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Shinzo Abe

Shinzo Abe is president of the Liberal Democratic Party and was elected prime minister of Japan in December 2012. He also served as prime minister in 2006 after being elected by a special session of Japan’s National Diet, but resigned after less than a year.

CommentInsight & Opinion

Abenomics needs bold next steps

PUBLISHED : Tuesday, 28 May, 2013, 12:00am
UPDATED : Tuesday, 28 May, 2013, 1:18am
 

Japan's drastic fiscal and monetary easing measures are supposed to boost its economy after nearly two decades of stagnation. That was the basis for its major trading partners to accept a big fall in the value of the yen and heightened risk of a currency war, at the same time as China is reducing currency tensions by gradually appreciating the yuan. A resurgence in the world's third-biggest economy would, after all, be good for the global economy. However, if Prime Minister Shinzo Abe's policies are to bring lasting recovery, business has to reverse a year of decline in investment in new plant and equipment and embrace reform.

The latest quarterly figures show that Japan Inc is not yet buying into Abenomics. Expectations that big business will bring offshore production home, hire more workers and raise wages have been disappointed, despite windfall gains from a 20 per cent fall in the value of the yen since late last year. But Abenomics is only six months old and these decisions can take years to execute. Otherwise, so far so good. Expansionary policies that boosted the stock market by 70 per cent in six months also lifted consumer spending and exports in the last quarter, with economic growth up 3.5 per cent in annualised terms. But the positives are not yet promising enough to discount the threat of an Asian currency war in which Hong Kong would be sidelined by its peg to the strengthening US dollar, but not isolated from a volatile regional environment.

Japan must return to a sustainable growth path if its looser policy is to benefit the global economy and not beggar its neighbours. Meanwhile Australia, South Korea and India have cut interest rates, prompting worries that this could foreshadow a round of competitive devaluations. Japan's finance minister, Taro Aso, claims Tokyo's stance is gaining greater understanding among the G7. The recent meeting of the G7 did not raise misgivings over the currency issue in public because major trading partners including the US have been accused of devaluing over the past few years through stimulus plans.

Japan has stagnated economically because it has failed to tackle necessary structural reform. Abe's radical stance offers a window of opportunity for a country with the world's highest ratio of public debt to GDP to tackle it with initiatives like the planned overhaul of its energy sector following the shutdown of its nuclear power industry. Otherwise it could simply shore up the status quo at the expense of trading partners. In that regard the effects of the weaker yen need to be monitored carefully.

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