rahul.khanna's picture

Abenomics may make or break Japan

Japan's easing program will make or break the third-largest economy in the world.  Crucial points are that apart from a weak yen and high liquidity there is not much else to cheer on at the moment.  The economy has shrunk rapidly over the last two quarters and the average Japanese citizen is feeling the heat of a high tax, low growth, and a high inflation environment. The wealthy on the other hand could not have been happier as the Nikkei continues to rally.

The common man in Japan may have little to cheer as wage growth is below inflation and until recently a second sales tax rise was looming. It seems like people had cut spending due to feeling the squeeze and were looking at the prospect of a proposed consumption tax rise.  

 

Going forward Abe faces a gargantuan task to get the economic growth back on track. The Economy is ailing with a high debt to GDP ratio. And given the delay to the Sales tax hike, fiscal reforms will remain a challenge.  A survey of exporters has said that importing raw material for production will become a greater issue due to the declining Yen and this may pose another problem.

But more grave concerns are over Japan's competitiveness in the world market, with 57 companies in the Fortune 500 compared to 62 last year. This figure was 100 in 2000 which begs the question that how can Japan be led on to the path of growth with an ageing and declining population. 

Structural reforms will be slow and amid a reflationary policy, the risk remains of asset price bubbles. Only the future will tell if this brave Keynesian experiment by Abe will get Japan out of the vicious circle of deflation and stagnant growth, but as history shows its not the first time Japan has followed inflationary policy, but I  must say - one on this scale has not been pursued.