Blog Abenomics enters second phase from a solid base

Abenomics enters second phase from a solid base
Shinzo Abe, Prime Minister of Japan, is well-placed to implement the second stage of his economic reform program, according to Dr. Motoshige Itoh.

“It was an important turning point because the Prime Minister has a mandate to reap the harvest of gains achieved from stage one,” Itoh, Professor of Economics, University of Tokyo and Member, Council on Economic and Fiscal Policy, Japan, told the AIC.

The wide-ranging policy, dubbed “Abenomics”, was launched in 2013 in an effort to reverse two decades of deflation and revive the Japanese economy. It is made up of three arrows: printing money to buy Japanese government bonds, massive fiscal stimulus and structural reform of important sectors such as agriculture, health and energy.

Despite an early surge in growth, the economy slid back into recession in the second half of last year. However, Itoh highlighted significant progress.

“The stock market, corporate profits, government revenues, employment and wages have all risen,” he said.

“But, Japan has been in depression during the past twenty years so it takes time to change mindsets sufficiently to consumption, investment and exports,” he warned.

Real negative interest rates should soon encourage companies to shift cash into higher yielding investments. The Yen - while a competitive currency - is at a 40 year low against the U.S. dollar, and the low oil price should raise manufacturing and export levels.

Itoh’s optimism is further boosted by recent wage increases - the biggest for 17 years - which should translate into higher consumer spending. A tight labor market means that wage rises could extend to smaller companies too.

But structural reform takes more time to implement, Itoh said.

“Stimulating the supply-side is a longer-term process and is essential to promote private investment,” he said. Agriculture, labor and energy reform requires extensive consultation, although Itoh pointed out that there has already been significant progress towards improving the pension system, and social security and welfare reform are now on the agenda.

Itoh assured AIC delegates that Abe is firmly focused on moving ahead with his economic program to boost the Japanese economy, but he will step cautiously.