Toward Japan’s Economic End-Game                

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Ever since Shinzo Abe started his second stint as Prime Minister, Japan has focused on positive economic signals, which has sparked futile hopes, including a bad sales tax proposition.

Japanese officials vow to stick to the planned tax hike in October (it has been delayed twice), barring a big economic shock. With the 2019 budget, Abe hopes to offset adverse impact of the sales tax by returning much of the extra revenue to consumers via $18 billion of offsetting measures, instead of faster debt-reduction.

But recently, the Cabinet downgraded its headline economic assessment for the first time in three years. Manufacturing, housing and retail indicators reflect signs of weakness, while first-quarter figures, expected in May, could show a contraction – especially as the impact of Trump’s tariff wars is spreading in Asia,.

 

Half a decade of Abenomics

In December 2012, when the Liberal Democratic Party returned to leadership, Abe campaigned on renewed fiscal stimulus, aggressive monetary easing and structural reforms. The devaluation of the yen, critical to Japanese exporters, was the tacit denominator of the proposed changes.

In addition to a huge liquidity risk, Tokyo took another risk in timing, as I argued then. It sought to implement the fiscal stimulus in 2013, while consolidation would follow. Obviously, unease increased in 2014. As Abe went ahead with the sales tax hike that spring, it triggered a sharp slump. Instead of strong expansion, consumers were hit hard and Japan began its third lost decade.

Yet, recently, international observers have been remarkably optimistic. Last November, the International Monetary Fund (IMF) reported Japan has had an “extended period of strong economic growth.”

As the growth rate, supported by huge monetary injections and rapidly-rising debt, increased to 1.9 percent in the fourth quarter of 2018, upgraded from preliminary data, … Read More...