Abenomics feared in trouble as challenges build

Sep 03 2014, 01:08 IST
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SummaryAbes aides and advisers are promising to forge ahead with painful structural reforms, while spreading the benefits of Abenomics to regional areas and drafting a long-term vision for addressing Japans shrinking population.

Prime Minister Shinzo Abes plan for Japans economy to generate self-sustained growth on the back of his three policy arrows of massive monetary easing, spending and reform appears to be faltering - but no magic solution is in sight.

Abes aides and advisers are promising to forge ahead with painful structural reforms, while spreading the benefits of Abenomics to regional areas and drafting a long-term vision for addressing Japans shrinking population.

But gloomy economic data suggests the plan is not succeeding as hoped and the only short-term contingency plans appear to be further central bank stimulus or delaying a second rise in the sales tax set for October 2015.

Abenomics is in trouble - because its not happening fast enough," said Robert Feldman, head of research at Morgan Stanley MUFG in Tokyo, who like many others says Abe must move faster on steps such as labour market reform to boost productivity.

Failure could leave Japans economy stuck in a low-growth mode or worse, unable to begin to curb public debt already more than twice the size of a $5 trillion economy, the biggest burden in the industrialised world.

Abes public support, now hovering around 50%, depends heavily on the economy. Most voters favour delaying next years sales tax rise to 10 percent after an initial hike in April to 8% from 5% dented a fragile recovery.

Will raising the sales tax a second time just when the economy is moving toward recovery really be a plus for the peoples livelihoods?" Koichi Hagiuda, an aide to Abe in his Liberal Democratic Party, said in an interview.

But there is also a risk to postponing it. Might not Japan lose the confidence of international society?" Hagiuda added.

The two-stage rise in the consumption tax is Japans boldest move in nearly two decades to rein in government debt.

Abe will formally launch stage two of his administration on Wednesday when he reshuffles his cabinet, although key members are expected to stay on.

The new cabinet will take over after a slew of troubling data including an annualised 6.8% drop in GDP in the April-June quarter.

Potentially more worrisome, real wages have fallen for 13 straight months as wage growth lags price rises, data on Tuesday showed.

That drop is casting doubt on a central tenet of Abenomics - that stimulus and higher prices would lift company profits and lead to higher wages, spurring consumption and making growth self-sustaining.

In order for income effects to work, wages

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