Abenomics, A Dangerous Cure

The Abe government has adopted a three-pillar strategy: renewed fiscal stimulus, more aggressive monetary easing from the Bank of Japan, and structural reforms to boost Japan’s competitiveness. This has resulted in a sharp depreciation of the yen and a rise in stock prices. Business confidence has reached historically high levels. Supported by expansionary fiscal and monetary policies, GDP is forecast to grow by around 1% in both 2013 and 2014.The risky strategy may work if the government succeed in raising potential output and boosting private sector demand.

A three-pillar strategy
At the general election in December, the Liberal Democratic Party (LDP) obtained a landslide victory and its leader Shinzo Abe returned as prime minister, a job he lost in 2007. The LDP campaigned on a platform of renewed fiscal stimulus, more aggressive monetary easing from the Bank of Japan (BoJ), and structural reforms to boost Japan’s competitiveness. This three-pillar plan has been dubbed “Abenomics”.

The government did not disappoint its supporters. Already in early January, the incoming Abe government presented a supplementary budget worth JPY 10.3 trillion (or 2% of GDP). Taking local government and private sector contributions into account, it could reach JPY20.2 trillion. However, the impact of the programme on GDP growth is likely to be limited, around 0.5 percentage point in 2013 and 0.2 percentage point in 2014.

Later in the month, the government and the BoJ issued a joint statement, announcing the raising of the inflation target from 1% to 2%. The BoJ promised to pursue monetary easing to achieve this target at the earliest possible time. The government, for its part, promised to formulate measures for strengthening competitiveness and the growth potential of the Japanese economy.

The supervision of macroeconomic policies including monetary policy was transferred to the Council on Economic and Fiscal Policy, an 11-member government body, which includes some ministers handling economic and fiscal policies, the BoJ governor and business leaders and academics. After having been dormant during the governments lead by the Democratic Party of Japan (DPJ) between 2009 and 2012, it has recently been revived by Prime Minister Shinzo Abe. This decision is an infringement of the BoJ’s independence.

BY Raymond VAN DER PUTTEN

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