Clouds hovering over Japan despite good news

THE man in the street may not yet feel better off and the absence of policy details may trouble economists, but Japan appears on track to shrug off decades of deflation that have hobbled its growth.

This was the consensus among panellists discussing economic prospects of the world's major economies at the second ST Global Outlook Forum last Friday. As they spoke, news reports from Tokyo said a key index for consumer inflation in Japan rose at its fastest pace in 15 years last month.

It gave rise to hopes that Japan's central bank remains on track to achieving its goal of a 2 per cent annual rise in prices for the second year running.

Indeed, when it comes to Japan, the world's third-largest economy, good news is not that hard to find these days.

According to the latest International Monetary Fund (IMF) forecasts, Japan's 2 per cent growth rate in 2013 will be the fastest among the G-7 group of developed economies.

Its stock market has gained 70 per cent since last December, shooting far past Wall Street's 25 per cent rise. Its corporate profits are projected to increase by 17 per cent, against the expectations of 3 to 4 per cent gains in Germany and the US.

But at the ST forum, sponsored by ANZ Bank and Mercedes-Benz, economists and this newspaper's own correspondents also noted some clouds hovering over Japan.

For starters, ordinary Japanese have yet to feel the impact of Abenomics, as Prime Minister Shinzo Abe's economic revival plan is dubbed.

The premise is that the "three arrows" of Abenomics - fiscal stimulus, monetary expansion and structural reform - will reverse the curse of downward spiralling wages, prices and spending seen since the 1990s.

The signs so far are mixed.

Wages have been decreasing every month for the last 11/2 years, said Ms Fiona Chan, ST's Tokyo-based senior economics correspondent.

Companies are not raising wages because they are not confident that growth will be sustained. In turn, "Japanese people do not feel confident increasing spending until they see their wages go up", she added.

Worse, consumer spending may take a hit next year. Japan will see its sales tax rise from 5 per cent to 8 per cent in April, likely dragging down consumption.

In addition, as ST's Japan correspondent Kwan Weng Kin pointed out, Mr Abe may yet be waylaid by some "grander" goals. Since July, after winning the Upper House polls, Mr Abe has been talking about revising the Constitution to allow Japan to widen the definition of its "purely defensive" defence policy. He is also on his way to setting up a US-style national security council.

"He has told supporters he sees it as his historic mission to change the Constitution, " said Mr Kwan.

Still, the mood may turn more upbeat next year, with expected wage increases that have been signalled by some big Japanese firms.

A bigger source of optimism is Mr Abe is now especially well-positioned to undertake deep restructuring of the economy, Ms Chan noted, listing measures such as making labour laws more flexible, and letting more foreigners in.

"These are at the heart of Japan's structural problems and these are the things that are the hardest to change as well," she said. The popular support for Mr Abe and his mandate for the next three years showed "things are ripe for reform right now and (he) may find it easier to push through these reforms", she added.

A beginning was made last week, when the government approved a plan to end the "gentan" - a system that provides subsidies to rice farmers. The move will help increase agricultural efficiency and clear the way for Japan to join free trade pacts, including the Trans-Pacific Partnership.

Said Mr Glenn Maguire, the chief economist at ANZ Bank, who was part of the panel discussion: "There is a recognition among policymakers that if Japan does not get it right this time, it's their last chance."

bhagya@sph.com.sg

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