‘Abenomics’ fell short — Japan’s new prime minister will have to pick up the slack

Outgoing Japanese Prime Minister Shinzo Abe is stepping down with much unfinished business in reviving the world’s third-largest economy — leaving his successor to pick up the slack.

Abe last Friday announced his resignation over poor health. But his signature economic strategy — a range of stimulus policies known as Abenomics — will likely survive not in the least because his close aide, Chief Cabinet Secretary Yoshihide Suga, has emerged as a front-runner to be Japan’s next prime minister. 

Suga has said he would “maintain and push forward” with Abenomics, which involve large-scale monetary policy easing, fiscal spending and structural reforms. But even if an Abe critic takes office, analysts said the coronavirus pandemic has left little room for the government to make drastic policy changes.

That will give investors the peace of mind that stability will persist in Japan.

“From the perspective of markets, investors are looking for stability, continuity,” Kathy Matsui, vice chair and chief Japan strategist at Goldman Sachs, told CNBC’s “Street Signs Asia” on Wednesday.

“Japan’s political history is marred by this rapid turnstile of leaders,” she said. “The biggest fear … is to go back to that pattern of constant change at the top because when you have that turnover, obviously it’s much more difficult to implement, especially, much needed structural reforms.”

But “the track record of Abenomics is mixed at best,” said Josh Lipsky, director of the global business and economics program at think tank Atlantic Council. He explained in a note last week that while Japan did grow, some policy goals were not achieved.

Abe came into office in late 2012 with grand plans to lift Japan’s economy out of decades of stagnation. Japan, once a bustling economy, experienced a major slowdown in growth during what became known as the “lost decade” from around 1991 to 2001.  

Abenomics helped accelerate growth again, though not at the rate Japan once saw and the size of the economy is still short of the 600 trillion yen ($5.6 trillion) target set by Abe’s government. But many analysts credited the outgoing prime minister for putting the Japanese economy in a stronger position today to withstand the shock from the coronavirus pandemic.

“Abenomics did create growth and avoided the worst case-scenarios for Japanese economy,” said Lipsky.

But the pandemic threatens to wipe out much of those economic gains, with the International Monetary Fund forecasting a 5.8% contraction in Japan’s gross domestic product this year.

The most successful aspect of Abenomics is the large-scale monetary easing by the Bank of Japan, said analysts. The BOJ’s unconventional measures such as asset purchases and yield curve control have entered the tool kit of other central banks.

Such monetary easing boosted stock prices and weakened the yen — helping Japanese companies dependent on exports to expand their profits.

“Abenomics has been effective in supporting large firms by boosting equity markets and nurturing the sense of stability that a sharp appreciation of the yen will not happen again,” said Shigeto Nagai, head of Japan economics at Oxford Economics.

“During Abe’s time in office, the profitability of large firms has risen significantly, by expanding their business abroad,” he wrote in a report last week.  

Those benefits to large businesses have not raised wages enough to spur households to spend, said Nagai.

“Without a sufficient rise in wages, the benefits of Abenomics were not shared by households, and thus failed to stimulate domestic demand. Abenomics did not stop the secular stagnation in household incomes,” he explained.

That leaves the BOJ’s 2% inflation target elusive for now, although the policies brought an end to deflation. The lack of inflation is not unique to Japan, with other developed markets — including the U.S. — similarly finding it challenging to raise prices despite solid economic growth.

But some economists said the pandemic-induced crisis, which has dampened demand further, could bring Japanese inflation back into negative territory.

While Abenomics involved an increase in government spending to support growth, the strategy also aimed to achieve a budget surplus and bring down debt over the long term. That’s a task made even more difficult by the coronavirus pandemic, according to analysts. 

“Fiscal policy has been anything but tight this year,” said Tom Learmouth, Japan economist at Capital Economics. He explained in a Tuesday note that there’s been more spending to support firms and households in the current crisis.

“As such, the budget deficit is set to surge,” he added.

Even before the pandemic, Japan’s government debt — at more than 200% of GDP — was already the highest among countries in the Organisation for Economic Co-operation and Development. Some analysts said such a debt pile could limit any further fiscal spending, which would in turn compromise Japan’s recovery.

Over the longer term, Japan’s next prime minister will have to tackle structural challenges that Abe has left largely unaddressed.

“Abe has succeeded in promoting corporate governance reform and in increasing the share of women, seniors, and foreigners in the labour force,” said Learmouth. “But the structural reforms with the most potential to lift productivity growth have not been addressed.”

He singled out Japan’s “excessive bureaucracy” as the most likely area for “widespread change in the near term.” That problem caused frustration among the public when households and businesses had to wait a long time before receiving government support during the pandemic — which contributed to waning support for Abe’s cabinet before his resignation, explained Learmouth.

“As such, there will be pressure on Mr Abe’s successor to reform Japan’s complex and undigitised admin systems that drag on productivity,” he added. “Such reforms have the potential to lift trend growth.”