Abenomics, year one

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Jordi Singla
December 5th, 2013

Abenomics is the term used to describe the strategy of ultra-expansionary economic policy promoted by Japan's Prime Minister, Shinzo Abe, since he took over at the end of 2012. It comprises three pillars. The first is unprecedented monetary expansion together with the establishment of an explicit inflation target (of 2%). The second is fiscal flexibility, understood as the capacity to combine fiscal consolidation with measures to support growth. The third consists of pro-growth structural reforms in the medium and long term. About to celebrate its first anniversary, on balance the work done and achievements made are positive but not conclusive. GDP has enjoyed three quarters of growth above its potential and the end of deflation is approaching. However, the details reveal a situation that is still weak and susceptible to reversal. Hence there is still a long way to go.

Specifically, in Q3 GDP grew by 1.9% annualized quarter-on-quarter (2.6% year-on-year), less than expected and with an unfavourable composition. On the one hand, private consumption grew by a meagre 0.4%, far below the preceding 2.5% and indicating that domestic demand has yet to consolidate. The traditional sources of growth were also disappointing: productive investment slowed down to 0.7% and exports dropped by 2.4%.

Monetary expansion is the ace up Abenomics' sleeve for the time being. Its goal is a weak yen to boost exports, as well as putting an end to deflation to consolidate domestic demand. The former has been partly achieved. From clearly overvalued levels, the yen depreciated by 24% against the dollar between October 2012 (discounting monetary expansion) and May 2013. This movement was accompanied by an over 80% rise in the Nikkei stock market, dominated by exporting firms. In this respect, the first half of 2013 was good for exports. But the Q3 figures represent a backward step that coincides with erratic performance by the Nikkei since May. The end of deflation has not been entirely achieved either. October's CPI increased to its highest rate in the last five years but only thanks to rising oil prices. Other broader inflation variables, such as the GDP deflator, are still negative. This means that another of the desired effects has yet to bear sufficient fruit: achieving nominal GDP growth that reduces the relative weight of public debt.

In fact, the fiscal front of Abenomics is arousing some scepticism. Huge public debt restricts the possibilities for fiscal expansion and means that a concept of flexibility must be adopted. Unless palliative measures are taken, the VAT hike planned for April 2014 (in order to contain debt) will weaken a private consumption that does not seem robust at present.

Regarding structural reforms, there is a worrying lack of precision. The aim is to increase disposable income via wage rises, greater female participation in the labour market and lower corporate savings. But little has been achieved so far.

Jordi Singla