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29.03.2015 г.

Abenomics: first results

Daria Senina (Moscow, Russia)

In the beginning of the year 2013 the Liberal Democratic Party of Japan won the elections in Japan and returned to power. New prime- minister Shinzo Abe declared, that his main goal was to pull Japan out the deflation which has stopped the economic development of the country almost for two decades already. His new economic policy was called «Abenomics» as it was something outstanding and absolutely new in the history of Japan.

In the beginning Abenomics was based on three main ideas and directions: changing the monetary policy of the Bank of Japan to risky and unpredictable measures, huge package of stimulus to encourage the economic activity and fiscal discipline.

As for the issues of monetary policy, Mr.Abe replaced the Governor of the Bank of Japan Masaaki Shirakawa with more loyal to ruling administration Haruhiko Kuroda, previously the head of the Asian development bank, relying on his strong skills of international negotiations. Mr.Kuroda fully accepted the new ideas about the change of course in monetary policy while it was a risky deed for the chief banker of the country. First change concerned the targeting of annual inflation of 2-3%. Also new monetary policy included massive monetary quantitative easing. New government decided to spend up to 101 trillion of yen on asset purchase. In 2014 Bank of Japan will implement additional quantitative easing program amounting to 13 trillion of yen (including 2 trillion of yen on purchase long-term JGB) [8].

Second part of the new economy policy included the enlarged stimulus package amounting to 20,2 trillion yen. 10,3 trillion yen were planned as government spending. The purpose of this step was to achieve 2% economic growth and creation of 600 000 new employment positions [9].

Also, the structure of state budget fulfillment will change for the fist time in four previous years. New government of Japan took the decision to rely more on taxes than on new JGB issuance. The target was to increase the consumer tax rate in 2014. Fiscal discipline was planned to be the medium of improvement for fiscal management.

Two main obstacles can rise on the way to Abe's desirable target: low level of wages in Japan and high prices on imported raw materials and fuel.

The global financial crisis of 2007-2009 did not affect positively the level of payment in Japanese corporations. For the last decade this parameter has been only decreasing. If people do not feel stability and expect that things may turn even worse, they are not likely to rise their spending. The growth of consumer demand requires the steady increase of salaries and well-being in Japan. Also, it is rather difficult to change the mentality of people even in 3 months while they have been expecting economic difficulties for almost 15 years already.

In January 2013 basic salary in Japan fell by 0,1% to 240 233 yen. Non-regular payments decreased by 1,5% to 18 419 yen.

No doubt, that new government of Japan recognizes this problem. Prime-minister Abe declared the possibility of decreasing taxes for those companies which increase the payments for employees. For example, in February 2013 "Lawson Inc." announced about its intention to rise salaries for permanent staff (65%) by 3%, and annual bonuses would amount approximately up to 150 000 yen. Employees with children might expect higher pay rise. For instance, employees with 3 children would get 6% pay rise and 300 000 yen annual bonus [5]. Prime-minister Abe called for rising salaries in private sector. But it can affect their capitalization in long-term as they will deduct this money from profits and will not spend these funds on investments in fixed assets.

It is very important to mention, that Japanese labor market is quite different from USA and EU. It has two features. The first is determining wages through individual negotiating them with employees. As a result, the wage negotiated reflects the company performance or forecast. The second feature is that bonuses contribute greatly to the annual income of employees in Japan. Thus bonus increase or decrease flexibly adjusts annual income according to economic fluctuations. Japanese labor market is not flexible and has a lack of mobility. So employees are likely to accept wage cut and stay in the same company rather than resign and look for another place for a long time. It can be a risky and unsteady situation.

To strengthen economic growth Japanese authorities are promoting some new suggestions concerning Japanese labor market and employment conditions. For example, they would like to promote the system of quasi-regular employees with job descriptions limited to certain areas and jobs and extending the childcare leaves to three years. But there are no many people who would like to accept such conditions of employment and again it may be a huge burden for companies to implement this system [10].

Recently Japan has to enlarge its imports of gas and other fuels to compensate the termination of functioning of almost all nuclear power plants except two after the earthquake and «Fukushima 1» tragedy. High costs of electricity use encourage Japanese small and medium business to move to other countries as the placement of their business. For example, many of them have moved to Vietnam or other countries of the Asian region. Big production giants also consider this choice and strengthen their positions abroad. «Honda Motor Co.» presented its plan of building new plant in Thailand which will start operating in 2015. Costs of the project amount to 44,6 billion yen. It will produce 120 units per year [6]. «Sharp Corp.» launches its last model of LCD TV set on the markets of Middle East meeting the growing demand of rich consumers. A lot of Japanese corporations do not show commercial interest in their own national market and move to foreign markets where they may expect desirable profit.

First victories of new economic policy came with not only turnaround in the monetary policy, but with currency wars, which brought the depreciation of Japanese yen. In the beginning of February 2013 USD dollar sharply jumped against yen (92 yen for 1 USA dollar). It has happened for the first time since June 14th, 2010. Actually, it rose a big wave of critics of Japan worldwide. Many countries noted about the possibility of analogical actions. This step of Japanese authorities worked against the exports of EU and USA. It has also deteriorated the positions of USA automotive giants. Actually, currency wars as usual move the worldwide economic situation to «beggar-thy-neighbor» when some countries improve its economy at the expense of the other countries.

This step allowed Japan to improve its weakened exports in the beginning of 2013. So we can say, that the country focuses once again on the same practice: it plans to develop and support exports in first turn rather than encourage consumer demand inside the country as the last target seems to be much more difficult for Japanese authorities.

To excuse Japanese participation in currency wars it is important to note, that it only copied the strategy of other developed countries. For example, USA representatives gave rather moderate critics to Japanese games with yen depreciation during the G20 finance ministers and central banks executives meeting in Moscow in February 2013, because they were afraid to receive relevant answers from Japanese side. Moreover, according to the data of Bank of International Settlements (BIS), during the last 6 years the leading participants of currency wars were South Korea and Great Britain. South Korea has gained 19% real depreciation of national currency since August 2007, and Great Britain - 17% [2]. But copying the American strategy may have risks in Japanese case, because the USA economy model differs a lot from Japan, and USA dollar is a world key currency.

As a result export gains boosted the growth of GDP by 3,5% at an annualized pace [1]. But the main parameter which can demonstrate in economic terms the end of deflationary processes is the growth of domestic investment. And this target is rather hard to achieve for Japan. Prime-minister Abe plans to scrap regulations to encourage investment including foreign investments in Japanese economy. In January 2014 the domestic version of Britain's Individual Savings Account (ISA) system (for Japan - NISA) will be introduced in Japan. Cash and deposits in Japan account for about 55% of household financial assets. It is 15% higher than in USA and 35% higher than in EU countries. The target of the new system is to move from savings to investments. NISA program is designed mostly for individual investors and will offer tax exemptions on capital gains and dividend income from investments amounting to 1 million yen a year for a maximum of 5 years. «Mizuho Bank» will develop more than 20 kinds of investment trusts in cooperation with U.S.-based «BlackRock Inc.», the largest investment management company in the world. It will be the largest launch in terms of the number of products. «Mizuho Financial Group» is planning to sell about 600 000 NISA accounts. Other Japanese banking giants are also considering the new investment scheme. For example, «Mitsubishi UFJ Financial Group» and «Sumitomo Mitsui Banking Corp.» plan to sell 500 000 NISA accounts each [11]. The new products will carry the risk of a loss of principal, but they will be easy for managing even for beginners. They will move together with the rise or fall of the 225-issue Nikkei Stock Average. To decrease costs and to attract young people as investors these new products will be sold only online. One person can have only one such account. So the competition between banks for customers is intensifying. For instance, «Mizuho Bank» will waive purchase commissions regarding investment trusts jointly worked out with «BlackRock». The bank will try to keep trust fees for investment trust operation and management low. «Nomura Securities Co.» has started the promotion campaign already, and customers, who apply for NISA accounts by July 2013 will get 2 000 yen when they open the account. The company also hold seminars for customers on NISA accounts system, and they attract so many people, that «Nomura» can not handle the crowds. «Daiwa Securities Co.» plans to sell 1 million NISA accounts and has already received more than 100 000 applications for them.

But the NISA program has some weaknesses. Customers have to keep relevant accounts at the same financial institution for at least four years. The Financial Services Agency is working over the scheme presently to allow customers to move their accounts from one financial institution to another every year.

So the lack of investments in Japanese economy provoked authorities and banks to introduce the new schemes to attract Japanese nation money in investment schemes instead of keeping it on deposit accounts.

In may 2013 yen depreciated to 102,76 per 1 USA dollar. It was the cheapest spot since October 2008. It happened mostly because of the new monetary policy of the Bank of Japan and its massive easing measures. Bank of Japan was buying the obligations denominated in foreign currency, and that has led to yen sales rise on currency market. The dollars were being bought respectively. The new Governor of the Bank of Japan Kuroda announced in April 2013, that Bank of Japan intends to double debt-buying to 7 trillion yen a month. He considers, that this step can lead to desirable aim of 2% inflation in two years. The risk is that it can also rise prices inside Japan and stock prices, but not the consumer demand.

The Bank of Japan increased the amount of cash in circulation and bolstered commercial banks reserves to encourage them to extend loans to corporations and consumers. The Bank of Japan predicted, that the result of its current monetary policy would be lower interest rates. As a matter of fact, the 10-year yield for newly issued Japanese government bonds is a benchmark of long-term interest rates, and on May 13th, 2013, this figure rose up to 0,800% per annum. It showed big fluctuations in a very short period (0,1 percentage point in one day) [12]. It may develop the tendency of increasing long-term interest rates and in the future decreasing investment in fixed assets.

In May 2013 the Diet of Japan adopted 92,62 trillion yen budget for fiscal 2013. It was rejected by the House of Councillors, but enacted under the Article 60 of the Constitution of Japan. This Article gives the lower chamber more power than the upper chamber in budget affairs [7]. Budget includes massive spending on projects for public works (about 5,3 trillion yen) and support of small and medium business. The defense budget will be also increased for the first time in 11 years [13]. According to budget plan, the government will issue 43 trillion yen in new bonds. The big problem which comes from such "optimistic" figures in Japanese budget is the volume of forecasted government debt. It can amount up to 1-quadrillion yen by the end of 2013 [14]. Japanese government fiscal situation is already called the worst among major industrialized countries. But new prime-minister is determined to improve the situation through restructuring, based on primary balance. Japan may expect the consumption tax hike from 5% to 8% in April 2014. But it will also be an obstacle for consumer demand growth and economic growth also.

At the same time, budget is not the only moot point between Japanese politicians. The social security system reform also became the apple of discord. The LDP and Komeito are looking for ways to improve the existing pension system, but as for the DPJ, it demands radical reforms, including the implementation of guaranteed minimum pension. If politicians do not come to agreement, this reform will be stalled [15].

As for Japanese corporations, many of them enjoy the growing exports profits except those, which depend a lot on imported raw materials and parts. For instance, «Toyota motor Corp.» operating profit reached 1,3 trillion yen in fiscal 2012. The corporation forecasts operating profit of 1,8 trillion yen this fiscal year [16]. «Honda Motor Co.» and «Suzuki Motor Corp.» also report good performance and high profits. Good situation in automotive sector affects the whole Japanese industry as it is bonded with other sectors in terms of supply. Japanese automotive giants rely a lot on parts manufacturers. High stock prices and expectations of consumption tax hike boosted the sales of luxury goods. Major department store operator «Mitsukoshi Holdings Ltd.» marked record operating profit. The same situation is observed in many housing construction firms.

But many electric appliance corporations pass through hard times at the moment because of the weak yen. «Panasonic Corp.» reported after-tax loss of 700 billion yen. «Toshiba Corp.» reported the decrease in operating profit. It suffers losses because of imports of its LCD televisions from own factories abroad [17].

On the 5th of June Abe' administration declared the draft of the «third arrow» of economic growth strategy. It included three main points: - a plan to revive Japanese industry through increasing total capital investment by 10% in three years to 70 trillion yen,

- a plan to develop strategic markets ranging from health to energy and agriculture,

- a plan to advance Japan to international markets including entry into Trans-Pacific Partnership free trade agreement.

Prime-minister Abe hopes, that these steps will encourage main Japanese corporations to develop new businesses and to increase their capital investments. He is sure, that profits of main corporations will «trickle down» to small and medium business and people. But this scheme was already practiced by previous Liberal Democratic Party governments and it did not work. Big companies made profit, but it did not affect wages and consumer spending. Also, the number of irregular workers increased.

Also Mr.Abe has set an ambitious target to boost per capita gross national income by more than 1,5 million yen in 10 years. To achieve it annual economy growth of 3% required.

The new strategy supposes big orders from abroad boosting Japanese exports of infrastructure technologies especially nuclear power generation equipment. But it seems doubtfull after the «Fukushima 1» crisis which still continues.

As for TPP negotiations, they may have some questions. To obtain gains from entry into Trans-Pacific Partnership free trade agreement Japan must lower its tariff barriers on agricultural products. It may force other countries to lower tariffs on Japanese manufactured goods. It will also provoke the reform of agricultural sector inside Japan. At the moment only small-scale farmers own agricultural land in Japan. According to government statistics, the production costs of large farmers are half of small ones. If the relevant law changes and big corporations are allowed to own agricultural lands, they can create strong competitive agricultural business units. But for Liberal Democratic Party reducing the agricultural protection for decades was an issue of political expediency[1].

According to economic growth strategy, prime-minister Abe encourages deregulation in special zones in Tokyo, Osaka and Nagoya[2]. The procedures there will be eased in order to attract people, money and goods. It is a well-known fact, that Japan lacks entrepreneurs as there are too many barriers on the way of would-be entrepreneurs. Venture capital industry in Japan is small. To borrow money for start up business Japanese entrepreneur has to provide huge personal guarantees, and it is not easy and possible for everybody. Prime-minister Abe would like Japanese commercial banks to waive borrowers of such type from guarantees if they give regular updates on cash flow and don't pay themselves big salaries. But banks would like to charge higher interest rates in exchange for waivers. Government is pushing on commercial banks, but they proceed staying resistant as they do not want to collect ballooning bad debts in their portfolios and get into «bubble» problems again as it was in the beginning of «lost decade». Venture business is always connected with some risks, and in USA and Europe it is often financed by business angels rather than commercial banks.

Conclusion: So-called «Abenomics», new economic growth strategy, has shown positive results in the first quarter of 2013. It helped Japan to overcome falling exports incomes and provoke the growth of consumer prices and stock prices. But it carries some risk which may manifest in the future. They mostly concern the growing government debt and fiscal problems, which are already reflected in high volatility of Japanese government bonds and high yields on them. It looks like the growth strategy has been altering since its start in the beginning of the year. If it was mostly concentrated on inflation and triggering consumer demand from the start, now it is focusing on main Japanese business giants which are supposed to be the drivers of economic growth.


1. Bloomberg, 18.05.2013

2. Financial Times, 25.01.2013

3. Financial Times, 12.06.2013

4. Financial Times, 12.06.2013

5. Jiji Press, 08.02.2013

6. Jiji Press, 08.02.2013

7. Jiji Press, 17.05.2013

8. The Yomiuri Shimbun, 23.01.2013

9. The Japan Times, 22.01.2013

10. The Yomiuri Shimbun, 13.05.2013

11. The Yomiuri Shimbun, 11.06.2013

12. The Asahi Shimbun, 14.05.2013

13. The Asahi Shimbun, 16.05.2013

14. The Asahi Shimbun, 17.05.2013

15. The Yomiuri Shimbun, 15.05.2013

16. The Yomiuri Shimbun, 13.05.2013

17. The Yomiuri Shimbun, 13.05.2013

[1] Financial Times, 12.06.2013

[2] Financial Times, 12.06.2013
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