Too early to judge Abenomics' effect
Updated: 2013-05-23 05:31
By Raymond So(HK Edition)
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Japan's Prime Minister Shinzo Abe took office for the second time last year. Since then, Abe has launched a series of economic policies aimed at economic recovery. Since the collapse of its real estate market in the early 1990s, Japan has been mired in two decades of economic recession with no sign of recovery. The rapid turnover of its leaders has further worsened the situation.
Every Japanese prime minister wanted to rescue the Japanese economy but to no avail. This time Abe has adopted aggressive economic policies such as further rounds of quantitative easing and letting the yen depreciate. It has dropped sharply against the US dollar since last November. The Nikkei has risen 60 percent during the same period. Exporters report an increase in profit. Toyota, the giant automaker, recorded the largest increase in profit in recent years. The chronic deflation in Japan seems to be fading. All the data signals strong prospects for the Japanese economy. The finance community dubbed these economic policies "Abenomics".
At the beginning, people were skeptical of Abenomics. The effectiveness of unlimited bond repurchases by the government and the sharp depreciation of the yen puzzled many people. If quantitative easing and yen depreciation are solutions to Japan's chronic depression, they seem to be too easy and hard to believe. Nevertheless, Japan's economy under Abenomics has showed signs of recovery. All of a sudden the finance community looks at Abenomics through a new prism.
Still, it is too early to conclude that Abenomics is a success. The seeming economic recovery is not solid, and the Japanese economy simply has too many problems. The high national debt relative to its GDP makes Japan's economy full of uncertainties. Also, Japan's economic problems have existed for more than 20 years, many of them related to deep-rooted economic issues. It is unable to resolve so many problems in less than six months. Hence, economic recovery in Japan is still too early to conclude.
Japan has high longevity, and this aging problem is becoming a big obstacle to economic recovery as it tends to weaken the propensity to consume. Since a developed economy requires domestic consumption to provide steam for growth, the drop in consumer power hinders the progress of recovery. Worse still, an aging population will also have negative impacts on product innovation and improvement. Young people are the source of innovation and more readily accept new products. When the population is getting older, the society's power of innovation and adaptability towards new technology will also lower, hindering economic recovery.
Another important factor is Japan's relationship with neighbor countries. Because of geographical proximity, Japan has strong economic ties with Asian economic powers such as China and South Korea. However, the Abe administration is also notorious for its nationalistic policies. Judging from the way his administration handles the Diaoyu Islands dispute with China, and the Liancourt Rocks dispute with South Korea, Japan is not trying her best to maintain positive diplomatic relations with the two countries. Instead the Abe administration places more emphasis on nationalistic policies over economic considerations. This casts doubt on the effectiveness of Abenomics as Japan cannot have economic recovery without having a stable working relationship with China and South Korea. If Japan is to place greater emphasis on nationalistic values than economic benefits, the economic ties with China and South Korea will deteriorate.
It is impractical to expect the economy to recover overnight on certain policies. The apparent achievements of Abenomics are still too early to judge. A more accepted idea is that Japan needs some drastic reforms in its economic systems. These deep-rooted problems are the real reasons for Japan's economic downturn. If these issues are not tackled, economic improvements will not be sustained by simply dumping money into the system. The Abe administration understands this very well. The fact is the Abe administration just wants to have some indicators which shows they can successfully turn around the Japanese economy and stay in power. From this angle, Abenomics is more like the last trump card that Japan has in reforming its economy. The roads ahead are not straight and there are many ups and downs ahead.
The author is dean of the School of Business at Hang Seng Management College.
(HK Edition 05/23/2013 page9)