trade deficit, eroding Japan’s current account balance.
If Japan’s growth soon tapers off, prices still might rise, a crippling scenario often described as stagflation.
“So far the stock market appreciates Abenomics, but there is still plenty of uncertainty on whether this ends
well,” said Kazumasa Iwata, president of the Japan Center for Economic Research and a former deputy
governor of the Bank of Japan.
Skepticism is ‘ingrained in me’
Abe is a second-time prime minister, and he seems to have taken cues from his first stint six years ago — a
short-lived fiasco that saw him resign because of bowel problems, his approval rating near 30 percent. This
time, his rating is more than twice as high, and Abe has been particularly vocal about rallying business
leaders to help him defeat deflation. In February, he asked executives to raise wages for employees if
possible.
Only a handful of companies have complied, but Abe has held them up as examples. When Jin, a national
eyewear retailer, gave roughly 6 percent bonus payments to its employees, Abe called the company
president to thank him.
With the bonus payments, according to employees and a company spokeswoman, one employee bought a
watch. One helped pay for a wedding. One took her mom on a vacation to Guam. Another used the money
for a down payment on a French car. For the employees, the payments were a sign of a turnaround — but
one that some still fear might be temporary.
“Not since I started working here have I felt something like this,” Koji Hiraoka, 36, said.
“It’s the same for me,” Fumio Mukaidono, 37, said. “The economy is going so fast. It almost makes me
concerned. It’s ingrained in me that things won’t go well — that it won’t be easy — because that’s all I’ve
known.”
NYT
Japanese Stocks Fall 5%
By BETTINA WASSENER
Published: May 30, 2013
HONG KONG — The Japanese stock market suffered another painful downward lurch on Thursday,
extending a sell-off that began a week earlier as a feverish six-month rally came to an abrupt end.
A 5.2 percent slide sent the Nikkei 225-share index to 13,589.03 points, its lowest level since late April,
and took the total decline since it peaked at nearly 16,000 points last week to more than 13 percent.
European and Wall Street shares, however, were trending higher.
Government officials were at pains on Thursday to play down the latest drop, saying it represented a
natural development after the huge rally set off by optimism over Prime Minister Shinzo Abe’s efforts to
haul the Japanese economy out of years of listless growth.
“Over the past month, we have seen an extraordinarily fast rise in share prices,” Yoshihide Suga, the top
government spokesman, said at a news conference. “In that regard, it would be unnatural if adjustments did
not occur.” He added: “It is normal for share prices to undergo corrections even as they rise.'’
The Nikkei soared more than 80 percent between mid-November and mid-May but staged a sudden aboutturn last Thursday, when it slumped 7.3 percent. Trading has been volatile ever since, as investors have
taken stock of the challenges that face Mr. Abe’s program, known as Abenomics, and weighed the pros and
cons of taking profits after the previous rally.
Signs that the U.S. Federal Reserve might, before long, begin to scale back its stimulus efforts also have
buffeted investor sentiment, as have higher bond yields in Japan and the recent end of a slide in the yen,
which had provided a welcome advantage to Japanese exporters.
The nervousness in Japan rubbed off on markets elsewhere in Asia on Thursday, though the declines were
not as pronounced. The main indexes in Singapore and Taiwan dropped just over 1 percent. In Australia,
the S.&P./ASX 200 fell 0.9 percent, and in Hong Kong, the Hang Seng Index slipped 0.3 percent. Stocks in
Europe were slightly higher in afternoon trading, and stock index futures indicated a higher opening on
Wall Street.
Whatever the exact reasons for the past week’s slide in Japan, the speed and extent of it has started to bring
to the forefront apprehension over Mr. Abe’s bold economic policies. With markets sputtering and
nervousness over a spike in long-term interest rates, skeptics of Mr. Abe’s monetary and fiscal push are
gaining more attention.
“The falling share prices point to the dangers that are inherent in Abenomics,” Ryutaro Kono, chief
economist for Japan at BNP Paribas and an outspoken critic of Mr. Abe’s economic policies, said in a note.
The program “at first triggered an asset bubble and brought about an economic euphoria,” Mr. Kono said.
“But the endgame is a higher risk of financial ruin, as current policies are pushed to the limit by a surge in
long-term interest rates.”
A batch of data due out Friday is likely to be closely watched for evidence of how far Mr. Abe’s policies
have succeeded in reinvigorating economic activity and combating the deflationary pressures that have
weighed on Japan for years. The data, for the month of April, are expected to show that industrial output
has improved and that deflation has abated somewhat. Analysts polled by Reuters forecast that core
consumer prices have fallen 0.4 percent from a year earlier, an improvement on the 0.5 percent decline
recorded in March.
“We think data will show that the Japanese economy has maintained a modest recovery trend” in the
second quarter of this year, analysts at DBS said in a research note.
On the other hand, the probability that prices continued to fall in April also highlights how tough it has
been to combat deflation, and underlines the concerns of many analysts that the central bank’s aim of
reaching 2 percent inflation in about two years will be tough to attain.
Analysts and investors also are eager for progress on promised structural overhauls, which many see as
crucial to the overall economy-lifting efforts of Mr. Abe’s government.
The challenges are whether the government’s long-term growth strategy and fiscal reform plan will be
“able to bolster investor confidence about Japan’s growth prospects and address their concerns about
Japan’s fiscal health,” the DBS analysts wrote. “A credible reform plan is needed to avoid a deeper
correction in the equity and bond markets.”
NYT
Abe Describes Strategy to Free Up Japan’s Economy
By HIROKO TABUCHI
Published: June 5, 2013
TOKYO — In a bid to give a second wind to his drive to kick-start Japan’s economy, Prime Minister
Shinzo Abe laid out a wide-ranging growth strategy on Wednesday that he said would beat deflation,
increase personal incomes and reboot an economy written off in recent years for its seemingly unshakable
malaise.
Initial enthusiasm over his program, dubbed Abenomics, of aggressive monetary easing, public works
spending and economic overhauls had driven the stock market up by 80 percent from late last year, when
Mr. Abe began his campaign for office, through the middle of May. But optimism has waned in the past
two weeks, as investors took stock of the risks and shortfalls that accompanied the bet to end longstanding
deflation. Investors have also demanded more specifics on how exactly Mr. Abe intended to encourage
economic growth.
Mr. Abe sought to offer answers Wednesday. He said he would provide tax breaks to encourage foreign
direct investment. He said he would remove cumbersome regulations, for example in the medical sector by
removing a ban on sales of nonprescription drugs on the Internet. And he pledged to combine Japan’s highgrade infrastructure and manufacturing prowess with the daring and creativity of a younger generation
eager to seize the reins from the economic old guard.
“For 20 long years of deflation, Japan suffered a deep loss of confidence,” Mr. Abe said. “It is now time for
Japan to become an engine of global economic growth.”
If Mr. Abe fails to deliver on his promises for bold change, the euphoria that drove Tokyo shares to a fiveyear high could evaporate further, economists warn. And without those fundamental overhauls, they say,
Japan is at risk of sinking back into the economic torpor that has defined much of the past two decades.
Mr. Abe also hopes to maintain momentum to upcoming parliamentary elections this summer, his first
major test at the ballot box for his economic policies. But with ratings high and political opponents weak
and divided, his Liberal Democratic Party is likely to make a strong showing.
He seemed to disappoint markets Wednesday, and stocks slumped as he spoke. The Nikkei 225-share index
ended the day down 3.8 percent, another rout in what is turning into an extended correction for the index.
Many economists and younger business leaders say that the crux of the overhauls lies in raising Japan’s
economic metabolism by making it easier for new companies to enter the market and for fading old ones —
of which there are many in Japan — to exit. That would need to be paired with a more flexible labor market
to smooth the transfer of workers from ailing companies to promising new ones.
Hope may lie in companies like Pijin, an Osaka-based start-up with roots in a student venture that
developed multilingual, “smart” Internet search technology. In March, Pijin released its first product: an
online service that links Quick Response codes — checkered symbols that can be scanned with a
smartphone — to cloud technology that provides translation into different languages.
“Everything about the Japanese economy tends to be skewed in favor of large, established companies and
toward Tokyo, and that needs to change” said Kenji Takaoka, chief executive of Pijin.
A 2010 study by the economists Kyoji Fukao and Hyeog Ug Kwon showed that Japanese companies set up
after 1996 added the most jobs in the period to 2010, creating 1.2 million, compared with a net loss of 3.1
million jobs over the same period at all companies founded before 1996. Foreign companies added more
than 150,000 net jobs to Japan, highlighting what is seen as the need for Japan to open up to more foreign
direct investment, whose inflows came to less than 4 percent of economic output in 2001, compared to a
fifth of the American economy and half of Britain’s.
That, economists say, would bring real change to a country famous for its world-class exporters like Toyota
and Canon but also chock-full of laggards that are sheltered by regulations and kept alive by subsidies,
sucking the lifeblood out of the Japanese economy. For Japan to make the productivity gains it needs to
grow, economists say, these domestic companies must be opened up to more competition from both inside
Japan and overseas. One catalyst for such change would be Japan’s participation in the Trans-Pacific
Partnership free trade agreement, already announced by Mr. Abe.
Still, some of the fundamental overhauls needed for an economic renewal, like labor market changes, are
conspicuously missing from Mr. Abe’s policy plans, as were vital details, said Akio Makabe, a professor in
economics at Shinshu University in central Japan.
“At the start, there was hope that Mr. Abe was as committed to economic reforms as he has been with
monetary policy and government spending,” Professor Makabe said. “But judging from this policy
platform, that commitment appears to be wavering. Where is the labor market reform? Where is the real
change? It seems he’s given in to the naysayers and listed up policies that just sound good.”
And then there has been Japan’s heavy-handed, government-driven industrial policies, which have worked
less and less in the new global economy. A government project worth 30 billion yen, or $300 million at the
current exchange rate, set up in 2007 to build Japan’s own web search engine ended in failure three years
later.
Mr. Abe spoke Wednesday of letting private-sector entrepreneurism take the lead in innovation. He said he
would set up special economic zones that would experiment with regulation, and revive private-sector
investment to the levels before the global financial crisis.
Mr. Abe also said he intends to liberalize Japan’s energy market by breaking up regional monopolies and
overhaul Japan’s medical insurance system. His government is also pushing for an early resumption of
Japan’s mostly idled nuclear reactors. And to tackle the problems of a graying population, he pledged to
make it easier for families to balance work and family, though his focus on mothers’ roles in child-rearing
and suggestions like extending maternity leave have led to some criticism that the proposals would be
counterproductive to advancing women’s participation in the work force.
Mr. Abe said growth policies would add at least 1.5 million yen to Japanese per capita income within a
decade, a goal reminiscent of a legendary income-doubling plan pursued in the 1960s.
The stakes are high, economists say. If the overhauls fail to ignite growth, the aggressive government
pump-priming and spending could come back to haunt Japan, dealing a heavy blow to its already stretched
finances.
Mr. Abe raised the stakes on Wednesday by saying he would urge Japan’s public pension funds, which
control more than $2 trillion in investments, to shift those holdings away from a heavy focus on domestic
bonds and toward higher-return equities and overseas assets. Such a shift would put Japan’s huge savings
pool to more efficient use, helping to prompt corporate investment and consumer spending, but also raise
the risk of driving the government’s borrowing costs higher as it competes with the private sector for
funding. Since last month, long-term interest rates have already climbed higher.
“Even if fiscal and monetary policies work to stimulate the market, their effects are passing, and Japan will
just be buying time,” said Ryutaro Kono, Japan economist for BNP Paribas, in a note to clients. “But the
kind of reforms that would truly raise economic growth rates have fallen by the wayside.”
NYT
In Japan, a Growth Strategy With Echoes of the Past
The former prime minister, Junichiro Koizumi, left, with Shinzo Abe, the current prime minister.
By HIROKO TABUCHI
Published: June 12, 2013
TOKYO — DIGITAL medical records. Special economic zones. Structural reforms.
The core ideas behind Prime Minister Shinzo Abe’s much-publicized growth strategy are stirring a nagging
sense of déjà vu.
They should. The plan, which is set to be approved later this week, borrows liberally from a string of
previous government initiatives that similarly promised to bolster the economy, including his own. And
economists and investors are increasingly worried that the latest initiative will have the same effect as the
past ones — that is to say, little at all.
“Every prime minister in recent memory has introduced an economic growth strategy, each not much better
than the other,” said Akihiko Suzuki, chief economist at Mitsubishi UFJ Research and Consulting, the
research arm of the large Japanese bank.
“Expectations rise, but are quickly dashed,” Mr. Suzuki said. “It’s foolish to expect something different this
time.”
The first two arrows of Mr. Abe’s economic push — a sizable dose of monetary and fiscal stimulus —
initially impressed investors, sending the stock market soaring as much as 80 percent in six months. But
some of that enthusiasm has evaporated, since Mr. Abe outlined the third piece, the core growth strategy. In
recent weeks, the Nikkei has been in a steady slide and it fell 5 percent on Thursday morning.
Some investors worry that the prime minister’s plans are not much different than the largely ineffective
attempts made by his predecessors, including Mr. Abe during his previous stint in 2006 and 2007.
Take Mr. Abe’s idea to help create a cutting-edge industry by digitizing Japan’s wealth of medical data,
ripe for mining by technology companies. A similar policy was featured in Mr. Abe’s accelerated growth
program, drawn up in mid-2007, during his previous term in office.
But after Mr. Abe resigned in September 2007, doctors started to grumble over the burdens of digitization.
Many clinics run by older physicians eventually won exemption from the plan, along with others who
found it difficult to work with digital technology. It is unclear whether the digital push this time will be
more comprehensive or how much new business it may generate.
Mr. Abe also wants to create special economic zones that would relax some aspects of nationwide
regulation in an effort to woo foreign investors. In part, the prime minister is pushing for more flexible
medical services to cater to expatriates and more leeway for companies in emerging fields to hire and fire
staff members.
Mr. Abe’s mentor, the former prime minister Junichiro Koizumi, tried much the same tack in the early
2000s. His reforms led to the creation of almost 1,000 special zones for structural reform, which relaxed
things like the paperwork required by foreign researchers, standardized school curriculums, and licenses to
home-brew sake, or Japanese rice wine.
The opposition Democratic Party introduced similar zones during its three-year stint in power, which ended
in late 2012 with the victory of Mr. Abe’s Liberal Democratic Party. But the long-term impact of such
efforts has been limited.
Sweeping economic goals and strategies have become an almost annual rite for Japan’s successive prime
ministers.
Before Mr. Abe’s growth strategy came three policy initiatives from the Democratic Party: Yukio
Hatoyama’s New Growth Strategy of 2010; Naoto Kan’s Scenario to Bring Back a Lively Japan of 2011;
and Yoshihiko Noda’s Japan Revival Strategy of 2012. Those initiatives did little to brighten Japan’s
economic prospects.
Preceding those policies were Yasuo Fukuda’s Economic Growth Strategy of 2008 and Taro Aso’s Future
Pioneering Strategy of 2009, which focused mainly on increasing gross domestic product. But the Japanese
economy suffered its most severe recession amid the global financial crisis, ending the Liberal Democratic
Party’s half-century of almost uninterrupted rule.
Now, investors are worried that Mr. Abe’s growth strategy is merely more of the same, a situation that
threatens to undermine confidence in the other facets of his program.
“Until now, Mr. Abe had exceeded expectations. But just as we got to the most vital part of his program, he
failed to produce anything substantive,” said Akio Makabe, a professor of economics at Shinshu
University.
Japan’s near-obsessive focus on growth plans traces its roots to the 1960s. At the time, Hayato Ikeda, then
the prime minister, promised to double Japan’s income in that decade by lowering taxes and investing in
infrastructure — a feat that would require 7.8 percent of growth a year. Japan’s economy exceeded
expectations, increasing 10 percent a year.
The success of Mr. Ikeda’s plan spurred more plans. His successor, Eisaku Sato, introduced three economic
growth strategies from 1964 to 1972, but each one brought slower growth than the last.
As Japan’s economy matured, and growth slowed further, focus shifted from growth to structural reforms
that would correct some of the country’s economic distortions. The most fervent reformer in recent
memory was Mr. Koizumi, who unleashed a platform of initiatives to increase competition in the Japanese
economy.
Even some of his most prominent policies have fallen by the wayside, highlighting how difficult it can be
to make changes stick in Japan.
A law that allowed private companies to compete with Japan’s sprawling post office to deliver letters, for
example, has been effectively neutralized with a provision that requires new competitors to set up at least
100,000 mailboxes across Japan and collect from all of those boxes at least six days a week. In the decade
since that law went into effect, not a single company has taken up the challenge.
A signature bid by Mr. Koizumi to privatize the post office’s vast financial arm, opening up the world’s
biggest bank by deposits to competition, has also been quietly rolled back. The timetable for privatization is
now delayed and the government is set to hold onto a higher proportion of Japan Post stock. Savers now
enjoy a higher deposit insurance cap on their savings at the post office, encouraging them to keep more
money parked there.
Mr. Abe has tried to accentuate the differences between his reform efforts and Japan’s previous attempts at
change. Mr. Abe has suggested the special economic zones might offer lower corporate tax rates. But he is
likely to face difficulty bringing Japan’s 38 percent tax rate in line with Singapore or Hong Kong — whose
corporate taxes are half that rate — without grumbling from businesses that do not qualify.
There are already early signs of fault-finding. Lawmakers from Mr. Abe’s own Liberal Democratic Party
have openly criticized a push to allow the sale of nonprescription drugs on the Internet — a move that
would hurt brick-and-mortar pharmacists, a vocal interest group in Japan. With an eye on coming elections,
the government is already moving toward keeping its Internet sales ban on more than two dozen of the
best-selling drugs, including indigestion medicines and hair growth formula for men, a pharmaceutical cash
cow.
“We have a problem if people start using twice the drugs they need, just because of the convenience” of
buying medicine online, Norihisa Tamura, the health minister, said at a meeting of lawmakers last week.
Mr. Abe’s economic drive is coupled with a far more aggressive program of pump-priming, which
economists say could make the difference. And some economists called for patience as Mr. Abe fleshed out
his reforms ahead of parliamentary elections this summer.
“It is in the nature of prime ministers’ speeches that they don’t have enough detail to satisfy the policy
wonks,” Nicholas Smith, Japan strategist at CLSA Asia-Pacific Markets, wrote in a note. “This seems like
complaining that the waiter didn’t read you the whole recipe book.”
WP
Japan’s volatile Nikkei plummets 6.4 percent
By Chico Harlan, Thursday, June 13, 6:45 AM E-mail the writer
SEOUL — Japan’s Nikkei stock market plummeted 6.4 percent Thursday, the latest in a series of alarming
dives that threaten to cut short the country’s economic resurgence.
In the last three weeks, Japanese stocks have lost more than 20 percent of their value, starting with a 7.3percent plunge on May 23. Since then, the Nikkei has transformed from the world’s best performing stock
market into its most volatile, as investors show growing concern about Japan’s dramatic strategy to end a
two-decade economic stagnation.
That strategy, designed late last year by Prime Minister Shinzo Abe, calls for a mix of government
spending and monetary easing, along with some economic reforms. But markets, after initially welcoming
Abe’s plan, now seem preoccupied with its risk. This also holds true for Japan’s normally sleepy bond
market, which has fluctuated heavily in recent weeks.
One of the biggest fears is that Abe, in his attempt to spur inflation, could leave the government in even
greater debt and pressured by rising interest rates. Some critical economists and investors also say that
Abe’s reform targets — improving opportunities for women; creating special economic zones; liberalizing
trade — sound similar to previous, failed ideas from earlier Japanese leaders.
Some investors are worried that the yen — which had weakened for eight straight months entering June —
could now reverse course, cutting away profits from Japan’s export-dependent giants.
Stocks across Asia fell on Thursday, but the losses were most significant in Japan, as the yen strengthened
more than 1.5 percent against the dollar. As of early evening in Tokyo, then yen stood at 94.4 to the dollar,
compared with 103 to the dollar in late May. The fortunes of Japanese stocks are heavily tied to the yen,
which, when it weakens, lowers the cost of Japanese products sold overseas.
During trading on Thursday, Japanese officials asked for calm, adding that Japan’s economy showed clear
signs of recovery. Even with the latest stock losses, the Nikkei is up nearly 40 percent since November,
when it became clear Abe’s Liberal Democratic Party would win parliamentary elections.
“There has been a steady recovery in the economy of Japan,” a Japanese government spokesman,
Yoshihide Suga, said. “So regarding the stock market situation, we believe we need to stay calm in
observing this state.”
Government data released in May indicated that Japanese consumers were spending more, an encouraging
sign for the economy. They were doing so despite the fact that few companies had given raises. Few
consumers, too, had personally benefited from the stock rally. (Only about one in six Japanese owns
stocks.)
Rather, economists said, consumers were feeling a psychological high from the Nikkei’s rise. Some worry
now that the spending could stop amid the plummet.
“People might start to think, ‘Oh this [recovery] is going to collapse,’ and they might then say, ‘Oh I can’t
buy things.’ ” said Edwin Merner, president of Atlantic Investment Research in Tokyo. “It could have a big
psychological impact.”
The Economist
Abenomics
Not so super
The “third arrow” of reform has fallen well short of its target; time for Shinzo Abe
to rethink
Jun 15th 2013 |From the print edition
EARLIER this year Shinzo Abe, Japan’s prime minister, unveiled the first two “arrows” of his three-point
economic plan—monetary easing and fiscal stimulus—and hinted at structural reforms to come. Japan’s
stockmarket soared by 80% in six months. Mr Abe’s approval rating soared, too. Then, after months of
euphoria, at the end of May, bond-market jitters about the radical easing plans helped to spark a sell-off in
shares. Now Mr Abe’s eagerly awaited “third arrow” of structural reforms has fallen well short of the rings,
let alone the bull’s eye. Indeed, it is so wide of the mark that one is left wondering if Abenomics has failed
before it even properly began.
The disappointment is all the greater because Mr Abe’s first two efforts were so successful. A weaker yen
has boosted exports. The first signs of inflation are appearing in Tokyo—a good thing, given the years of
stagnation. The economy grew at an annualised rate of 4.1% in the first quarter as consumers regained
confidence. In April Mr Abe signed up to talks on the Trans-Pacific Partnership (TPP), a regional free-trade
area, committing Japan to opening up uncompetitive industries. He also promised to overhaul the electricity
industry.
On June 5th Mr Abe let loose his third arrow. It contained some useful measures, such as lifting a ban on
the sale of drugs online and obliging the government’s pension fund to start holding corporate leaders to
account. But much of the rest was old-fashioned industrial policy which has been tried, and has failed,
before (see article). Meaningful deregulation, labour-market reform and steps to make agriculture
competitive in order to prepare for the TPP were all shelved. Truly bold measures, such as boosting
immigration or changing the electoral system to give proper weight to young and urban voters, are off the
agenda entirely.
The reason is not hard to spot. Ahead of a crucial election in July, the Liberal Democratic Party (LDP) has
been pressing Mr Abe not to offend the farmers, doctors and businessmen on which it has long relied. Yet
for those, like this newspaper, who think that Mr Abe has the chance to drag Japan out of its decline, his
climb-down is a disappointment. With a public debt of 240% of GDP, printing money and public-works
spending can go only so far. Most of what ails Japan, from its insider-dominated labour market to excessive
regulation and poor corporate governance, is structural. The excitement has been that Mr Abe seemed to
understand this.
Get back into that telephone booth and change clothes
All is not lost. Mr Abe’s popularity remains high, and the LDP’s rivals are on the ropes. Mr Abe knows that
if he continues to balk at structural reform, Japan will go back to being a once-great economy condemned
to a slow ebb. He said on June 5th that this first package of reforms is just a “way point”, and that, after the
election, he will open a “second season” of his growth strategy.
Mr Abe must honour this pledge and face down his own MPs on reforms, as he did when he signed up to
talks on the TPP. Now, more than ever, he cannot afford to become distracted by his pet project of
changing Japan’s post-war constitution. Instead he should first fill his cabinet with reformists and then take
on the rest of his party. Issue by issue, he will need to isolate and then defeat the opponents of change.
It is still too early to write off Abenomics. But this was a bad week for Japan.
The third arrow of Abenomics: Misfire
Shinzo Abe disappoints with a timid attempt at structural reform
Jun 15th 2013 | TOKYO |From the print edition
GREAT expectations at home and abroad surrounded the announcement on June 5th of the “third arrow” of
Abenomics, the plan of Shinzo Abe, Japan’s prime minister, to pull the country out of its long slump. The
first arrow had come in the form of a monetary revolution at the Bank of Japan on April 4th, when the
bank’s new governor, Haruhiko Kuroda, pledged to end deflation by pumping vast quantities of money into
the economy. The second arrow was a similarly dramatic fiscal stimulus package worth {Yen}10.3 trillion
($116 billion). But the keenly awaited growth strategy is the most important of the three arrows, since it
seeks to boost Japan’s long-term economic performance. When it came, however, the announcement left
many disappointed by its timidity. Coming after a series of stockmarket falls, it suggested that Abenomics
was already fizzling out.
To help design the strategy, Mr Abe had convened a series of reform committees, most notably the
Headquarters for Japan’s Economic Revitalisation inside his own Liberal Democratic Party (LDP), and the
Industrial Competitiveness Council (ICC). He invited onto them private-sector businesspeople, economists
and proponents of reform, including Heizo Takenaka, the former right-hand man of Junichiro Koizumi,
who as prime minister between 2001 and 2006 fought against fierce opposition to privatise the postal
system.
One area that reformers hoped the committees would tackle is Japan’s labour market. Unless they are going
out of business, firms are barred from firing staff employees. That produces perverse results; in January the
labour ministry investigated the sad phenomenon of oidashi-beya, or “banishment rooms”. Some wellknown firms, it was reported, were sending hundreds of employees into special rooms and leaving them
with little or nothing to do all day. Officially, the rooms are to retrain people for new assignments, but the
true purpose, many say, is to push workers into leaving. Most companies hang on to their excess workers,
so their costs are inflated, leaving them unwilling to take on young employees or to raise salaries. This in
turn has contributed to stagnant wages and continued deflation.
The reformists made bold suggestions for the labour market and for other parts of the economy. Firms
should be able to fire employees with severance pay, some argued. Agriculture is in urgent need of reform
as Japan enters negotiations for the Trans Pacific Partnership, a free-trade agreement, in July. Most farmers,
tending tiny plots on a part-time basis, are uncompetitive. Companies should be allowed to buy farmland,
said private-sector members of the ICC; at present they may only rent, and are bound by tight regulations.
To help eliminate loss-making firms and encourage the birth of profitable new ones, the LDP panel urged
an overhaul of Japan’s famously poor corporate governance. The law, it said, should oblige firms to enlist
independent board directors.
But the government’s announcement did not go so far. Indeed, most of the more radical ideas put forward
by Mr Abe’s committees failed to make it into the strategy announced on June 5th, which instead evoked
the long tradition of multi-year economic plans. It contained plenty of ambitious targets, such as a promise
to lift income per person by 40% over ten years. And it has some helpful measures, such as lifting a ban on
the sale of drugs online. Its centrepiece is a series of deregulated and lightly taxed zones around the
country, to be overseen by a new minister. These will become the engine to pull the economy forward, says
Akira Amari, the economy minister. Several past governments have created such zones, with some success;
the robotics industry, for instance, benefited from being able to test new robots in special areas. But under
the Democratic Party of Japan in 2009-12, a series of international zones failed to achieve much.
Little has been included on the key issues of the labour market, health care, agriculture and broader
business deregulation, says a member of the ICC. Instead of tackling dismissal rules, the government’s
strategy creates a third category of contract worker. This is very disappointing, says Yoshihiko Miyauchi,
chairman of Orix Corp, a conglomerate. Except for a new public body which will collect farmland and
lease it to firms, policy on agriculture will remain largely unchanged. Nor will outside directors be
compulsory on corporate boards, as the LDP panel recommended. Keidanren, a powerful lobby group for
big firms which is a strong backer of the LDP, is only half a reformer; it throws its weight behind labourmarket liberalisation, but also opposes more outside oversight of its own members.
On several parts of the growth strategy, the government had to fight, but prevailed, says Mr Amari. The
chief of Japan’s medical association visited him to oppose the sale of drugs online, he says, but the measure
still went through. The growth strategy also takes steps to allow patients to pay privately for advanced
drugs without forfeiting public coverage of the rest of their treatment, as happens now; doctors fiercely
oppose this, he says.
Insiders say that LDP members pressed forcefully to make sure Mr Abe did not announce anything too
radical ahead of July’s crucial election for the upper house of parliament. The party has long relied on
special-interest groups, notably farmers, doctors and businesses. Since its political opponents are weak,
says Kotaro Tamura, who worked for Mr Abe during his disastrous first term as prime minister, the party
could have announced a sharper third arrow. But in the end it decided not to risk it before the election, not
wanting to rely on a potentially fickle general public.
By mid-May the stockmarket had nearly doubled within six months on exuberance about Abenomics,
especially on expectations of structural reform. That it has fallen by 20% since then, and fell again during
Mr Abe’s speech last week, alarmed his advisers. They quickly promised movement on tax cuts for
business.
People who helped to formulate the growth strategy say that Mr Abe and his cabinet will go much further
once the party wins control of the upper house next month, as it is expected to do. More radical steps will
be taken on agriculture, for instance, promises one of the ICC’s members. One important stage will be a
cabinet reshuffle, which is expected in September. Mr Abe’s current cabinet contains some ministers who
were picked chiefly as a reward for supporting his unexpectedly successful bid for the party’s leadership
last year; a new cabinet may well contain keener reformers. Pro-reformists also take heart from the fact that
Yoshihide Suga, the powerful chief cabinet secretary, strongly backs reform. He is close to Mr Takenaka,
the most ardent advocate of change.
But Mr Tamura is worried. Several of the LDP’s candidates for the upper house election represent vested
interests. Mr Abe, he says, could have unleashed a more penetrating third arrow as a test to approve new
candidates, as Mr Koizumi did with postal reform. Meanwhile, Mr Abe has another project, changing
Japan’s post-war constitution, which could distract attention from pushing through structural reform. The
third arrow is still a long way short of its target.
Abe's 'Growth Strategy' And The Upper House Election - Forbes
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Stephen Harner, Contributor
INTERNATIONAL | 5/19/2013 @ 8:58PM | 757 views
Abe's 'Growth Strategy' And The Upper House Election
Last week at Waseda University, Ellis Krauss, professor of Japanese politics at
UC San Diego gave a public lecture entitled: “What’s Wrong with Japan? ...It’s the
Politics.” It was a convincing lecture from one of U.S. academia’s most respected
Japan scholars.
One of the points Krauss made was that Japan has many–arguably too many–
elections. Japanese voters are called to the polls for one or another level of
government election on average once every year, under six election systems with
rules for weighting of votes
Protrait of Prime Minister Shinzō Abe of Japan, Saturday, Sept. 8, 2007, in Sydney.
from urban and rural districts (malapportionment) and easily changeable
outcomes.
The most common dyfunctionality is failure to capture a majority of seats in both
the Diet lower chamber House of Representatives and upper chamber House of
Councillors. This seemingly structural phenomenon has confounded most
governments in recent years, and today confronts Prime Minister Abe. Upper
House elections have been occurring the year after Lower House elections, and
have resembled U.S. “mid term” elections where voters express disappointment
with the ruling party by throwing support to opposition parties and candidates.
What has created a revolving door with seven prime ministers in the past six
years is that whenever candidates identified with the ruling government party
lose in any election, and particularly in a Diet election, pressure mounts on the
prime minister to resign.
Abe Shinzo’s resignation after one year as prime minister in September 2007 was
subsequently explained as compelled by an attack of ulcerative colitis, but the
ultimate cause surely was his party’s loss of a majority of Upper House seats the
previous month.
Abe has resolved not to suffer a similar fate in the Upper House elections this
July. He is marshaling all the resources of his office to win not just a majority, but
two-thirds of the seats for his pro constitutional revision coalition.
single seat and multi-seat districts sufficiently different
to produce different
party or candidate results from the
same voters in successive elections. This
situation leads to unstable politics and easily changeable outcomes.
1 of 3 5/28/13
Abe's 'Growth Strategy' And The Upper House Election - Forbes
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At its debut last fall, “Abenomics” was broadly interpreted as at least as much a
short term gambit to win the July elections as longer view economic policy. Of
Abenomics’ “three arrows” (i.e., massive monetary stimulus to “beat deflation”
and weaken the yen; greatly augmented fiscal stimulus through increased deficitfinanced public works spending; and a “growth strategy” to increase Japan’s
economic competitiveness), the first and second have been let fly.
As though to keep the pre-election momentum going, in a speech on May 17 Abe
expounded the themes–and some specific, headline grabbing goals–of the third
arrow growth strategy, to be officially unveiled in recommendations of several
special committees early next month.
Here are the topic headings and some points from his speech.
1. A Growth Strategy to Boost Private Investment.
Through an “infrastructure export strategy,” triple overseas sales from JPY 10
trillion in 2010 to JPY 30 trillion in 2020 in the fields of medical services,
culinary culture, space, disaster prevention, eco-cities.
Marshal the world’s technology, human resources, and money behind Japan’s
growth. Japan’s corporations should take the lead, increasing investment to
increase labor productivity and to increase profits. Government will do its part by
implementing an investment friendly growth strategy.
2. Japan to Lead in Applying Innovations.
Support businesses introducing cutting-edge innovations through regulatory
reforms. For example, remove government restrictions on hydrogen tanks to
facilitate innovation in fuel cell vehicles and effectively deal with protection of
privacy while opening up opportunities in “big data” information services.
3. Expand Private Investment
Make the coming three years will be a “period of concentrated promotion of
investment.” To promote investment domestically, implement comprehensive
measures in tax, budget, financial, regulatory reform, and regulatory system
adjustment. First, recover the investment volume of JPY 70 trillion prevailing
before the Lehman shock.
To assist companies to invest and use cutting-edge equipment, introduce a
program to enable companies to use leasing structures to finance investment.
Facilitate venture capital investment new business financing by providing a
backstop alternative to entrepreneur personal guarantees. Promote industry
restructuring.
4. A Winning Agricultural Industry.
The world food market is expected to double in ten years. Through differentiated
product and market strategies, double of Japan’s exports to JPY 1 trillion.
5. “Cool Japan” Strategy.
Today 8 million visitors come to Japan annually. First target an increase in
visitors to 10 million, then to 20 million. As a “tourist destination” model
country, relax visa issuance requirements, especially to ASEAN country
residents. Establish a public-private “Cool Japan” fund of JPY 50 billion to secure
media channels and produce content.
6. World-Beating University Reform.
Discard the “Japanese universities are for nurturing Japanese” mentality. Reform
governance and relax restrictions on investing in businesses. During the next
three years, the eight national universities should bring in some 1500 elite
researchers and double the number of foreign instructors.
Does the above offer investment opportunities? Definitely. Think Hitachi, Orix,
Sony, Panasonic, Toyota, Denso and possibly Dentsu, though the latter has
already doubled this year (disclosure: I have minuscule positions in several of
these). But investors should also be keeping an eye on the July election and
hoping that Abe’s strategy will work.
This article is available online at:
http://www.forbes.com/sites/stephenharner/2013/05/19/japan-diet-elections/
NYT
Election Win by Ruling Party Signals
Change in Japan
Franck Robichon/European Pressphoto Agency
Workers emptied ballot boxes as vote counting began for the election in Japan's upper house of Parliament.
By MARTIN FACKLER
Published: July 21, 2013
TOKYO — Japanese voters handed a landslide victory to the governing Liberal Democratic Party in
parliamentary elections on Sunday, opening the possibility of dramatic changes in the long-paralyzed
country, even as it returned Japan to effective one-party rule that seemed to thwart recent hopes for a more
competitive democracy.
Kazuhiro Nogi/Agence France-Presse — Getty Images
Shinzo Abe, the Japanese prime minister, celebrated his party's decisive victory.
By securing control of both houses of Parliament for up to three years, the win offers Prime Minister
Shinzo Abe, an outspoken nationalist who promises to revitalize Japan’s stagnant economy and strengthen
its military, the chance to be the most transformative leader in a decade. It also offered an opportunity to
end the nation’s series of short-lived and ineffective prime ministers.
The victory comes at a time when many Japanese seem more open than ever to change, after years of failed
efforts to end the economic slump, and as an intensifying territorial challenge by China that has nudged this
long-pacifist nation toward seeking a more robust military.
And unlike some of Japan’s previous colorless leaders, Mr. Abe, 58, seems eager to become such an agent
of change. He campaigned on promises to make fundamental, and possibly painful, changes in the
economy. But his vows to stand up to China and rewrite Japan’s antiwar Constitution to allow the legal
right to maintain a full-fledged military, rather than self-defense forces, raising fears he will go too far and
further isolate Japan in the region.
A week before the election, he became the first prime minister to visit a tropical island near the group of
uninhabited islets at the heart of the dispute with China, and had earlier raised eyebrows by riding in a tank
and climbing into a fighter jet in front of cameras.
“Abe has a pragmatic side and a strongly nationalistic side,” said Hiroshi Shiratori, a professor of political
science at Hosei University in Tokyo. “This election could free him up to do more of the latter, which is
what he really wants.”
At the same time, it remains unclear how far the Japanese people may be willing to let Mr. Abe go. The
Associated Press, citing numbers from Kyodo News Agency, said 52 percent of voters went to the polls,
one of the lowest turnouts since the end of World War II. While Sunday’s results gave his ruling coalition a
comfortable majority in the upper house, it fell short of the two-thirds that the Liberal Democrats and allies
would need to revise the Constitution, something that has not happened since it was crafted by American
occupiers after World War II.
As vote counting continued into the early hours of the morning, officials said the Liberal Democrats had
won 65 of the 121 seats being contested. When combined with the 11 seats secured by its coalition partner,
a small Buddhist party, the Liberal Democrats had taken enough seats to gain a majority in the 242-seat
chamber.
The largest opposition group, the Democratic Party, suffered a humbling setback, securing 17 seats from
voters who still blame it for failing to deliver on promises of overhaul after an election four years ago that
ousted the Liberal Democrats in what had seemed to herald the advent of a vibrant two-party democracy.
Before the vote on Sunday, one weekly tabloid criticized the impending return of the Liberal Democrats’
effective monopoly as “a return to the ways of our ancestors.”
Speaking to reporters after the victory, Mr. Abe thanked voters for ending the so-called twisted Parliament,
in which opposing parties had split control of the two houses since 2007, adding to Japan’s long political
paralysis. But he admitted that he faced a challenge in convincing other lawmakers and also voters, who
must approve any revision to the Constitution in a public referendum.
“There is still need to widen and deepen the debate on the Constitution,” Mr. Abe said. “Voters have given
us this new period of political stability, so we have time to deepen the debate.”
He said he would also pursue an intermediate step of making the Constitution easier to revise by requiring a
simple majority in Parliament instead of the current two-thirds. But making this change would require
changing the Constitution, which means gathering enough votes.
Still, analysts said the win, coming seven months after Mr. Abe’s party regained control of the lower house,
had made overhaul of the Constitution feel like a real possibility for one of the first times since its adoption
in 1947. In interviews outside polling stations, voters said that anxiety about China, and a hunger for
leadership to restore Japan’s international standing, made them willing to at least try some of Mr. Abe’s
ideas.
“I agree with Abe,” said Noriaki Hibi, a 51-year-old telecommunications worker in the Tokyo suburb of
Sayama. “Given the current situation with China, I think we need military preparedness.”
But analysts said that support could fall once discussion turned to the specifics of constitutional change,
with polls showing a majority of voters still opposing changes to the antiwar provisions. They also said
much of the support for Mr. Abe rested on the popularity of his economic stimulus policies, known as
Abenomics, which have already succeeded in starting Japan’s $5 trillion economy on the road to a
recovery.
“This is not unconditional support for Mr. Abe’s whole agenda,” said Jun Iio, a political scientist at the
National Graduate Institute for Policy Studies in Tokyo. “Public support could evaporate if the economy
starts to sour.”
Japan growth slows in second quarter,
adds to sales tax uncertainty
By Leika Kihara and Stanley White
TOKYO | Mon Aug 12, 2013 7:36am EDT
(Reuters) - Japan's economic growth slowed more than expected in the second quarter, offering ammunition
to those seeking to temper a planned sales-tax increase even as government debt has risen past 1,000
trillion yen ($10.4 trillion).
But as the sharp slowdown was driven by an unexpected fall in corporate capital spending while personal
spending remained hardy, the data may encourage Prime Minister Shinzo Abe to proceed with the tax hike
and soften the pain by offering tax breaks to boost business investment.
The sales-tax rise is meant as a first step toward tackling Japan's enormous public debt.
The world's third-largest economy grew by an annualized 2.6 percent in April-June, government data
showed on Monday, a third straight quarter of expansion but below both market expectations of 3.6 percent
growth and a downwardly revised 3.8 percent rate in the first quarter.
Abe, whose top priority has been to spur growth and pull Japan out of 15 years of deflation, faces in
coming weeks what he has called the tough decision of whether to go ahead with the tax increase.
Under a multi-party agreement last year, the tax is to rise to 8 percent from 5 percent next April and to 10
percent in October 2015. But the government must certify that the economy is strong enough to withstand
the pain of the fiscal tightening.
The premier is to decide by early October, and government officials have flagged the April-June GDP, and
its revision on September 9, as key factors.
"The economy has been steadily rising since the inauguration of the Abe administration last year," Abe told
reporters.
"I'll continue to take all possible care about the economy. I'd like to focus on the economy, including
implementation of further growth strategies in the autumn."
Abe's government is divided on the sales tax, with reflationist advisers urging him to delay or water down
the increase and the Finance Ministry avidly urging him to proceed, given the nation's dire finances.
Public debt exceeded 1 quadrillion yen -- or 1,000 trillion yen, about double GDP, for the first time in June.
The reflationist camp jumped on the weak GDP data.
"There is no need to raise the sales tax in a hurry," Koichi Hamada, an adviser to Abe and a professor
emeritus at Yale University, told Reuters.
But economists noted that growth remains robust. Some, like Mari Iwashita at SMBC Nikko Securities,
said GDP is more likely to be revised up than down because the two weakest elements, capital spending,
are the ones that typically change the most.
"At the moment Japan's growth is still the fastest among the developed economies, thanks partly to
'Abenomics'," Iwashita said.
STRONG SPENDING, WEAK INVESTMENT
Economy Minister Akira Amari said the data offered "good numbers for making a judgment on the tax
increase." But he expressed concern about the sixth straight drop in capital spending.
The top tax officials in Abe's coalition parties recently told Reuters that the premier would go ahead with
the scheduled tax increase and that the open consideration of a delay was partly political theatre aimed at
getting the finance and other ministries to approve fiscal stimulus measure.
Targeted tax cuts to boost business investment as well as a cut in corporate tax rates are two of the most
prominently discussed measures.
Bank of Japan Governor Haruhiko Kuroda has said the tax hikes are needed and would not hurt the
economy. Kuroda has also said Japan can raise taxes and still escape deflation.
The Nikkei 225 share average fell to its lowest since the end of June as confidence was hit by the
combination of weak capital spending and the expected sales tax increase affecting consumption, but the
market pulled off its lows, ending down 0.7 percent.
On a quarter-to-quarter basis, Japan's economy grew 0.6 percent in April-June. External demand added 0.2
percentage point to growth, while domestic demand contributed 0.5 point.
Private consumption rose 0.8 percent from the March quarter, more than a median market forecast of a 0.5
percent increase, on robust spending on food, travel and consumer electronics.
But capital expenditure slid 0.1 percent, much weaker than a median market forecast for a 0.7 percent
increase and marking the sixth straight quarter of decline.
NYT
Concern Over Japan’s Growth Strategy
By BETTINA WASSENER
Published: October 31, 2013
HONG KONG — Nearly a year after Japanese began to hope that their economy could turn around under
new leadership, a sense of realism is replacing the euphoria.
Economists and investors have grasped just how difficult it will be for Prime Minister Shinzo Abe to
sustain the growth of the last few months. Nowhere is that sentiment more evident than the Japanese stock
market. The Nikkei 225 index is now nearly 40 percent above where it started the year, but the gains during
the last four months have been slight — just 3.4 percent.
The economic recovery Mr. Abe engineered during the last year has been remarkable given the decades
Japan in which languished. Buoyed by a big pickup in public works spending and a Bank of Japan policy of
flooding the economy with low-interest money, growth has accelerated markedly. Deflation, the country’s
biggest economic problem, seems to have disappeared.
The Japanese central bank said on Thursday that it now expected the economy to expand 1.5 percent in the
year starting next April, up from a previous forecast of 1.3 percent.
The yen, whose persistent strength weighed on Japan’s important export sector for years, has fallen more
than 20 percent against the dollar over the last year, making Japanese goods more competitive in
comparison with those of their rivals from South Korea and elsewhere.
That has helped corporate earnings recover, too. Nippon Steel, for example, on Wednesday raised its profit
forecast for the year by 13 percent, buoyed by government infrastructure spending, which has increased
demand for steel in Japan. Honda Motor said on Wednesday that it was on track for a 43 percent jump in
full-year operating profit.
Mr. Abe “projects a more confident Japan,” Kazuo Hirai, chief executive of Sony, said in a news
conference in October. He is “projecting himself as a different kind of prime minister who is willing to get
on a plane and represent Japan in a way that people wanted from a Japanese prime minister,” Mr. Hirai
added.
For many ordinary Japanese and small businesses, however, the benefits so far are less tangible. “There is
no Abenomics effect at all here,” Wakana Otake, the owner of a shop that sells fancy ties in the Ginza
shopping district of Tokyo, said Thursday. “We heard luxury items sell well in department stores and so
on,” but her shop had seen no benefit so far, she said. “It’s actually worse than last year, and last year was
worse than the previous year. It’s getting worse and worse for the last seven or eight years, I think. I
wonder when I will finally see the bottom.”
“Nothing has changed,” said Ryuichi Mizukami, a clerk at a nearby camera and photo shop. “Sales are
about the same as last year. Prices are the same. We don’t feel any Abenomics effect here yet.”
Looking ahead, economists say some of the hardest work remains to be done. Japan’s leaders still have not
taken on the far-reaching structural changes to make the country’s businesses more competitive. The
economists worry that without reform, Japan could slide back into the deflation mode that had dogged it for
more than a decade.
Nicknamed the “third arrow” of Mr. Abe’s economic policy, these include efforts to make the labor market
more flexible, improve productivity in the service sector and bring more women into the work force. Under
a growth strategy laid out in June, Mr. Abe also set the goal of creating special economic zones that would
relax some regulation and attract foreign investors.
Many of the plans laid out in June, however, lack detail and risk being watered down, analysts said.
Similarly, plans to lower corporate taxes — a move seen as crucial to bolstering Japan’s competitiveness
and encouraging more foreign companies to bring operations to the country — will not be completed until
December.
“There is a sense that the series of strong announcements earlier has been replaced by mere holding
statements,” said Gary Dugan, chief investment officer for Asia and the Middle East for the wealth
management company Coutts.
The third arrow of the recovery plans seems to be “veering off target,” he said. “We have scaled back our
optimism on Japanese equities until there are clearer signs that measures to help the economy are being
brought back on track.”
Izumi Devalier, Japan economist at HSBC, said, “The third arrow has not even been fired yet.” She said,
“Investors were hoping for really game-changing chances. But that’s not how politics works in Japan. You
need to build a consensus between cabinet and the bureaucracy.”
The likelihood now, she said, is that “there is not going to be a lot of progress on the third arrow in the next
few months.” Another problem is that the economic improvement of the last year has yet to directly affect
many of Japan’s households. Although the job market is tight and unemployment is low, companies have
so far largely resisted making large investments or raising salaries.
Government data released on Thursday underlined this point. Workers’ total earnings edged up just 0.1
percent in September, compared with a year earlier, and summer bonus payments, an important indicator of
whether companies are willing to pay more, rose just 0.3 percent.
Consumer prices rose 0.7 percent in September, compared with a year earlier. That means real wages
actually fell, Masamichi Adachi, an economist at JPMorgan in Tokyo, said in a research note. “While there
is anecdotal information that labor shortages are pushing up the wages of certain types of workers”
including construction-related workers and part-timers, he wrote, “average wages remained weak.”
And even though the wages of large companies are likely to increase in the next fiscal year along with
profits, “it looks difficult to see a material rise in the average wages of all workers in the near future.”
“People are feeling better, more confident these days,” said Hiromichi Shirakawa, managing director of
Japan economics at Credit Suisse in Tokyo. “But if you are Japanese, living in Japan, you don’t feel a huge
change.”
Go to a nightclub or a restaurant, he said, and it won’t be packed. “In Japan, that’s normal.”
The Economist
Japan and the poor
On yer bike
The public approves of the government taking aim at welfare recipients
Nov 23rd 2013 | ONO |From the print edition
AMID a din of slot machines and air thick with cigarette smoke, it is hard to believe that the grim-faced
punters in the pachinko parlours of Ono are enjoying themselves. But this small city in south-central Japan
wants to take no risks. In April it enacted a law that orders citizens to inform on anyone found squandering
welfare money on pachinko. Trips to hostess bars are also among the pastimes now forbidden for those on
so-called “livelihood assistance”. The city admits that to its knowledge none of its claimants is guilty of
such sprees. But the new law goes down well with taxpayers.
Other cities are studying Ono’s tactic. And in August the central government made the first of a series of
cuts to benefits amounting to as much as 10% over three years. It is also about to pass a law making it
harder to claim welfare. The crackdown comes just as the economy is picking up. Thanks to measures
taken by Shinzo Abe, the prime minister, the stockmarket is sharply higher, property values are rising and
large companies are more optimistic. This has benefited the better-off, though not, noticeably, the poor.
The share of the population on welfare continues to climb.
The figure is still extraordinarily low compared with other countries—Ono, with a population of 50,000,
has a mere 149 recipients. But across Japan—a country where the shame of being on benefits is especially
great—numbers have been rising. There was much public hand-wringing in 2011, when the number of
welfare recipients passed 2m for the first time since the social-security system started after the war. Few
then questioned the need to help the poorest at a time of high unemployment, food shortages and inflation.
Today more than 2.2m, or 1.7% of the population, draw livelihood assistance (see chart).
Yet the belief that jobs are easy to find and well-paying is still strong, even though the reality has changed
since Japan’s boom years. Public perception of people on welfare is worse than it has ever been, says
Makoto Yuasa, an anti-poverty activist in Tokyo. The country is having a “welfare queen” moment, he
says, similar to Ronald Reagan’s attack on America’s benefit system in 1976. But in Japan the ill-will is
unfair. According to the Japan Federation of Bar Associations, only around a fifth of those eligible for
welfare actually receive it. Many more unemployed or working poor, as well as impoverished old people,
could claim but choose not to. Others are turned away.
Powerful social stigmas are at work. Traditionally, the family is still expected to provide. Last year a
wealthy comedian was pilloried on television when it was discovered that his aged mother was claiming
welfare, even though entirely legally. Welfare fraud receives close media attention, though claimants are on
the whole both more honest and more closely policed than in most countries.
The system will tighten further with the government’s welfare-reform bill. Local authorities will be able to
investigate the ability of families to support their relations, demanding bank details and even checking up
with relatives’ employers. Currently authorities may only request that families help out. The new law will
increase the proportion of people either not applying or being turned away at local city counters, says
Tetsuro Kokubo, director of a national council on welfare problems.
It also risks further increasing a problem which is already alarmingly prevalent: dozens of cases each year
of poor people quietly starving to death at home. Such cases have in the past shamed the authorities into
making it easier to get help from the state. But now the trend is to get tough. Since Ono’s new law in April,
in six instances citizens reported suspected welfare cheats. One case of heavy drinking was linked to mental
health problems already known to the authorities. Three pachinko players who were fingered were not in
fact receiving government money. The other two reports led to people in dire need immediately being given
benefits.
NYT
A Building Boom in Japan Has Echoes
From the Lost Decade
Hiroko Tabuchi/The New York Times
Work on an agricultural ditch in Saga, Japan. Public works contracts in Saga have risen for six straight
months.
By HIROKO TABUCHI
Published: December 8, 2013
SAGA, Japan — The bulldozers started up with a rumble this year in this bucolic corner of southern Japan,
unleashing a construction frenzy — and a sinking feeling of déjà vu.
Prime Minister Shinzo Abe
The traffic cones and “under construction” signs alongside Saga’s roads and waterways are about the only
visible change brought about by “Abenomics,” Prime Minister Shinzo Abe’s much-lauded plan to put
Japan back on the path to growth. Residents here say the building boom is a throwback to Japan’s troubled
1990s, when far-flung regions across the country tried to build their way back to prosperity.
And they worry that, like previous attempts, growth will not last.
“How long before all this winds down again? That’s what everyone’s worried about,” said Masataka
Matsuo, a construction worker reinforcing an irrigation ditch several miles away from the city center.
Japan has been the world’s surprising growth story this year, largely outpacing other major industrialized
countries with a bold set of policies that are lifting its economy after years of deflation. So far, it has been
Mr. Abe’s bid to pump the nation’s banks with money — together with his promises of wide-ranging
market reforms — that have garnered much of the investor spotlight.
But some economists say that Japan’s recovery has become dangerously dependent on large-scale public
works spending, remembered here for adding to Japan’s debt burden, fueling pork-barrel politics and
riddling the country with little-used roads, bridges and dams.
On Thursday, the government announced new stimulus spending of 5.5 trillion yen, much of it for public
works, in a bid to offset any negative public reaction to a coming increase in a national sales tax.
Still, pouring money into infrastructure projects will do little to lift Japan’s growth potential in the long
term, some economists warn. And with limited evidence that monetary easing is in fact lifting the real
economy, growth “risks falling off a cliff” when government outlays sputter, said Chotaro Morita, chief
strategist at SMBC Nikko Securities in Tokyo.
Recent figures seem to support this view. In the three months to September, consumer spending grew a
mere 0.1 percent from the last quarter, and capital investment grew just 0.2 percent, despite the easy money
available under Japan’s ultra-loose monetary policy. Net exports fell 0.6 percent.
Even the rise of the stock market — up by almost 50 percent since the start of the year largely because
exporters’ earnings are higher — has not helped average people spend more.
“Japan’s growth engine has been massive government spending,” Ryutaro Kono, economist for BNP
Paribas, said in a recent note.
Saga, a small prefecture of about 850,000 people, knows all about government largess. Construction was
abundant here during the Lost Decade 1990s, as Japan sought to fend off recession with a huge public
works drive that in some years topped the entire military budget of the United States.
Saga built a new airport, dammed nearly all its river systems, and opened a 200-acre landscaped park with
a shiny visitor center and almost 100 historical buildings. At the peak of the building frenzy, one in nine
workers in Saga worked in construction.
But from the early 2000s, a reformist prime minister started to reduce spending, leaving regions like Saga
in the lurch. The Democratic Party, which took the country’s helm in 2009, declared that Japan would
further shift its resources “from concrete to people.” By 2012, public investment had declined to a third of
its peak in 1998. Almost a fifth of Saga’s construction companies closed or went out of business. The local
economy plummeted.
Mr. Abe, who led the Liberal Democratic Party to victory last December, has again turned on the spigot.
Barely two weeks after he took office, Mr. Abe announced a ¥10 trillion (over $110 billion) emergency
stimulus package centered on public works.
Within days, Saga’s prefectural assembly passed a ¥28 billion stimulus package of its own, four-fifths of
which went to infrastructure projects. The runway at Saga’s airport must be repaved, lawmakers said, and
roads extended. The prefecture even began to upgrade its Japanese-style public toilets to Western-style
ones.
Public works contracts in Saga have risen for six straight months. The prefecture scrambled to hire 47
temporary employees just to handle the extra tenders. Nationally, public works projects are at their highest
level in a decade, with almost ¥4 trillion spent in the first three quarters.
“If a road serves even one person, it serves an important purpose,” said Masatoshi Inadomi, a Liberal
Democratic lawmaker in Saga’s prefectural assembly.
Still, with no guarantee the spending bonanza will continue, even construction companies are hesitant to
ramp up hiring or investment. A growing number of public construction projects are finding no bidders
because of a shortage of workers and machinery.
“There’s lots of work, but it’s too risky to start expanding again. Government is so fickle,” said Tsuyoshi
Kishimoto, president of Kishimoto Gumi, one of Saga’s biggest contractors.
This fiscal wheel-spinning would not be as much a concern if the other Abenomics policies were wielding a
wider effect. But here in Saga, there are few signs the easy money is being put to good use. Lending at the
Bank of Saga, the region’s biggest lender, “has been largely flat this year” with little signs of a pickup in
demand for funds, said Takanori Nishikubo, a bank spokesman.
Nor are consumers here starting to spend, and for good reason. Saga’s ratio of job offers to job-seekers, a
crucial employment measure, continued to stagnate at 0.77 in September. An almost 20 percent jump in
construction jobs was not enough to offset a loss of jobs in other sectors, according to the local
government. With a tepid labor market, wages have also remained stagnant, as have consumer prices,
because of weak demand, according to a November report released by the Fukuoka branch of the Bank of
Japan.
Mitsuko Maruko, who has run an electronics store in Saga for almost four decades, says she follows the
upbeat news on Abenomics but sees no uptick in her own business. Her small store is one of the few
retailers still doing business in her hamlet, Iwaya; many young people have left. She said she could not
think of expanding or hiring outside help. Sales have been on a near-constant decline for the last two
decades.
“Absolutely nothing has changed,” Ms. Maruko said.
Still, in Saga’s Karatsu city, there is a bid to harness another aspect of Mr. Abe’s economic growth plan:
cutting the red tape that inhibits businesses from starting or growing.
Led by Bloom, a local company that conducts testing on imported cosmetics, a regional project is seeking
to bring farmers and workshops together to produce cosmetics and perfumes.
Karatsu has earmarked about ¥10 million for the project so far, a pittance compared with the billions of yen
going to construction. The hub is pushing for Saga to be named one of the government’s new “special
economic zones,” a designation that could bring favorable tax rates, looser restrictions on hiring and firing,
and other business-friendly measures.
Saga officials say they have especially high hopes of revamping the agricultural sector by getting local
farmers to grow valuable cosmetic ingredients, like traditional herbs.
“The idea is to create something new in Saga,” said Shinji Yamasaki, Bloom’s chief executive. “For
growth, you need new ideas.”
EIU
April 25th 2014
Print Share
Have the three arrows of Abenomics hit
their targets?
The eponymous economic agenda championed by the prime minister, Shinzo Abe, known as
"Abenomics"—which aims to reflate and put the economy onto a high growth trajectory—continues
to have a generally positive impact on Japan's economy, but the government's commitment to forcing
through its most controversial measures will be tested in 2014. Failure on this front will have a
profound effect on Japan's long-term growth trajectory. The Economist Intelligence Unit expects the
economy to remain on a sustainable growth path over the short term, but rates of GDP expansion
will remain unimpressive.
The initial, more straightforward stages of Abenomics have been implemented and have broadly achieved
what was intended. Mr Abe's platform consists of three strands, or "arrows": flexible fiscal policy,
aggressive monetary loosening and deregulation. The first two of these arrows gained traction in 2013,
when a weak yen boosted the value of exports (in local-currency terms) and contributed to an acceleration
in the rate of consumer price inflation, to an average of 1.2% year on year in July–December, the fastest
pace for five years. Real interest rates also entered negative territory for the first time in years. But the third
arrow of Mr Abe's programme, structural reform, has yet to gain traction.
How aggressively Mr Abe pursues structural reform remains one of the central questions for 2014.
Certainly, there is a temptation instead to bask in the glory of battles already won. There have been two
fiscal stimulus packages in the past year or so, and monetary policy has undergone dramatic change after
the Bank of Japan (BOJ, the central bank) adopted a new framework, referred to as "quantitative and
qualitative monetary easing", in April 2013, a variant of quantitative easing.
Hitting the target
The marked depreciation of the yen, which averaged ¥97.6:US$1 in 2013, compared with ¥79.8:US$1 in
2012, has helped to support economic growth and push up price growth towards the BOJ's core consumer
price inflation target of 2%. Average monthly trade data for January–February 2014 showed a 9.6% yearon-year rise in exports in local-currency terms. The rate of consumer price inflation has been accelerating
in recent months and stood at 1.5% in February. Much of Japan's inflation is still of the "wrong sort",
driven by cost-push pressures such as the high cost of imported fuel (a problem aggravated by the
shutdown of all of Japan's nuclear reactors), rather than by demand-pull factors, which would indicate a
more fundamental break with the entrenched deflation of the past.
Inflation will be boosted by the 3–percentage-point increase in the rate of consumption tax, to 8%, that took
effect in April. We expect the tax rise to lift average inflation to 2.9% in the second quarter and to 2.3% for
2014 as a whole, which would be the fastest annual rate since 1991. Our forecast of inflation of 1.6% on
average in 2015 already accounts for a second planned rise in the consumption tax rate, to 10%, in October
of that year. The government is not committed to this second increase—Mr Abe has said that it is
dependent on further satisfactory economic growth—but to step away from the policy because of a weak
economy would cast the entire Abenomics project in a poor light. As a result, we expect the rise to be
implemented.
Structural reform doubts
If the first two arrows have hit their respective targets, the trajectory of the third is still to be determined.
Deregulation offers ample scope to boost Japan's natural rate of GDP growth. The government has
expressed a desire to liberalise the electricity and pharmaceutical industries, to reform the social security
system, and to get more women into the workplace and into senior positions. So far, progress on these and
other reforms has been slow and resistance among vested interests, many of whom belong to Mr Abe's
Liberal Democratic Party, has been fierce.
Although the creation of special economic zones and some cuts to corporate taxes are likely, they do not
represent the sort of dramatic changes that are needed to put the economy on a high-growth trajectory.
Mr Abe has had some success in his attempt to use trade agreements as a method to coerce Japan's cosseted
farmers, in particular, to become more competitive. In April a deal was signed with Australia that will see
high tariffs on agricultural goods imports fall over the next 15 years, putting greater pressure on the
domestic sector. However, the failure of US and Japanese trade officials to agree agricultural and
automotive tariffs is holding up trade negotiations for the 12-member Trans-Pacific Partnership, the
conclusion of which will help to create a huge free-trade area that would cover nearly one-third of world
exports.
Subdued growth
Just as doubts are rising over whether Mr Abe's economic agenda will put the economy on a higher longterm growth trajectory, concerns are increasing over near-term prospects for expansion following the
increase in the consumption tax rate in April. Similar to other forecasters, we believe that the tax rise will
make economic growth volatile this year and expect it to cause a quarter-on-quarter contraction in the
economy in April–June. However, the ongoing implementation of the budget for fiscal year 2014/15
(April–March) and a ¥5.5trn (US$53.6bn) supplementary stimulus package will boost economic activity in
the second half of this year, resulting in real GDP growth of 1.5% for the year as a whole.
Abenomics has played a key role in reflating Japan's economy, which had been trapped in a deflationary
bind for nearly two decades, but until structural reforms gain significant traction, rates of economic growth
will remain unimpressive—at an annual average of 1.3% in 2015–18—as negative trends such as rising
public debt, lingering overcapacity and the ageing of the population take their toll.
NYT
International Business | News Analysis
Shinzo Abe’s Bid to Shake Up Corporate
Japan
By HIROKO TABUCHIJUNE 24, 2014
Photo
Mr. Abe, Japan’s prime minister, has proposed untangling the protective mutual stockholdings among
corporations. Credit Kazuhiro Nogi/Agence France-Presse — Getty Images
Even for the land that invented Toyota-style efficiency, Prime Minister Shinzo Abe is on a tear. His ruling
Liberal Democratic Party pushed 98 percent of its bills through Parliament, a success rate not seen in Japan
for over a decade.
But after a meteoric rise in the market last year, Tokyo shares have lately lost momentum as investors
increasingly question whether Japan’s hard-charging prime minister can actually achieve his ambitious
goals.
Mr. Abe’s solution? Another blast of economic measures. And in a harbinger of just how far he will go to
rouse Japan’s long-sluggish economy, he promised, among other things, to take on Japan’s staid corporate
managers and one of the most sacred of sacred cows: the nation’s interlocking connections among Japanese
companies that form the core of Japan, Inc.
In a televised address to the nation on Tuesday, Mr. Abe unveiled a fresh set of economic policies intended
to kick-start growth in Japan, the world’s third-largest economy. The country needs more women in the
workplace, he said, and more entrepreneurs and more foreign workers. Japanese corporations would do
well to ditch their anemic seniority-based systems and start rewarding high performers. And company
boards need to start hustling to generate better returns and lure back investors.
“In my growth strategy, there are neither taboos nor sacred cows,” Mr. Abe said. “There is only a singular,
strong devotion to see this through to the very end.”
Among domestic and foreign investors, however, skepticism is rife. In his bid to raise economic growth,
Mr. Abe has so far relied heavily on monetary and fiscal stimulus, which he refers to as the first two
“arrows” of his so-called Abenomics agenda. The most highly anticipated third arrow — changes intended
to bring a healthy dose of competition and innovation to the economy — has largely underwhelmed.
Continue reading the main story
Related Coverage

In Japan, Abe Proposes Corporate Tax Cuts and
Greater Role for WomenJUNE 24, 2014
Despite the flurry of bills and proposals adopted this year, details have yet to be worked out even on
centerpiece measures, like lowering Japan’s effective corporate tax rate, which is one of the highest in the
industrialized world, at 35 percent. The plan, for now, is to cut it to below 30 percent over the next years.
Continue reading the main story
Inside Japan Inc.
Many companies in Japan own shares in each other to create relationships that can protect them from
outside intereference. Here are some companies that have disclosed their connections, beginning with Ezaki
Glico, a candy maker that has struggled to post steady returns even as it has resisted other shareholders’
demands for change.
Graphic @ http://www.nytimes.com/2014/06/25/business/international/shinzo-abes-bid-to-shake-upcorporate-japan.html?hpw&action=click&pgtype=Homepage&version=HpHedThumbWell&module=wellregion&region=bottom-well&WT.nav=bottom-well&_r=0
Already, powerful voices have warned against cutting Japan’s corporate tax rate without securing other
sources of revenue for the cash-starved government. In other sensitive areas, like labor market deregulation
and tradition-bound agriculture, proposals have already been watered down.
“The Abe government will likely struggle to implement all but the most inoffensive of policies in the
growth strategy,” Tobias Harris, a Japan expert at the corporate advisory firm Teneo Intelligence, said in a
note.
One highlight of Mr. Abe’s growth platform, however, has been a promised overhaul of corporate
governance, where the administration has laid out a robust set of proposals to bring significant change to
the way Japanese corporations are run. Japan’s financial regulator has already introduced new guidelines to
bolster shareholders’ monitoring of Japanese companies.
The government is also preparing what advisers say will be a world-class corporate governance code that
requires multiple independent outside directors, formal protection of whistle-blowers, and other measures
that proponents say would have been unthinkable before Mr. Abe came to power a year and a half ago.
These corporate governance reforms also seek to put an end to a decades-old tradition: the practice of
holding shares in one another to create a web of relationships meant to keep unwanted interference to a
minimum.
It is not easily visible on the surface, but Japan’s biggest corporations are linked together in a sprawling
web of mutual shareholdings that shield company executives from the pressures of the stock market.
Coddled in a comfortable old boys’ club, Japanese executives have long gone unpenalized for failed
investments, refusing to withdraw from money-losing businesses, hoarding cash and bringing shareholders
perennially low returns.
Mr. Abe’s government sees the cozy arrangements as out of place these days, especially as the country
seeks to win over foreign investors. Mr. Abe’s latest round of measures calls for a reduction in crossshareholdings to “as low a level as possible.”
“It’s the simple answer to the question of how to raise Japan’s productivity,” Masaaki Kanno, Japan
economist at JPMorgan Securities, said this month. “The role of the shareholder will be more important.”
Take Ezaki Glico, the Osaka-based candy maker that has long struggled to generate steady returns on
equity. Glico’s equity relationships to companies far removed from its chocolate and chewing gum business
have long protected its management, and thwarted shareholders’ demands for a corporate overhaul.
According to regulatory filings, Glico’s cross-shareholdings include mutual stakes in companies as diverse
as Duskin, a cleaning services company; Toppan Printing, which puts out books; and the TV network
Tokyo Broadcasting System. Glico even has a cross-shareholding relationship with House Foods, a rival in
the snacks business, as well as its main lenders.
Those relationships came in handy for Glico’s beleaguered management in 2008, when Steel Partners, an
American hedge fund led by the billionaire Warren G. Lichtenstein, tried to force Glico to overhaul
management, and accept an outside board member.
Glico’s allies rallied to the rescue, approving a poison-pill measure that effectively shut down Steel
Partners’ efforts. By the end of the year, the hedge fund had dumped its roughly $175 million stake in
Glico; foreign observers cried foul.
For all the efforts to put an end to such practices in Japan, recent filings show they remain prevalent —
especially between companies, like Glico, with a history of being targeted by activist investors. And it is
unclear how effectively the government can pressure companies to disentangle their shareholdings. Indeed,
while Mr. Abe’s economic platform is widely seen as impressive, the challenge — as investors in Japan
have learned from the country’s previous attempts at change — is to carry the plans through. Many parts of
the Abenomics strategy have been intentionally left vague, to avoid attacks and help win the favor of the
country’s powerful bureaucrats and interest groups.
But nailing down those details, and preventing those various interests from watering down Mr. Abe’s goals,
will fully test his much-vaunted political skills.
Bank of Japan Unexpectedly Moves to
Stimulate Economy
By JONATHAN SOBLEOCT. 31, 2014
Photo
The stock market in Tokyo jumped about 5 percent on news of the stimulus boost.
TOKYO — After insisting for more than a year that its aggressive monetary policy was sufficient to revive
Japan’s economy and end deflation, the Bank of Japan on Friday unexpectedly announced that it would
increase the amount of money it pumped into the country’s financial markets by buying larger quantities of
government debt.
The central bank surprised analysts and investors by expanding its program of bond-buying — an initiative
similar to the stimulus just ended by the Federal Reserve in the United States — to increase Japan’s
monetary base by 80 trillion yen a year, or $734 billion, up from a previous range of ¥60 trillion to ¥70
trillion.
The move helped send stocks around the world higher. The Standard & Poor’s 500-stock index was up 0.8
percent in early trading on Friday. The Nikkei 225-stock index average made additional gains rose almost 5
percent on the day, while the yen fell to its weakest level against the dollar in a month.
The central bank’s stimulus has been the cornerstone of a nearly two-year effort by Shinzo Abe, Japan’s
prime minister, to reinvigorate the economy and end the persistent consumer-price declines that have
weighed on growth since the 1990s. That effort has shown signs of faltering lately, with economic output
contracting sharply in the second quarter.
The Bank of Japan is hardly alone in struggling to keep consumer prices rising at a rate considered
desirable by central bankers — typically at or about 2 percent, a level where increases are mild but still
comfortably above deflation. Prices have been falling in parts of crisis-hit Europe. Even in the United
States, where the economy is stronger and the Fed’s bond-buying program has been criticized by some
inflation hawks, the rate remains below the official 2 percent objective.
In the past week, Sweden’s central bank, considered one of the most inflation-phobic, cut its benchmark
short-term interest rate to zero in an effort to ward off falling prices.
Japan’s rate has been at zero for years, prompting it to explore more experimental measures like
quantitative easing, in which the central bank buys huge quantities of government debt and other assets in
an attempt to hold down longer-term rates, lowering borrowing costs for businesses and consumers.
Mr. Abe’s handpicked central bank governor, Haruhiko Kuroda, drastically expanded an existing bondbuying program at the central bank in April 2013. He has maintained that the new monetary settings would
be enough to lift inflation to 2 percent by about the middle of 2015.
Cheap money and the depreciating effect it has had on the yen have encouraged investors to pile into shares
of big manufacturing companies like Toyota and Hitachi. Those companies’ profits have risen with the
currency’s fall because they do much of their business outside Japan in currencies like the dollar and the
euro.
But the announcement on Friday amounted to an acknowledgment that the economy needed more help.
While prices have in fact been rising, the Bank of Japan’s favored measure of consumer inflation, which
excludes the price of fresh food, has been stuck at just over 1 percent for months. The bank also said that its
stimulus measures had had an effect smaller than expected on growth, cutting in half its estimate for
expansion in gross domestic product in the fiscal year ending in April, to 0.5 percent.
In addition to increasing the scale of its bond-market intervention, the bank backed away from its
previously specific timetable, saying simply that it would keep its easing measures in place “as long as it is
necessary to maintain that target” of 2 percent inflation “in a stable manner.”
Weaker consumer spending after a sales-tax increase in April and the inflation-dampening effect of falling
oil prices prompted the decision, the central bank said.
Mr. Kuroda, at a news conference, called the move a sign of the bank’s “unwavering commitment to
escaping deflation.”
“We will do whatever it takes to achieve our price target,” he said.
The central bank said in a statement accompanying its decision: “On the price front, somewhat weak
developments in demand following the consumption tax hike and a substantial decline in oil prices have
been exerting downward pressure recently.”
The move was nonetheless contentious, with four out of nine of the bank’s policy board members voting
against — a far closer margin than for any decision by the bank since Mr. Kuroda took over.
Beating deflation has long been a goal in Japan, one that has eluded successive prime ministers and central
bank chiefs.
Mr. Kuroda’s efforts have been the most successful so far, yet not everyone is comfortable with his
headlong approach to creating money. As in the United States and elsewhere, critics have warned that
quantitative easing encourages the government to pile up debt and could one day lead to runaway inflation.
And in a country that still feels the effects of a disastrous land and stock bubble that burst more than 20
years ago, fears of undue asset-price surges remain.
Uncomfortably for policy makers, the recent bout of mild inflation has also been uneven. Exacerbated by
April’s sales tax increase of three percentage points, prices have been going up faster than incomes, in
effect making many people poorer.
Adjusted for inflation, average incomes for working households were down 6 percent in September,
according to government data released on Friday. Public support for Mr. Abe’s economic policies,
collectively known as Abenomics, has waned.
“If you’re a small business, or if you’re working a part-time job, you feel that nothing has come your way,”
Kathy Matsui, an analyst at Goldman Sachs, said, though she added that she supported Mr. Abe’s fight
against deflation, as well as other goals of Abenomics, like deregulation and corporate-governance reform.
A second sales-tax increase, which like April’s increase was approved by a previous government, is
scheduled to take effect in October 2015. Surveys show most Japanese voters want it scrapped, but Mr.
Kuroda, a former finance ministry official, has been a vocal supporter of moving ahead as planned.
Abenomics picks up speed
The battle for Japan
Shinzo Abe’s fight to reshape Japan’s
economy and society is entering a new
phase
Jun 28th 2014 | TOKYO and YABU | From the print edition
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THE arrest on May 17th of a Japanese pop star, Aska, for possessing drugs would normally have attracted
little attention. Yet the tentacles of the affair reach further. Aska is an acquaintance of Yasuyuki Nambu,
founder of Pasona, a temporary-staffing agency. Following the arrest a tabloid newspaper splashed stories
about sumptuous parties thrown by Mr Nambu in an impeccably appointed guesthouse in the capital.
Besides Aska, revellers included glamorous hostesses and senior politicians from the government of Shinzo
Abe, Japan’s prime minister. One was the labour minister, Norihisa Tamura.
Odd as it seems, the scandal is a sign that Mr Abe’s strategy to shake up Japan is at last having an impact:
those opposed to his reforms are worried enough to want to try to damage their proponents. The labour
market is one of the main battlefields; muckraking journalism, one of the weapons, complain Mr Abe’s
advisers.
His opponents are right to fret. This week the government approved a blueprint for structural reforms. After
countless false dawns, Japan may at last have the combination of political circumstance and economic
exigency to make reform inevitable and, in Mr Abe, a leader with the nous to bring it about. In 2013 he
launched a bold, three-part plan to pull the country from its long economic stagnation. Borrowing from a
folk tale, he dubbed his changes the “three arrows”. The first was a jolt of fiscal stimulus for the economy,
the second an unprecedented monetary boost through massive quantitative easing. The third is a set of
radical structural reforms aimed at boosting the economy’s long-run rate of growth.
The most recent Japanese prime minister to dare attempt far-reaching changes was, in 2001-06, Junichiro
Koizumi, Mr Abe’s mentor. Now, like him, Mr Abe faces a wall of resistance. Labour unions, farmers,
doctors, giant corporations and their supporters among politicians and bureaucrats are uniting in opposition
to change.
The third arrow is the most important, but the hardest to shoot. Fears had grown over whether Mr Abe
would even try. Yet Japan’s deep-seated problems—a rapidly shrinking population, a risk-averse corporate
sector, a dangerously high level of national debt (240% of GDP) that might one day provoke a crisis, and
an inflexible labour market—are only worsening.
The first two stages of Mr Abe’s grand design were swiftly achieved. His fiscal stimulus of ¥10.3 trillion
came a month after his return to power in December 2012. Haruhiko Kuroda, installed three months later as
governor of the Bank of Japan (BoJ), promptly launched a massive round of quantitative easing to drag the
economy from its long deflationary vortex. The BoJ is in sight of its goal of generating core inflation of 2%
by the spring of 2015; it has now risen to around 1.25%. For a time some even argued that “Kurodanomics”
was enough by itself to restore vigour to the economy.
The last arrow in the quiver
The first master plan for structural reform, unveiled last June, was a disappointment. Just before an election
for the upper house of parliament in July, Mr Abe played safe. His Liberal Democratic Party (LDP) and its
coalition partner, New Komeito, won a majority in both houses of parliament. Shunning the chance to be
radical, the LDP slumped into lazy complacency, loth to irk powerful vested-interest groups. Disillusion
with Abenomics set in. The main stockmarket index, the world’s best-performing in 2013, has fallen (see
chart).
Reformists around Mr Abe harbour two nagging doubts about him. One is that he might be diverted by the
nationalist agenda that marred his first, abortive stint as prime minister in 2006-07. In December he visited
the Yasukuni shrine in Tokyo, where high-ranking war criminals are among the war dead honoured. For
Japan’s neighbours the shrine has come to symbolise an unrepentant militarism.
The second fear is that Mr Abe simply lacks the gumption to push through sweeping changes. His advisers
admit he may lack the zeal for economic reform that he has for the issues of security and constitutional
change. But he now seems ready for the battle. His government’s growth strategy has swollen into a 249item monster of mind-numbing bureaucratese. Some are merely bids for fat budget allocations for
boondoggles. Yet many of the measures are aimed at the most vital parts of Japan’s economy and society.
Mr Abe’s high approval ratings are tied to the stockmarket, so he first paid attention to its investors. He
promised to cut Japan’s corporate-tax rate from its current level of around 35%, first to 29% and then
lower—a symbolic step long demanded by Japan Inc. He also wants to push the ultraconservative
Government Pension Investment Fund (GPIF), the world’s deepest pot of savings, into taking greater risks
to boost returns. The GPIF’s leadership has accused the government of cynically using it to lift the
stockmarket.
Anti-reformers argued for stopping there, doing little to disrupt ordinary Japanese lives. Instead, the
government is starting to tackle the so-called “bedrock” regulations holding back three important parts of
the economy: farming; medical services; and the labour market. When Mr Koizumi tried to break through
these rules, by, for example, allowing manufacturers to hire temporary workers from firms such as Pasona,
it provoked a public backlash.
A controversial proposal of recent weeks, known as the “white-collar exemption”, seeks to tackle Japan’s
culture of inhumanely long working hours and low productivity, particularly in services. Highly paid
professionals, as elsewhere, will no longer earn “overtime” pay. Mr Abe wants workers paid for work, not
hours. But labour unions have misrepresented the measure as a ruse to cut pay for the rank-and-file.
“Salarymen” are shown on television furiously opposing it, even though the exemption will not touch most
of them. Yet the plan is to go much further in labour-market reform and give firms the right to fire workers.
Sacking permanent employees, still the majority of the labour force, is in effect impossible today.
Unpopular as it would be, this reform would have the biggest economic impact of any.
Watchdog-whistle politics
A duel over Japan’s poor corporate governance offers further evidence that Mr Abe is making changes that
count. Early this year the government quietly introduced guidelines obliging institutional investors to
monitor companies more effectively. In May Yasuhisa Shiozaki, the LDP’s most ardent economic
reformist, outlined plans for an accompanying corporate-governance code. Future whistle-blowers would
fare better than did Michael Woodford, a former president of Olympus, who was sacked in 2011 when he
discovered vast fraud at the firm. And independent directors would become near-mandatory.
The proportion of Japan Inc owned by foreigners is rising sharply (see chart), helping the reforms along.
But Keidanren, Japan’s main business lobby, a generous donor to the LDP, detests the changes. Yet they
would help usher in something like shareholder capitalism to Japan. The allocation of capital would
improve, away from dying, zombie businesses towards innovative, growing ones.
Despite his past image as a social conservative intent on maintaining Japan’s traditional gender roles, Mr
Abe’s government is to allow foreign workers to care for children and the elderly in a series of “special
economic zones”, and so help women climb the career ladder. This has elicited the usual xenophobia,
including from the labour minister. Mr Tamura suggested that foreign influences might damage the
development of Japanese youngsters. The LDP may also change the tax system to stop penalising working
wives. Millions of couples who benefit from the current system will be up in arms.
Mr Abe also seems willing to take on powerful vested interests in farming and in health care. Supporters
see as among his boldest moves an attempt to overhaul Japan Agriculture (JA), a network of agricultural
co-operatives that is one of the LDP’s most powerful political supporters. In health care, the government
will allow patients to combine private medical care with publicly covered medicine in many more cases,
rather than forcing them to forfeit their public coverage when opting for advanced treatments. That should
boost advanced health care and lay the ground for increased medical tourism.
Mr Abe has also identified a number of special economic zones to experiment with the most ambitious
reforms. When ministers and their bureaucrats resist making changes nationwide, Mr Abe threatens to
enact them still more radically in the zones, which include Tokyo and Osaka.
“If all these measures do not represent meaningful reform, then there is no meaningful reform,” declares
Koichi Akaishi, an official at the Cabinet Office. But in truth they are only a beginning. The third arrow as
yet does not attack the labour market with sufficient vigour and is unlikely to carry a strong enough boost
to the supply side to restore vim to Japan’s economy. Growth in GDP has leapt over the past year, and in
the first quarter of 2014, the economy notched up an impressive spurt of an annualised 6.7%, but that was
partly a result of a rush to buy before the rise in April in consumption tax from 5% to 8%. The tax rise is
expected to exert a powerful drag on growth for the full year. The BoJ may yet unleash a second round of
monetary easing later in 2014 in order to reach its 2% inflation target.
Agreement on another pillar of Mr Abe’s revival plan, the Trans-Pacific Partnership (TPP), an ambitious
regional free-trade agreement, would provide a further big jolt to his plans for reform. Mr Abe’s bravery in
joining the talks over the fierce opposition of JA and its LDP supporters fostered optimism about
Abenomics. But talks drag on, and agreement looks distant.
Scatterguns v snipers
Some argue that Mr Abe would be better off aiming at fewer targets. Rather than go some of the way on a
wide array of measures, they say, he should concentrate on a few and go the full distance. Gerald Curtis of
Columbia University argues a better strategy would have been to have chosen five or so “do or die”
reforms and concentrate political capital on them.
Mr Akaishi in the Cabinet Office counters that “if you want to change the economic and social structure of
the country, you have to tackle far more, and in detail.” Without tighter corporate governance, for example,
Mr Abe’s tax cut for businesses could allow Japanese corporations to sit on ever-larger hoards of retained
earnings, rather than put the money to work. Increased labour-market flexibility demands higher levels of
job creation through easing barriers for entrepreneurs. So Mr Abe has a plan to boost business creation by,
for example, legalising the crowdfunding of Japanese start-ups.
Jesper Koll, of J.P. Morgan in Tokyo, compares Mr Abe’s tactics to a venture capitalist’s investments;
some will fall flat, but with so many, some are bound to work. And the pressures for reform are only
mounting. The country’s demographic headwind, for example, blows ever harder.
Hundreds of towns and villages are threatened with depopulation. A typical one is Yabu, an agricultural
settlement of some 26,000 inhabitants set in the mountains of deepest rural Hyogo prefecture. The town is
shutting down schools as its population of young people shrinks rapidly. Elderly tillers farm the land, with
the average landowner in his mid-70s and usually no children ready to take on the task. Farming is on its
deathbed. Abandoned, weed-filled fields are spreading along the mountainsides. In response, Yabu’s
mayor, Sakae Hirose, last year applied for the city to become one of Mr Abe’s special economic zones. He
will override local agricultural committees to allow companies to buy farmland for the first time. He says
local powers-that-be are resisting his attempted reforms “severely”.
But young people have much to gain from Abenomics. Workers used to be protected by an expensive
system of lifetime employment. But firms place new entrants on short-term, ill-paid contracts. Nearly twofifths of the workforce now falls into this “irregular” category (see chart).
For Soichiro Takashima, the young mayor of Fukuoka, a city on the southern island of Kyushu, it is the
poor prospects of Japan’s youth that Mr Abe’s reforms must improve. His generation has never seen an
increase in salary, he says. And yet, he explains, it “wants to dream and succeed like our counterparts
elsewhere in Asia”.
Mr Takashima’s plan for Fukuoka, another of the new special economic zones, was to allow firms to fire
employees with ease in their first five years in business. He backed down after strong opposition from
locals and from the labour ministry in Tokyo. For now Fukuoka will open centres to advise firms about
their rights to make lay-offs. Yet Mr Abe is intent on backing reforming mayors such as Mr Hirose and Mr
Takashima. He has pledged to extend reforms in the zones within two years.
The list of all Japan still needs to do after years of political paralysis and inaction is daunting. Failure is still
a possibility. The BoJ is only a little over halfway towards meeting its inflation target, and it will have to do
without the help it got from the yen’s depreciation last year. Households are squeezed by rising food prices
and falling real incomes; people could still become fed up with Abenomics.
In for the long haul
Yet other factors support Mr Abe and his efforts at reform. Unemployment is at a low, the financial sector
is healthy and corporate earnings are improving, providing a cushion for potentially painful changes. And
Mr Abe has time. The opposition is in disarray. The Democratic Party of Japan, elected in 2009 on hopes of
fresh thinking in politics, changed next to nothing while it was in power. It is still traumatised by its
trouncing in 2012. There is no need in any case for Mr Abe to face voters before 2016. The pace of reform
may look slow, says Michael Cucek, author of a wry blog on Japanese politics, but Mr Abe will be
determined and unwavering.
The government has started to discuss the likelihood of his staying in power even until 2018. After that, the
LDP’s rules would oblige him to step down as the party’s leader. Returned from the political dead, Mr Abe
has already surprised with his born-again determination to press for far-reaching reforms. There is a good
chance that he will stick to his arrows and, against all the odds, change Japan.
NYT
For data see: http://www.nytimes.com/2014/11/06/business/in-japan-moves-to-stimulate-economyreach-a-critical-stage.html?hp&action=click&pgtype=Homepage&module=first-columnregion&region=top-news&WT.nav=top-news&_r=0
In Japan, Moves to Stimulate Economy
Reach a Critical Stage
By JONATHAN SOBLENOV. 5, 2014
Photo
Hiroyuki Hara, who has a flower shop in Tokyo, says sales are down this year
because of the shrinking buying power of paychecks. Credit Kentaro Takahashi for
Continue reading the main story
TOKYO — Hiroyuki Hara has increased prices at his flower shop in recent months, part of a broad reversal
of the deflation that has long plagued Japan’s economy. Getting prices rising is a national goal, but Mr.
Hara isn’t sure the new landscape is any more vibrant.
“We used to get a lot of office workers in here, but now it’s mostly just older people, the ones with
savings,” he says. Sales are down this year. He blames the shrinking buying power of his customers’
paychecks.
Mr. Hara’s own costs are mounting too, as a precipitous decline in the value of Japan’s currency has made
imported flowers pricier. And although he is charging more, the extra money is going to the government,
which controversially raised sales taxes in April. A further tax increase is planned for next year. “It has me
worried,” Mr. Hara says.
Japan’s audacious campaign to reinvigorate its economy is entering a make-or-break phase.
After nearly two years of aggressive stimulus under Prime Minister Shinzo Abe, joblessness has plunged,
big companies like Toyota are earning record profits and corrosive price declines have been replaced by
something Japan has rarely seen in decades — inflation.
Continue reading the main story
Japan’s Predicament
Rising prices are shrinking buying power, while the falling yen is making imports more costly and a tax
increase is weighing on growth.
Yet the benefits of Abenomics, as the program is known, have been unevenly distributed. Many consumers
and businesses simply don’t feel better off.
The problem threatens to undermine support for the effort at a critical juncture. Economic output fell
sharply in the second quarter, immediately after April’s sales tax increase — evidence that consumer
confidence remains fragile. Mr. Abe will soon have to decide whether to move forward with the next tax
increase or table it.
“There is a spreading sense of disappointment with Abenomics,” says Masazumi Wakatabe, an economics
professor at Waseda University in Tokyo. The fact that prices are rising is not, by itself, a bad thing. Just
the opposite: The government and most economists see it as preferable to the deflation that has dogged
Japan since the late 1990s.
When prices fall, it encourages households and businesses to squirrel away cash, holding back growth.
Deflation also makes it difficult for central banks to rally an economy by cutting interest rates, which in
Japan have been stuck at zero for years.
Yet the public is showing clear signs of inflation fatigue. In a poll published on Monday by the Tokyo
Broadcasting System, a national television network, nine in 10 respondents said they had no “real feeling”
that the government initiatives were improving living standards.
Instead of the balanced rise in prices and wages that Mr. Abe promised, pay has lagged, in effect making
workers poorer. Adjusted for price changes, household incomes were down a full 6 percent in September
compared with a year earlier.
Kathy M. Matsui, an analyst at Goldman Sachs, says sluggish wage growth is partly the flip side to Japan’s
protective employment practices. “The social contract is what? It’s when times are tough, unlike in the
West, we’ll keep you on the payroll, although we’ll slash your wages,” she says. “But then when times get
good, you don’t get as much of what you might get elsewhere.”
Rather than ease efforts to create inflation, the central bank has redoubled them. In an unexpected decision,
the Bank of Japan said on Friday that it would expand its program of buying government bonds and other
assets to the equivalent of more than $700 billion a year. The move, intended to stimulate borrowing and
spending, spurred a rally in global stocks.
“We are at a critical point for escaping deflation,” Haruhiko Kuroda, the central bank governor, said,
adding that “half measures” would only bring back Japan’s “deflationary mind-set.” Hinting at what could
be more stimulus to come, he added that the Bank of Japan would do whatever it took to meet its official
target of 2 percent “core” price increases, a measure that excludes the effect of taxes and other items.
But the aggressive stimulus, which has pushed down the value of the yen, is only complicating matters. At
the outset, the currency’s retreat was universally embraced as a relief for Japan’s many exporters. Now it is
feeding concerns that imports are too expensive. The value of the yen is down more than 30 percent against
the dollar since 2012. Exports were supposed to flourish in response, but the trade balance has instead been
stuck in deficit.
It is not just the flowers in Mr. Hara’s shop that are costlier, but also big-ticket items like oil and natural
gas, consumption of which has soared since the Fukushima nuclear disaster in 2011. Nuclear power plants
remain closed nationwide, and electricity bills have leapt by double digits as a consequence.
“If the yen weakens any further, it would be bad for Japan’s economy as a whole,” Genichi Tamatsuka, the
president of Lawson, one of Japan’s biggest convenience store chains, told reporters this week.
In parliament on Tuesday, Mr. Abe was forced to defend the central bank actions that have depressed the
currency. “When the yen falls, there are issues that go with that fall, and we have to deal with them,” he
said, though he gave no sign that he would pressure Mr. Kuroda to reverse course.
The sales tax increase has drawn the most intense opposition. The two-stage rise was authorized by a
previous government, as a means of tackling Japan’s vast public debt. The second part, which is scheduled
for October, will take the rate to 10 percent — double what it was before the first increase.
Mr. Abe has the authority to stop it if he judges the economy too fragile. But he must make his choice by
next month to get a revised tax law through parliament in time. So far he has been coy, saying only that he
wants to make a “coolheaded decision.”
Some lawmakers and economists close to the government have urged the prime minister to postpone, by
perhaps 18 months, thus, giving time, they hope, for wages to catch up to prices and create a less painful
kind of inflation. “We need to prioritize economic growth,” Kozo Yamamoto, a lawmaker in Mr. Abe’s
Liberal Democratic Party who helped plan the stimulus policies, said in an interview.
Most of Japan’s business and political leaders are lined up on the other side of the debate, citing potential
danger to the country’s creditworthiness if financial markets conclude the country is turning away from
fiscal discipline. The powerful finance ministry, corporate executives, bankers and even the largest
opposition party favor going ahead as planned. Sadayuki Sakakibara, chairman of Keidanren, the lobby
group that represents Japan’s biggest companies, has called the tax increase a “national issue” that “can’t be
avoided.”
Even Mr. Kuroda, the Bank of Japan governor, is pushing for the tax rise to go ahead. He is doing so
despite complaints that it will widen the gap between wages and prices and discourage the precise thing he
is trying to foster, consumer spending.
A finance ministry official before he became a central banker, he views the tax as essential to addressing
the debt, which relative to the size of the economy is the largest in the world. By printing money freely, he
is creating what he hopes will be a cushion against its economic impact.
“If there were a loss of confidence in the government’s finances,” Mr. Kuroda said last week, “it would be
extremely difficult to deal with.”
Defying Expectations, Japan’s Economy
Shrinks Further
By JONATHAN SOBLENOV. 16, 2014
Photo
The Shiodome business district in Tokyo. Japan's gross domestic product shrank by
an annual pace of 1.6 percent in the most recent quarter Credit Thomas
Peter/Reuters
TOKYO — Japan’s economy unexpectedly shrank in the third quarter, according to government data
released there on Monday, extending a painful slump triggered by an increase in the national sales tax and
making it more likely that policy makers will put off a second tax hike scheduled to take effect next year.
The two-stage tax increase has become an all-consuming political issue in Japan, to the point that Prime
Minister Shinzo Abe is considering dissolving Parliament and calling fresh elections, people close to him
say. Monday’s economic report is seen as critical to Mr. Abe’s decision, which is widely expected to come
this week.
The preliminary report, issued by the Cabinet Office, showed that gross domestic product fell at an annual
pace of 1.6 percent in the quarter through September. That added to the previous quarter’s much larger
decline, which the government now puts at 7.3 percent, revised downward from 7.1 percent in its last
report.
The third-quarter G.D.P. figure confounded analyst forecasts, which were mostly more optimistic.
Economists surveyed by news agencies and think tanks had been forecasting annual growth of slightly
more than 2 percent on average. Mr. Abe has not said how much the economy would have needed to grow
to give him the confidence to raise taxes again, but one of his economic advisers, Etsuro Honda, has argued
that the minimum number needed to be close to 4 percent — higher even than the forecasts and far better
than the surprising negative result.
Although the next tax increase would not come into effect until October, Mr. Abe needs to decide what to
do about it soon, to give Parliament time to change the relevant legislation if he opts to cancel or postpone
it. If fully implemented, the plan would double the tax on all goods and services sold in the country, to 10
percent, over 18 months. It now stands at 8 percent after the first stage went ahead in April.
The increases are aimed at curbing Japan’s massive government debt, which at about two and a half years’
national economic output is the largest in the developed world. But there are concerns that after years of
sluggish wage growth, consumer confidence is still too weak handle them. Instead of solving the debt
problem, heavier taxes could simply push the economy back into a downward slide.
Mr. Abe has been trying to end Japan’s long era of deflation through an unprecedented campaign of
economic stimulus. The effort, known as Abenomics, has dealt with setbacks in recent months. After the
unexpectedly severe slowdown in the second quarter, institutions ranging from the International Monetary
Fund to the Bank of Japan have cut their estimates for economic growth this year and next. The central
bank, its goal of reaching 2 percent stable inflation looking increasingly out of reach, was prompted late
last month to expand a stimulus program involving massive purchases of government bonds.
Abenomics is now in a particularly delicate phase. Consumer prices are rising, if not yet as strongly as
hoped, as are corporate profits and the value of assets like stocks and property. But so far not much of the
new wealth has reached average workers. Incomes have fallen behind the rising cost of living, in effect
making people poorer. Another of Mr. Abe’s advisers, Kozo Yamamoto, a lawmaker in his ruling Liberal
Democratic Party, says the second tax rise needs to be put off “until wages catch up” to prices.
Monday’s data showed surprising weakness across most areas of the economy. Consumer spending barely
picked up from its depressed level after the tax increase in April, while indicators of housing and business
investment declined.
Mr. Abe does not need to call an election to modify the tax plan, since his party is in firm control of both
houses of the national legislature, the Diet. Even the existing tax legislation gives him some scope for
review if he judges that the economy is struggling, and with a parliamentary majority the L.D.P. and its
smaller coalition partner, New Komeito, could rewrite the law as they wanted.
Parliament’s current term lasts until mid-2016, making any election a year and a half sooner than legally
necessary. Some political commentators have suggested the tax issue is merely a convenient pretext for Mr.
Abe to seek a fresh term while he has political advantage on his side. Opposition parties are weak and
disorganized, and although his once-sky-high poll ratings have slipped he remains relatively popular, with
public support of around 50 percent.
A majority of voters say they would like to see the tax hike scrapped, and the conventional wisdom is that
the L.D.P. would easily win a snap election, particularly if its campaign were based on changing course on
the tax.
NYT
Prime Minister Shinzo Abe Calls for
Early Elections in Japan
By MARTIN FACKLERNOV. 18, 2014
Continue reading the main story Video
Play Video|0:46
Japanese Premier Calls for Elections
Shinzo Abe, the Japanese prime minister, called for early elections to seek a new mandate on his economic
policies after data showed the country falling into recession.
Video by Reuters on Publish Date November 18, 2014. Photo by Toru
Hanai/Reuters.
IWAKUNI, Japan — With his once-vaunted plan for reviving Japan’s economy now faltering, Prime
Minister Shinzo Abe declared on Tuesday that he would dissolve Parliament and hold national elections
next month, saying he wants a new mandate from voters.
In a broadcast on live national television, Mr. Abe explained the move by saying he wanted to ask voters to
approve his decision to postpone a scheduled increase in the national sales tax, which he warned could
further hurt growth. But he also framed it as a broader referendum on his economic measures, known as
Abenomics.
“There are divided opinions about the economic policies that we are pursuing. There is also resistance,”
Mr. Abe said. “To continue advancing that growth strategy with the support of the people, we need to listen
to the voice of people.”
Political analysts said the decision to call an election was an admission by Mr. Abe that his widely watched
economic program, intended to pull Japan out of its two-decade slump, was losing steam. That program, a
mix of increased government spending and an aggressive pumping of cash into the economy by the central
bank, lifted the stock market and won praise as a potential model for other developed economies. In
Washington last year, Mr. Abe proudly proclaimed that Japan was back on solid footing.
Now it appears he may have spoken too soon. Economists say growth in the Japanese economy, the world’s
third-largest, after the United States and China, has faltered because of a failure to follow up with painful
changes and because of the ill-timed increase in the national sales tax. The final blow came on Monday,
when official figures showed that Japan had fallen into recession in the third quarter.
Those figures, and growing criticism from opposition parties saying that his policies were failing, prompted
him to call an election, Mr. Abe said.
“There is criticism that Abenomics is a failure,” Mr. Abe said. “So what should we do? Unfortunately, I
have yet to hear one concrete idea.”
Calling elections could also be a bid to renew support for a government that has suffered from a growing
number of financing and other scandals. While he has been able to overcome major political damage so far,
the problems are similar to those that Mr. Abe faced during his first term as prime minister. Seven years
ago, those scandals eventually toppled his government.
Analysts said a prolonged economic slowdown could spell the end of the so-called Abe phenomenon, in
which the prime minister enjoyed high approval ratings and appeared destined to stay in office for several
years, a rarity in a nation with a long series of leaders with short political life spans. They said the basis of
his popularity was his success in lifting some of Japan’s economic gloom and in restoring confidence.
“The size of the economy’s decline was a big shock to Abe and the Liberal Democratic Party,” said
Katsuyuki Yakushiji, a professor of politics at Toyo University in Tokyo. “It makes Abenomics look like a
failure. Abe suddenly looks desperate to stay in power.”
Analysts also said the recent signs that Abenomics was fizzling could hamper, or even block, Mr. Abe’s
attempts to implement less popular parts of his agenda, such as expanding the role of Japan’s military, or
restarting its shuttered nuclear industry.
Perhaps most important, Mr. Abe is seeking a mandate on an issue close to voters’ pocketbooks: whether to
postpone a second scheduled increase of the national sales tax, which by law is to take place next year.
On Tuesday, Mr. Abe said he wanted to submit the issue to voters because it would amount to a reversal of
a position by his Liberal Democratic Party, which supported the tax increase bill when it passed two years
ago. Such a delay would undoubtedly prove popular among voters, especially after the first increase of the
sales tax this year was widely blamed for contributing to the current recession.
However, many political experts also said they detected a deep pessimism under Mr. Abe’s decision. By
calling an election, they said, Mr. Abe was essentially admitting that he did not see the economy regaining
its energy anytime soon. Such a negative assessment of the country’s economic future might be pushing
him to hold the election now, before voters become even more unhappy, they said.
Mr. Abe’s approval ratings have begun to fall recently, with percentages in the low 40s in recent opinion
surveys.
“There is only one reason to call an election now, and that is the fear that things will be only worse if he
waits,” said Gerald L. Curtis, a specialist on Japanese politics at Columbia University. “The expectation of
political stability and an Abe administration unchallenged for six years, that so many thought just two
weeks ago was the most likely scenario, is now history. Suddenly, we have an economy in recession, a
government in political trouble and a very cloudy future.”
With Mr. Abe facing so many challenges, an election might seem risky. However, analysts said the prime
minister was betting that his party still had one thing going for it: It remains more appealing to voters than
the main opposition Democratic Party, which has fallen into disarray since its election defeat two years
ago.
In fact, experts said, one reason to call an election is to prevent the Democrats and other opposition parties
from having enough time to enlist candidates and mount a serious challenge. With the vote only a month
away, the Democrats acknowledge they have candidates to compete in only about 134 of Japan’s 295
electoral districts.
The next-largest opposition party, the Japan Innovation Party, run by the mayor of Osaka, Toru Hashimoto,
has said it can field fewer than 75 candidates.
“The opposition has been caught with its pants down,” Mr. Curtis said. “Waiting another year to call the
election only gives the opposition more time to get better organized.”
NYT
A Sudden Schism Between Shinzo Abe
and the Bank of Japan Governor
By JONATHAN SOBLENOV. 19, 2014
TOKYO — The Japanese prime minister and central bank governor have cooperated so closely over the
last two years that their relationship is routinely likened to a three-legged race. Bound at the ankles and
moving in sync, they have hustled toward their declared goal of ending economic stagnation.
The governor of the Bank of Japan, Haruhiko Kuroda, has taken such an outsize role in efforts to promote
growth that some commentators slyly refer to Tokyo’s stimulus initiatives as “Kurodanomics.” The
description of Mr. Kuroda as the driving force behind Japan’s economic policy — known in polite
company as Abenomics, after Prime Minister Shinzo Abe — seemed to fit snugly last month, when he
pledged to inject even more central bank money into the economy.
Yet the partners suddenly look out of step. Mr. Abe announced on Tuesday that he would postpone a
planned tax increase that Mr. Kuroda had long supported. Higher taxes are vital to taming Japan’s national
debt, Mr. Kuroda argues, and some are calling Mr. Abe’s reversal a stab in the back.
“Prime Minister Abe has betrayed Kuroda and the Bank of Japan and chosen victory over scruples,”
Soichiro Tahara, a prominent political commentator and journalist, wrote on Wednesday in a piece posted
on the website of the Asahi Weekly magazine. In addition to delaying the second and final phase of the tax
increase by a year and a half, to April 2017, Mr. Abe called a snap election for next month. Analysts
believe his Liberal Democratic Party will win.
Mr. Kuroda had lobbied hard for Mr. Abe to stick to a long-agreed timetable to increase the national sales
tax, which was meant to double to 10 percent, with the first step coming last April and the second next
October. Many saw an implicit deal: Mr. Kuroda would print more money, supporting the economy, and
Mr. Abe would raise taxes and tackle the debt.
“Fiscal discipline is the responsibility of the government and Parliament, not the central bank,” Mr. Kuroda
said at a news conference on Wednesday, seeking to dispel talk of a rift. Asked if he thought delaying the
tax increase would have the intended effect of encouraging growth and inflation, he added, “There’s no
point going into my personal views.”
Mr. Kuroda was speaking after the central bank’s policy committee voted to leave its monetary settings
unchanged. The decision was universally expected, after a surprise move the last time the committee met,
on Oct. 31, when it approved a proposal by Mr. Kuroda to buy trillions more yen worth of government
bonds and other assets. The initiative is intended to keep borrowing costs low and encourage spending and
investment.
Masamichi Adachi, a former central bank official who is now an economist at JPMorgan Chase, said it was
inevitable that Mr. Abe’s wishes would prevail in any disagreement with Mr. Kuroda over policy. “Some
people regarded it as a coalition, and in that sense he’s lost standing,” he said of Mr. Kuroda. “But he
totally understands he’s under Abe, not an equal. At the end of the day, the B.O.J. has no independence
from the Abe administration.”
Mr. Kuroda was appointed the Bank of Japan’s governor by Mr. Abe last year. Before that, he built his
career at the Ministry of Finance, which has pushed for years to have the sales tax raised. With government
revenue constrained by weak growth and deflation, Japan’s debt has grown to the equivalent of two and a
half years’ economic output, by far the highest level in the developed world.
Within the ministry, Mr. Kuroda was known as an advocate of aggressive stimulus measures, something
that set him apart from more cautious colleagues. Yet compared with others in Mr. Abe’s inner circle,
which includes proponents of all-out government spending financed by the central bank, he has been a
relative budget hawk.
“Maybe it’s because he still carries some Finance Ministry DNA, but he’s aware that if the government
loses all financial constraint, there’s a risk of a bond-market plunge,” said a veteran ministry official, who
spoke only on the condition of anonymity to avoid antagonizing his former colleague.
Mr. Kuroda said on Wednesday that he believed the Japanese economy was still fundamentally on a path to
growth, despite government data released on Monday that showed that the country had slipped into
recession in the third quarter.
Gross domestic product contracted at an annualized rate of 1.6 percent, the data showed. That followed a
7.3 percent plunge in the previous quarter, after the first stage of the sales tax increase. The blow to
consumer spending from the increase led to the recession and persuaded Mr. Abe to delay the second
phase.
Mr. Kuroda now appears to be focused on holding Mr. Abe to a pledge to stick to the new 2017 timetable
no matter what obstacles the economy throws up. The plan is to balance the budget, excluding interest
payments on the debt, by 2020. Many economists say that is unrealistic, but Mr. Kuroda said on
Wednesday that it was crucial to try.
“The government has laid out a medium-term fiscal consolidation plan and has set a clear target,” he said.
“I hope the government follows this plan diligently and creates a sustainable fiscal structure.”
The Economist
Japan's economy
About that debt
Nov 18th 2014, 22:20 by R.A. | LONDON


IT HAS been a tumultuous couple of weeks for Japanese policy makers. First, the Bank of Japan
dramatically scaled up its quantitative easing programme in response to weak growth and inflation figures.
Then, new data revealed that the Japanese economy shrank at a 1.6% annual pace in the third quarter, when
growth had been expected. That decline was the second quarterly contraction in a row, putting Japan in a
technical recession. And today Shinzo Abe, the prime minister, called snap elections with an eye toward
building a mandate to postpone an imminent rise in Japan's consumption tax. The consumption tax rise is
part of a strategy designed to get Japan's government debt under control; Japanese government debt is now
above 240% of GDP and the government continues to run deficits of around 8% of GDP per year. But the
first part of the deficit-reduction strategy, an initial rise in the consumption tax which took place earlier this
year, seems to have been a significant contributor to the Japanese economic slowdown.
Japan's travails suggest a couple of key questions. First, what is going on with the economy that a
consumption tax increase throws it back into recession? it may seem odd that an increase in the
consumption tax from 5% to 8% could derail what had been until the second quarter of this year a relatively
robust looking recovery. I'm not sure how surprised we ought to be, however. Given a general growth
slowdown across the world few economies can count on external demand to carry their recoveries forward
(as Japan did in the mid 2000s). The economies that are growing strongly now—America and Britain—are
very clearly not relying on rising net exports. Instead domestic demand is left to bear the load. In Japan,
that means the mobilisation of its significant private savings toward consumption and investment.
And that, in turn, means beating deflation. Higher inflation would mean that Japanese households should
expect the gentle erosion of their savings, unless those piles of yen are put to good use. Deflation, by
contrast, allows Japanese households to earn a positive return on their savings even when interest rates are
stuck at zero.
But re-establishing consistently positive inflation is a confidence game. If households believe they will
spend, firms will hire, and prices will rise. If households doubt the government's commitment to generating
more inflation then the game is lost. The initial consumption tax rise certainly had a powerful effect on
consumption choices; real GDP grew at a 6.7% annual pace in the first quarter as people brought purchases
forward before the onset of the tax increase, then fell at a 7.3% pace in the second quarter. But the
persistence of the negative effect probably reflects a loss of confidence that the battle against deflation will
be won. The increase in the tax rate on consumption is clearly contractionary, and that is not the sort of
action a government takes when it is fully committed to getting inflation and interest rates up.
Second, should we be concerned that Japan is not addressing its fiscal issues? This really is the critical
question.
One answer to it is that a determination to raise taxes and/or cut spending is not exactly at the heart of the
issue. Rather, the big problem has been the inability to manage growth in nominal output.
It is very hard to reduce the debt to GDP ratio in an economy in which the denominator refuses to grow.
Another answer is that there may come a time to worry about debt, but now is not it. The normal
mechanisms through which markets concerned about debt register their displeasure (and inhibit growth)
simply aren't a problem in Japan. Interest rates have rarely been lower. Too-low inflation is the matter. As
Paul Krugman has said, a loss of market confidence in Japan's fiscal situation would not necessarily be a
bad thing; if capital outflows led to a lower yen and higher inflation, that would be a welcome outcome for
the Bank of Japan. And a serious debt panic need not be a concern so long as markets have faith that
Japan could address its fiscal issues when push comes to shove. Given the readiness with which Japan
moved forward on the initial tax rise, despite rock-bottom interest rates, it stands to reason that any
meaningful uptick in government borrowing costs would prompt further fiscal consolidation. So for now
fiscal concerns ought clearly to be second fiddle to growth-boosting policies.
And still another answer is that while Japan was once a very dirty shirt indeed, it is looking less dirty by the
day. Among big bond issuers euro-area economies are moving up the league tables. Those euro-area
economies do not have their own central bank, and the central bank they do have is not nearly as eager as
the Bank of Japan is to buy government bonds. If liquid rich-world bonds are a scarce and precious
resource, then the troubles within the euro zone are good news for Japan. And another sign that it ought to
worry a bit less about its fiscal shortfalls.
But let's also be clear about the nature of Japan's debt problem. Its ratio of gross government debt to GDP is
over 240%, which sounds perfectly awful. But if one nets out the value of debt held by different branches
of Japanese government, then the ratio falls to less than 140%. The Bank of Japan alone holds about 20%
of outstanding Japanese government bonds and is buying more each year than the government, spendthrift
that it is, can issue. And despite all that interest rates and inflation are as low as low can be. Japan is rapidly
moving toward a world in which it can simply net out the obligations everyone insisted it would need to
bear. That is debt monetisation, the harbinger, if ever there was one, of hyperinflation. And yet
hyperinflation is about the last thing Japan has to worry about.
It's ironic, in a way: by dealing a blow to the economy and reinforcing deflationary pressures the
consumption tax rise, which was intended as a step to deal responsibly with Japan's accumulated debt, may
have cleared the way for the relentlessly acquisitive Bank of Japan, and to monetisation. Of course, this
wouldn't represent a free lunch. If one believes that Japan would have functioned as a more or less normal
economy over the last decade or two had it not been stuck at the zero lower bound, then its experience at
the deflationary trap has cost the economy trillions of dollars worth of output, and individual Japanese
workers untold jobs and wage increases.
But at this point, the debate over what Japan should do about its debt is somewhat absurd. No amount of
fiscal rectitude is going to get Japan out of its long-term rut. And so long as Japan is in its long-term rut
government debt will build and will find its way onto the balance sheet of the Bank of Japan. It is hard to
see how tax increases that undermine the effort to beat deflation serve anyone's purpose. They are paving
the road, it should be clear, to something even less familiar and more bizarre than Japan's current straits: the
monetisation of a massive amount of government debt with no inflationary consequences.
NYT
With Bad Economic News for Japan,
Abe’s Magic Seems to Evaporate
By MARTIN FACKLERNOV. 20, 2014
Photo
Prime Minister Shinzo Abe, left, with Shigeru Ishiba, the state minister in charge of
revitalizing local economies, in Parliament on Wednesday. Credit Kazuhiro
Nogi/Agence France-Presse — Getty Images
TOKYO — Is this the end of Abenomics? And if so, why did it fail?
These are the questions being asked in a shellshocked Japan just days after government accountants
announced that the economy, which most experts said they believed was rebounding, had fallen into a
sharp recession.
The answers, economists and political experts say, may turn on the difficulty that Japanese leaders have
had in choosing between competing policy approaches: monetary stimulus and fiscal austerity. And that
indecision reflects an intense debate about which aspect of Japan’s severe economic woes represents the
greater problem: the downward spiral of deflation that stimulus proponents blame for causing two “lost
decades” of stagnation, or the ballooning national debt that fiscal hawks worry could doom the nation’s
future.
It also reflects a political tug of war, pitting the powerful Ministry of Finance and its demands for
budgetary discipline against Prime Minister Shinzo Abe and others who favor government spending and
aggressive monetary policies to stimulate growth.
It was in an attempt earlier this year to balance these conflicting impulses that Mr. Abe allowed a planned
increase in the national sales tax to go through despite warnings that it could snuff out the fragile recovery
he had fostered. Now that those warnings appear to have proved true, Mr. Abe is even more committed to
the stimulus approach, postponing a second tax increase and calling a snap election to win renewed support
for his growth strategy.
But there is a third view, that neither a balanced budget nor a major stimulus alone will be enough to
produce a lasting recovery. What are needed, proponents of this view argue, are painful, market-opening
reforms that Mr. Abe has thus far failed to produce. Abenomics, they say, has so far amounted to little more
than a short-term supercharging of the economy.
“Abenomics has just been a mixed bag of tricks so far,” said Takao Komine, a specialist on economic
policy at Hosei University in Tokyo. “Its success or failure will depend on whether Prime Minister Abe can
deliver on the long-term structural changes.”
Just a few weeks ago, Abenomics was still winning accolades as a rare success story among developed
nations, many of which seemed to have caught the same disease of low to no growth and corrosive price
declines known as deflation. When Mr. Abe took office two years ago, he pressured the central bank into
making a drastic push to reinflate the economy by pumping it full of cash, which he backed up with huge
government stimulus spending. Japan’s stock market soared as the moves seemed to work a miracle,
transforming the economy into one of the world’s most robust growth stories.
Then, seemingly overnight, Mr. Abe’s magic seemed to evaporate. The mortal blow came on Monday,
when government figures showed that the world’s third-largest economy shrank by a steep 1.6 percent in
the three months ending in September. It was the second straight quarter of economic contraction, the
definition of a recession. Mr. Abe, who enjoyed high approval ratings just a few weeks ago, suddenly
looked desperate, appearing live on national television to plead for his economic program.
Most economists agree that the immediate cause was the increase on April 1 of the sales tax to 8 percent
from 5 percent, which prompted a tightening of consumer spending that rippled through the $5 trillion
economy.
Koichi Hamada, a former professor of economics at Yale University who has been an architect of Mr.
Abe’s revival policies, said the tax increase was never part of Abenomics. Rather, he said, it was a legacy
from the previous administration, which passed a law mandating that it be put in effect this year. He said
fiscal hawks within Mr. Abe’s own governing Liberal Democratic Party had urged the prime minister to let
it take effect as scheduled to help tame Japan’s ballooning national debt, which has grown to the equivalent
of more than two years of economic output and is already the largest in the developed world.
The real force behind the tax increase, he and others said, was the Ministry of Finance, the strongest of
Japan’s powerful central ministries and an advocate of balanced budgets. As Japan’s deficits have spiraled
upward during its long economic downturn, the ministry has pushed for increasing the national sales tax as
the best way to raise new revenue.
Mr. Hamada and others said the ministry scared the Abe government into going through with the tax
increase by arguing that any delay in the tax would make Japan look fiscally irresponsible and cause a
stock market crash. Fiscal hawks like those at the ministry fear that a failure to address Japan’s national
debt could lead to a crisis of confidence in which Japan can no longer sell its bonds.
But on Tuesday, Mr. Abe defied the fiscal hawks and postponed the second tax increase until 2017.
Investors applauded his renewed focus on growth, sending stocks rebounding after the biggest one-day
drop in six months on Monday. “The Ministry of Finance is a tough and powerful opponent, but Abe has
the guts to fight back,” Mr. Hamada said.
Some analysts described the snap election as an attempt to curtail the ministry’s influence. By making the
tax increase the election’s top issue, Mr. Abe is forcing the ministry’s supporters within his own party to
fall in line behind him. “Calling the election is a calculated move by Abe to silence his opponents,” said
Mr. Komine, the economist from Hosei University.
Mr. Hamada expressed optimism that the recession was just a temporary setback, and that the central
bank’s decision late last month to pump even more cash into the economy would bring back growth. “The
rocket has faltered, but it won’t crash,” he said. “Abenomics is still the right policy for Japan.”
Other experts are not so sanguine, pointing out that the tax increase was relatively small given the size of
the economy. It was a sign of the underlying weakness of Abenomics that it caused such damage, they said.
In particular, these critics argue that Mr. Abe has failed to deliver on promises to nurture entrepreneurship
and new industries, and has proved unwilling or unable to challenge the central bureaucrats and vested
interests in Japan that are resisting market-opening reforms. The farm lobby, for example, has blocked a
trans-Pacific trade deal meant to showcase Mr. Abe’s more competitive Japan.
Mr. Abe’s policies have also failed to stop sliding wages. The average income of working households fell
in September for a 14th consecutive month. The stimulus and tax increase may have exacerbated the
problem. The central bank’s very success in curtailing deflation drove prices higher for the first time in
nearly two decades. But because wages did not climb, and the sales tax pushed prices up further, most
Japanese felt poorer.
“I’d say it’s time to call Abenomics a failure,” said Jeff Kingston, a professor of politics at Temple
University’s campus in Tokyo. “The recession means Abe has failed to deliver on growth, and he has
whiffed the structural reforms. All that is left is disappointment.”
Japan’s economy
Pump-priming
Shinzo Abe unleashes a (small) stimulus
package
Jan 3rd 2015 | From the print edition
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IF YOUR first shots miss the target, keep firing. That seems to be the lesson in Japan, where the cabinet of
Shinzo Abe, the prime minister, approved an emergency stimulus package worth ¥3.5 trillion ($29.1
billion) on December 27th to pep up the recession-hit economy. Yet what stood out was the diminished heft
of the package. Nearly two years ago the first of three “arrows”, as the various parts of Mr Abe’s
programme have been dubbed, was a fiscal boost of ¥10.3 trillion, followed by another spending package
worth ¥5.5 trillion in April 2014. The other facets of “Abenomics” will now have to be exploited.
The government hopes that its meagre package will boost Japan’s real GDP by as much as 0.7% in 201516. Although more modest, the stimulus is more finely targeted this time, notes Robert Feldman of Morgan
Stanley, an investment bank. A third of the total is to go on helping small businesses and households
particularly hard hit by the effects of a weak yen and a squeeze in real incomes, both side-effects of
Abenomics itself. Measures will include handing out shopping vouchers to the poor and subsidies for
heating oil.
Another of Mr Abe’s aims is to spread the growth-boosting effects of his policies—a combination of
quantitative easing by the Bank of Japan, fiscal stimulus and structural reforms—right across the country.
So far, Tokyo has lapped up the benefits; a further ¥600 billion will therefore go on trying to rev up local
economies, including an attempt (surely ill-fated) to draw people away from the capital to the countryside.
The largesse should aid Mr Abe’s Liberal Democratic Party (LDP) as it faces nationwide local elections in
the spring.
The remaining ¥1.7 trillion will go on a traditional speciality of the LDP: public-works spending. Outlays
on infrastructure, including reconstruction after the tsunami-cum-nuclear meltdown of 2011, could boost
GDP more directly than handouts to households and small firms, since businesses may pocket the cash
rather than embark on new spending. Yet the effect may be more muted than the government intends. The
flow of stimulus money into the economy is being hampered by labour shortages in the building industry;
public-works spending even fell slightly in the second quarter after a tax increase, contributing to a
contraction in economic output. The IMF recently noted that both the implementation of planned public
works and their effectiveness in boosting the Japanese economy have declined over time.
The handout hardly helps to meet the government’s target of halving the primary
deficit (which excludes interest payments on debt) from 6.6% of GDP in 2010 to
about 3.2% in 2015. Fiscal hawks complained that the last package, of ¥5.5 trillion,
consumed two-thirds of the proceeds from a rise in the consumption (value-added)
tax. A further increase has been postponed from October 2015 to April 2017. In
December Moody’s downgraded Japan’s debt, though markets barely reacted,
having factored in the central bank’s strong support for the bond market.
Since Japan’s public debt is approaching 245% of GDP, the size of stimulus packages will surely be
constrained in future. The Bank of Japan has already done a huge amount on the monetary front. That
leaves Mr Abe short of ammunition. Political constraints make his so-called “third arrow”—reforms to
Japan’s inefficient agriculture, health-care and labour markets—hard to fire. It is fast becoming his only
hope.
Japan in graphics
Falling blossom
Dec 15th 2014, 13:24 by The Data Team
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A look at Japan’s economic and demographic difficulties as voters choose "Abenomics"
JAPANESE voters renewed the mandate of the ruling Liberal Democratic Party (LDP) in legislative
elections on December 14th. The vote was seen as a public reaffirmation for the bold economic policies of
prime minister Shinzo Abe, called Abenomics. However the country is far from united: the Communist
Party more than doubled its seats in the Diet, Japan’s legislature. And amid the general support for
Abenomics, the country faces extraordinary economic headwinds.
Japan is the third-largest economy after America and China. It is so wealthy that its regions boast the same
economic heft as large countries. The entire economy of Brazil fits into the Kanto region that includes
Tokyo, for example. Yet despite this wealth, Japan’s economic growth has been largely stagnant over a
period known as the two “lost decades”. America’s GDP grew threefold during that time while China’s
soared. After a short stint as prime minister in 2006-07, Mr Abe returned in 2012 calling for a bold, threepart plan of stimulus spending, monetary easing and structural reforms—the so-called “three arrows” of
Abenomics.
With the first arrow, the government splashed out 10 trillion yen ($84 billion) to boost the economy. With
the second arrow, the Bank of Japan agreed to swell its balance-sheet, which in effect flushed capital into
the economy. Japan’s stockmarket cheered the actions. But a previous government had scheduled a
consumption-tax rise in April; when Mr Abe went ahead with it, demand fell and GDP atrophied. This
prompted Mr Abe to delay the second part of a tax hike, due in 2015, calling into question his commitment
to fiscal consolidation.
Decades of almost no growth and heavy government spending to support the economy has left Japan with
the highest public debt in the world, at close to two and a half times the size of its economy and more than
double that of industrialised countries. It makes the third arrow of structural reform critical, since only by
removing anachronistic regulations and freeing companies to compete domestically and internationally can
the country enjoy sustainable growth. It was precisely debt concerns that obliged Mr Abe to push ahead
with the first consumption-tax hike despite the fact that it conflicts with his economic programme.
A big drag on Japan is its ageing and shrinking population. The country has 127m people and this is
forecast to fall to fewer than 100m by midcentury because of the low birth rate. Already there are more
elderly than youth, and this will become even more pronounced over the next several decades. It puts a
strain on the economy in two ways. First, it means fewer workers to produce growth or pay taxes to fund
public services. Second, more elderly means greater public outlays for pensions and healthcare.
On December 14th Mr Abe's party, the LDP, maintained its big legislative majority in elections for the
country's powerful Lower House. That is a reversal from five years ago, when the Democratic Party of
Japan (DPJ) won a landslide victory, ending more than half a century of nearly unbroken LDP rule. But the
DPJ's inept economic management, and its amateurism at managing the recovery following the earthquake,
tsunami and Fukushima nuclear disaster in 2011, brought many voters back into the arms of the LDP.
Abenomics promised a break from the previous, ineffectual LDP economic policies. The question now for
Mr Abe, and for Japan, is whether he will use the renewed mandate to shoot the third arrow of structural
reforms.