SINGAPORE (June 13): Contrary to what critics have said, Abenomics is working, says Japan Finance Minister Manubu Sakai at Nomura’s 2016 Asia Investment Forum on June 7, defending the three-pronged strategy implemented by Prime Minister’s Shinzo Abe in 2012 to lift the Japanese economy out of years of contraction.

Abenomics, Sakai said, succeeded in hauling Japan out of deflation and changed the extreme “risk averse” mindsets of consumers and corporations. Not only have corporate earnings risen by over 40% since 2012 to a record high of JPY65 trillion (S$829 billion) in 2015, GDP has risen to over JPY500 trillion from just JPY30 trillion, and unemployment has fallen by 3.2%, Sakai said.

That’s not all. Last year, the country’s overall wage rose by 3% yoy, the highest annual wage rise achieved in 17 years. Tourist arrivals have also surged, doubling to 19 million last year, following changes in visa requirements.

“Aside from the easing of monetary policy by the Bank of Japan, Abe has extended fiscal stimulus and made efforts to strengthen the economy by restructuring and deregulating sectors such as agriculture. As a result, exports have risen and the economy has improve,” Sakai noted in his speech.

Abenomics involves looser monetary policy, higher fiscal spending and a nationwide restructuring in an all-out effort to boost growth. However, it recently drew flak for failing to stimulate growth after Abe hiked the consumption tax to 8% from 5% two years ago.

“The economy has been stagnant since 2014 and growth has zig-zagged around 0%,” says Takashi Miwa, chief economist at Nomura.

“Meanwhile, the yen has appreciated substantially despite the BOJ’s negative interest rate policy and the equity market has fallen. As such, there has been a lot of doubt over the effectiveness of Abenomics.”

Structural reforms

Sakai says the Abe government aims to bring GDP up by JPY100 trillion to JPY600 trillion and the country’s primary balance back to a surplus within the next five years under Abenomics. One way is by restructuring the social system to lay a better foundation for growth.

For starters, funds will be channeled into daycare and nursery facilities so women can continue working. “We want to keep the population fully employed and will also raise the minimum wage level by 3% to accelerate consumption,” he says.

Meanwhile, efforts will be taken to raise investments in research and development by both the public and private sector to 4% of GDP in five years, while visa and work permit requirements will be eased to bring in more foreign talent. “The government hopes to generate JPY30 trillion in value-add from foreign contributions to the labour market by 2020,” says Sakai.  

Maternity and childcare support will also be raised to encourage couples to have larger families. “We aim to increase Japan’s birth rate to 1.8 from 1.46 in five years to maintain the population at 100 million,” says Sakai.

Fiscal stimulus

Further fiscal stimulus is also on the cards. On June 1, Abe postponed a second hike in the consumption tax by 2.5 years to Oct 2019. The tax hike, from 8% to 10%, was originally scheduled to take place in April next year. “The delay will help to prevent any decline in consumer spending and demand and keep the economy supported,” says Sakai.

That’s particularly important given that Japanese companies have not been reinvesting their profits, while wages, though rising, have not grown enough to spur higher consumption. Instead, many firms are buying back shares and paying out dividends to shareholders.

Notably, the delay also comes a month before Japan’s upper house elections on July 10.  “When Abe hiked the sales tax in 2014 that translated into higher food prices which seriously damaged consumer sentiment. That’s why Abe is taking no chances this time and pushing the hike back given that any recovery in growth is still likely to be slow this year,” says Daiju Aoki, an economist at UBS.

Government debt

One concern though, is fiscal sustainability given the rapid build-up of Japanese government debt since the 2007 global financial crisis. As at 2014, gross public debt stood at 254.2% of GDP, up from 182% in 2007, driven by persistent fiscal deficits.

Based on UBS’s calculations, even if the nominal growth rate meets its expectation of 0.6% this year, getting the primary balance back into the black by 2020 would be impossible, as that would require a consumption tax rate of about 15%.

In addition, Abe is also expected to announce a supplemental budget of at least JPY5 trillion, most of which will go towards restoring damages caused by a series of earthquakes in the South of Japan in April.

“If the government continues issuing bonds to fund public spending, we expect gross debt to reach 257% of GDP by the end of this year,” says Aoki. Currently, Japanese government bonds make up 80% of the government’s total debt.

Miwa of Nomura reckons the Japanese government still has room to absorb more debt though. “We only need to worry when Japanese households start moving money out of the country, as that would cause the yen to fall and JGB yields would rise,” he says.

“For now, with the world economy still shrouded in uncertainty, the yen will remain strong and JGB yields low.”

Further easing

Another positive for the government is the BOJ’s current negative interest rate policy, as that will keep the cost of financing its debt low. “Negative rates will keep the interest payments on JGBs stable and public debt sustainable,” says Takahiro Sekido of Bank of Tokyo-Mitsubishi UFJ.

In fact, one of the issues economists are hotly debating is if the BOJ will ease its monetary policy further during its June 16 meeting. With no prospect of the BOJ reaching its 2% inflation target this year, Aoki believes the central bank could take rates deeper into negative territory to help weaken the yen and boost export competitiveness.

Miwa reckons the further BOJ easing is on the cards, too. He says the biggest risk to the Japanese economy is if the USDJPY falls below the 100 level on persistent U.S. rate hike delays and other global risk events, such as Brexit, which could lead to a “growth shock.”

Sekido believes the BOJ will keep its current policy on hold though, mainly because further negative rates will hurt Japanese banking sector profits at a time when corporations are saving instead of expanding.

“The BOJ will probably adopt a wait and see stance in June and July and ease rates only in October, after the elections take place. Currently, the banking sector is not ready for further negative rates,” says Sekido.

Whatever the case, the economists agree that Japan’s fiscal stimulus and structural reforms should help to boost the country’s growth in the coming years. This year though, investors can expect GDP growth to come in below 1% as the measures trickle down into the economy.