Abe's arrows go off course

Japanese prime minister's 'three arrows' of stimulus have disappointed investors in recent weeks, and are now being dubbed a PR muddle

PUBLISHED : Wednesday, 12 June, 2013, 12:00am
UPDATED : Wednesday, 12 June, 2013, 3:56am

Japan's prime minister, Shinzo Abe, last week tried to launch the third of his famous "three arrows" that are supposed to be his modern weapon of choice to defeat decades of deflation and to put the country back on the road to fast economic growth.

Economists and markets waiting for bold and effective action were disappointed. Abe launched not an arrow flying to its target, but a handful of mouldy old feathers of the same old general promises of promoting private sector investment, opening up energy, health and infrastructure, doubling foreign investment, and expanding the role of women in the economy.

The Nikkei-225 Index lost ground again. Having soared past 15,000 points for the first time in five years and climbing to a high of 15,942.6 on May 23, the stock market indicator fell to 12,887.5 at the close of last week. The yen, which had fallen to 103 against the US dollar, strengthened to 97-98. Just to show how fickle, and potentially dangerous, it is to put faith in Mr Market, the Nikkei rose on Monday by almost 5 per cent.

As a simple A-B-C of how to run an economic policy, Abenomics is lacking a C and D. Some critical voices say that the policies should not be called Abenomics, but Awanomics, because in Japanese "awa" means "bubble". Others simply described the policy as "Muddlenomics" or "hopium".

An American commentator recalled the Henry Wadsworth Longfellow poem about shooting arrows in the air. "I shot an arrow into the air; it fell to earth I know not where …" and changed it to "it landed on my foot".

Abe's approval ratings have been in the 70 per cent range, almost unheard of for modern Japanese prime ministers, who have been used to anything from 10 to 25 per cent, but the long-suffering Japanese people have, so far, been fed snake oil.

Richard Katz of the New York-based Oriental Economist, noted that "the alleged wealth effect from the stock market rally is more of an advertising slogan from the PR firm of Abenomics' Happy Talk than a serious economic analysis".

It will be all for the good if the sceptics are heard and their arguments properly argued over. The main problem of Abenomics, apart from the reliance on happy talk, is that it has not been thought through or the implications of implementing the crucial third arrow properly examined.

In these days of sophisticated robots and drones, it may be surprising that anyone gets excited about talk of three arrows as a weapon of choice for ending decades of slump. But the reference is to legend, which makes it powerful snake oil for a public looking for rescue.

So far only one arrow has been properly launched - by the Bank of Japan in its programme of quantitative easing, but the goal of 2 per cent inflation is still far off. Nevertheless, the optimistic expectations have been successful in driving the stock market higher and the yen lower, and won the applause of Nobel laureates. The Economist magazine featured Abe in tights flying through the air like Superman, faster than the accompanying jet fighters.

But even this arrow could backfire. Generating inflation could risk triggering capital flight as Japanese investors seek higher returns elsewhere. Bond markets have already experienced some gyrations, and with its debts of 245 per cent the Japanese government has to beware rising bond yields. If interest rates on Japanese bonds rise to 2.2 per cent, the government will have to spend 80 per cent of its tax revenues just to pay the debt interest.

Many economists claim that the lower yen will greatly benefit Japan. Big exporters like Toyota are already raking in the gains, but a country heavily dependent on imported energy is also paying a heavy price. A key question is whether Japan is making the kind of products that the world will clamour for if the price is right.

The woes of Japan's household name electronics makers suggest that they will need more than a falling yen to rescue them. In 1992, Japan's exports accounted for 67 per cent of those of Asia; by 2003, they were 30 per cent, and by 2012 had fallen to 15 per cent as new hungrier competitors with brighter ideas had sprung up in mainland China, South Korea and Taiwan.

The second of Abe's three arrows, classic pump priming has been a mainstay of government policy for years, and has just increased the government debts and kept the construction companies in good profits to feed some of them to the coffers of the old-style politicians, particularly of the long-ruling Liberal Democratic Party.

The third arrow is crucial: restructuring and reform of Japan. The best that can be said is that Abe is making the right noises.

All the time, Japan's population is getting increasingly grey. Sales of adult diapers already exceed those of baby nappies. Time is running out for the happily soaking frog.