Can Abenomics survive? ? The disappointing ?third arrow? and a perplexing tax hike.

By Prateek Ghoshal

For Japan the year 2012 ended with a bang, thanks to the introduction of Shinzo Abe into power. Termed as the messiah of the Japanese economy, Abe vowed to jolt the recession-riddled country out of its deflationary malaise. He soon instituted a three-pronged approach to reinvigorate the economy via monetary, fiscal and structural policies, which were subsequently termed as his ‘three arrows’. This included a hefty stimulus package of 20.2 trillion yen ($210 billion) to raise GDP growth, which currently remains stagnant at 2% and to raise inflation to 2% via monetary easing. Structural reforms were also planned to boost domestic markets and increase trade partnerships.

The results were quiet encouraging as stock markets boomed and domestic demand rose drastically. There was also a considerable surge in exports due to monetary policy, which kept exchange rates extremely low. The entire world glittered with optimism as animal spirits finally took off in Japan.

Since late 2013 however, financial analysts have become quiet dubious with respect to Abenomics. Amongst the plethora of criticisms faced, there are two, which genuinely need attention. This article primarily discusses these two issues.

The misfiring third arrow

While the first two arrows have succeeded in quickening economic growth, the third arrow aimed for structural reforms has felt drastically short of its potential target. The four key areas highlighted for structural reforms include agriculture, labor markets, healthcare and female participation in workforce. However since it’s inception, little has been in these areas.

Japan’s labor markets have been a major point of debate. ‘Unless they are going out of business, firms are barred from firing staff employees’ states The Economist. This is subsequently leading to a large virtually unemployed population. However, recent policy measures are hoping to make it easier for companies to replace regular “salarymen” with temporary contracted workers. As many economists believe, a free-flow of labor is necessary ensure durable growth.
One of the most important reforms that is still under process is the Trans Pacific Partnership, a free-trade agreement between Japan and 11 countries along the Pacific Rim, which could be extremely beneficial for the Agriculture sector of Japan. However due to lack of consensus, the agreement is still currently halted and raises more eyebrows regarding the efficiency of the third arrow.
Another perennial issue that Japan is facing is a Demographic crisis. More than 22% of Japan’s population is already 65 or older as of 2014. In response, Abe has instated policies aiming to increase female workforce, which could possibly offset the aging problem to some extent, however definite policies are still needed in this regard.

Nomura economists have termed the third arrow as ‘’the key to improving medium-term growth potential”, justifying its importance to balance monetary and fiscal measures.

Surviving the Tax hike

It’s no April Fools’ Day joke this year for Japanese consumers, who face a sales tax hike for the first time since 1987. Post 1^st April, the sales tax will rise from 5% to 8% with a possibility of a further hike to 10% in 2015. Since Abe announced the policy, massive debate has been generated owing to the effects of this tax hike.
Those in favor of it argue that it will help bring down Japan’s massive debt, which currently stands at 230% of GDP. Critics against it argue that it will derail Japan’s economic growth, which had finally shown glimpses of optimism.

So could the tax hike have been delayed?
A recent Bloomberg News survey of 34 economists showed mixed results on the tax hike’s expected impact. Eleven said the government only had four years or less to address its fiscal deficit, which is still forecast to exceed 240 percent of GDP by the end of 2014.
Hence the timing is extremely crucial, however Abe has carefully contemplated the decision after postponing it last year. Even though growth will be temporarily hit but most economists have shunned cries of a ‘recession’.

The tax hike has considerable risk associated with it but it is indeed a necessary one.

Conclusion:

A series of stringent and efficient policy reforms are extremely crucial to determine Japan’s near future and the whole world is patiently waiting for the third arrow to finally fire. Moreover, the recent tax hike has faced a fare amount of criticism but it might be the right action after all. Only time can tell whether Abenomics can survive these colossal issues. Let’s wait and watch!

He is a second year student pursuing a Bachelor of Arts in Economics from Kirorimal College, Delhi University. When he’s not jamming with his band (a passionate drummer) or supporting his beloved football team (Manchester united), he finds solace in economics. He has previously worked as an intern with CII (Confederation of Indian Industries) under the economic policy and research department. His interests include macroeconomic policy, finance and business development. Can be reached at prateek.ghosal@gmail.com