Column: Will it work?

Jan 08 2014, 02:51 IST
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SummaryAbes policies are reaping early dividends but their success could be impeded by a rise in CAD & ageing population

The year 2013 was not a particularly bright one for the global economy. But among the pall of gloom, there was a tiny bright spot. Japan. Analysts would eagerly wait to see if the bright spot flowers into a sparkle in 2014. That would mark the beginning of a new chapter in the worlds third-largest economy. It would also signal the triumph of Abenomics.

Like Reaganism and Thatcherism, Abenomics has captured the fancy of financial analysts and economic experts by its effort to revive growth and economic activity in a moribund Japan.

Supporters of Abenomics point to the six-year high recorded by the Nikkei at the Tokyo Stock Exchange as vindication of its success. If the health of the Nikkei is taken as an indicator of economic rebound, then Abenomics is yielding results.

Abenomics, or the Japanese Prime Minister Shinzo Abes policies for reviving the Japanese economy, are intrinsically expansive. As in most such macroeconomic policies, the three planks for generating economic stimulus, or the three arrows of Abenomics, are monetary, fiscal and exchange rate policies.

Soon after assuming office towards the end of 2012, Prime Minister Abe announced monetary expansion leading to a significant quantitative easing by the Bank of Japan and injection of large doses of liquidity. A fiscal stimulus package worth more than $100 billion was adopted within a couple of months. At the same time, the yen has been held firmly and occasionally encouraged to slip for stimulating exports.

Exports have been central to Abes policies. There is little doubt over his keenness to get Japan back to its position of prominence as the worlds leading export-oriented economy. He is relying on three aspects in this regard. The first is the depreciating yen. The second is encouraging exports through fiscal incentives like lightly taxed zones around the country. The third is aggressive trade diplomacy.

The yen has been kept low due to large inflows of funds into the domestic capital market made possible by the easy monetary policy of the Bank of Japan. A low yen is keeping investor sentiment strong on the expectation of buoyant export outlook for SMEs as well as the established brands like Sony and Toyota.

Fiscal incentives, part of Abes structural reforms policies, should encourage exports further. Over the last one year, Prime Minister Abe has personally initiated Japans entry into major trade relationships. These include joining the Trans-Pacific Partnership (TPP) and initiating an FTA with the European

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