Shinzo Abe, Japan’s prime minister, is a man of conviction. But even he must have had a moment of self-doubt on Monday when it emerged that Japan grew by an annualised 1 per cent only in the last three months of 2013, less than half of what analysts expected. Some will surely see these disappointing numbers as a sign that Abenomics, the prime minister’s mix of fiscal, monetary and supply-side policies aimed at revitalising the economy, is coming off the rails. But while this judgment is probably too hasty, Mr Abe and Japan’s corporations must act soon to stop the recovery coming to a grinding halt.
The primary objective of Abenomics was to return Japan to inflation after a decade and a half of falling prices. So far, the results are encouraging. Thanks to the copious programme of quantitative and qualitative easing by the Bank of Japan, core consumer prices, excluding fresh food, jumped by 1.3 per cent in December, the fastest pace in five years. The BoJ is on track to meet its 2 per cent inflation target – set for 2015.
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Nor were the growth figures reported this week too negative. Consumer spending and business investment grew faster than in the third quarter – a sign that domestic demand is not in retreat. The bad news came mainly from trade, with imports significantly outpacing exports in spite of a falling yen. Overall, Japan expanded by a respectable 1.6 per cent in 2013, the fastest rate in three years.
While Tokyo’s recent economic record appears solid, the outlook is shakier. In April, the government will go ahead with plans to increase the consumption tax from 5 to 8 per cent. This rise will push up consumption in the short run as consumers are expected to bring forward spending on products such as cars and washing machines, but at the price of depressing growth later in the year. Nor are there signs that businesses are about to go on a spending spree. An official survey has shown that orders of machinery could fall by almost 3 per cent in the first three months of 2014. This would be first quarterly drop in a year.
So far, Japan’s corporations have been a big stumbling block on the road toward successful Abenomics. In particular, the largest multinationals have enjoyed the benefits of an ultra-weak currency, which has boosted both their exports and the value in yen of their profits from abroad. But little of this cash has been channelled back into the economy. Not only have companies been reluctant to invest. They have also stopped short of giving employees permanent pay rises, limiting themselves to larger one-off bonuses.
Corporations are probably right to be wary of stretching themselves too much ahead of the planned increase in the sales tax. But failing to give workers pay rises during the traditional bargaining rounds this spring would be myopic. Inflation is eating into the purchasing power of consumers. Were corporations to inject new cash into the economy via higher wages, much of it would find its way back into their coffers.
Mr Abe has rightly thrown his weight behind the idea of more generous wage settlements. But he would be wrong to assume that the future of Abenomics is solely in the hands of corporate Japan. There is more the government can do, such as weakening the contractionary effect of a higher sales tax through a temporary income tax cut. This could be rolled back when the economy starts growing in a sustained way.
For this acceleration to happen, it is essential that Mr Abe gives some muscle to his structural reforms agenda. So far, this has been the most disappointing of Mr Abe’s “three arrows”, falling short, for example, of introducing changes to Japan’s inefficient labour market. If Abenomics is to hit its target, the prime minister needs to adjust his aim.
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