No bullet-train ride for Abenomics

A year has passed since Mr Shinzo Abe staged a spectacular comeback as Japan's Prime Minister, pledging that his nation's stagnant economy would enjoy a similar revival.

Mr Abe, 59, got off to a good start. His series of growth-boosting, deflation-busting policies - collectively called Abenomics - sent the yen plunging, boosting exports, corporate profits and stock markets.

As a result, Japan's economy grew about 4 per cent in the first half of this year, beating its developed-country peers. Consumer prices have stopped falling and are now edging up at their fastest pace in five years, after two decades of growth-sapping deflation.

But each notch on Mr Abe's economic belt so far has had caveats attached. The main one is that Japanese companies, disenchanted by a string of short-lived political regimes and miscarried reform promises, have yet to be persuaded that it is different this time.

Most are holding back on raising wages, the crucial factor in making inflation a virtuous cycle of higher spending, improved company earnings and increased pay.

With key structural reforms delayed and long-term prospects still uncertain, bosses are not confident enough to invest in their businesses and expand operations - without which real growth will continue to be elusive.

Success?

MUCH of the economy's renewed vitality stems from two of Mr Abe's so-called "three arrows" - flexible fiscal and aggressive monetary policies - which are well on their way to hitting their mark.

The 10.3 trillion yen (S$146 billion) public spending package has helped fuel the economic engine, especially in the July to September quarter, when growth slowed as consumers shopped less and companies shipped fewer exports.

Meanwhile, the Bank of Japan's (BoJ's) bold monetary easing and energetic anti-deflation rhetoric pushed the yen down and kept it there, laying the ground for a much-needed export resurgence.

In the last 12 months, the yen has fallen over 20 per cent against the greenback, euro, pound, yuan and won, among other currencies.

This has led to better corporate performances, sending the Nikkei share index surging more than 60 per cent.

The BoJ's moves also helped defeat deflation, at least temporarily. Japan's inflation is expected to have jumped to a new five-year high in October, the fifth straight month of price rises, a Reuters poll found last Friday.

But not everything is rosy. The Nikkei's meteoric rise has stalled since May, as investors await more concrete economic reforms.

As for inflation, consumer prices are rising more because the yen's plunge has made imports dearer, rather than because shoppers have raised spending.

To achieve the BoJ's goal of 2 per cent inflation by 2015, what will be needed is more demand- side inflation, which can only materialise when Japanese firms bite the bullet and raise wages.

"Recent data... supports the view that a sustained exit from deflation is possible, particularly if the gradual tightening of the labour market can subsequently be translated into income growth," said Schroders fund manager for Japanese equities Nathan Gibbs.

Sceptics say the BoJ's monetary easing is not working as well as advertised. The central bank is pumping 70 trillion yen into the economy a year, but banks are sitting on that money because companies have little interest in borrowing for capital investment.

And although the Nikkei has soared, not every company is enjoying the fruits of Abenomics.

The head of the Japan Chamber of Commerce and Industry, Mr Akio Mimura, said last Thursday that smaller businesses have yet to benefit from the policies. While the big listed firms are flourishing, the situation is different in small and mid-sized firms, he said.

Surveys bear this out. Even as Japanese business sentiment climbed to a six-year high in the July to September quarter, sentiment stayed negative among small companies.

Still doubtful

THE other big group that remains doubtful of Abenomics are Japanese workers, who are still waiting to feel the effects of faster growth on their salaries.

Bonuses have been raised, but many Japanese bosses are wary of committing to a hike in base pay. A survey published in the Yomiuri Shimbun newspaper this month found that only eight of 105 companies polled were considering raising base salaries.

In the meantime, workers saw their base pay shrink in September for the 16th month in a row. Their total wages, including overtime and bonuses, have only risen in two months out of the last 17.

The drag on wages is partly the fault of Mr Abe's third arrow - structural economic reforms to encourage private investment - which is still hovering half-heartedly in the air.

To be sure, some tentative moves have been made in the right direction. Initial proposals have been tabled to better manage Japan's huge pension fund, loosen rigid labour and immigration laws, promote entrepreneurship and ease rules in some tightly-controlled sectors, including agriculture and medical products.

Earlier this month, Mr Abe's Cabinet approved a Bill to create strategic special zones to experiment with reforms on urban land use, employment, health care and farming, among others.

But if the pace of the Bill is any indication of Mr Abe's stomach for reforms, it may be some time before any real change takes place, economists say.

"In terms of content and speed of implementation... there is no question that the Bill fell short of the market's expectations," said Nomura economists Shuichi Obata and Tomo Kinoshita.

"However, we regard it as an important step forward towards implementation - albeit leisurely paced - of the Abe government's regulatory reforms."

The steps announced so far have failed to adequately address Japan's fundamental problem of a fast-ageing, low-replacement- rate population, said Standard & Poor's chief global economist Paul Sheard.

"The growth strategy plans... lack coherence and credibility, judged against the huge demographic headwinds that Japan faces and appears to be doing little directly to counter."

Even disregarding this, raising real economic growth from the 0.8 per cent averaged in the last decade to the 2 per cent targeted by Mr Abe seems "a huge task and something that has never been done in recent Japanese history".

Still, many Japan watchers are the most upbeat in years. They suggest reasons Mr Abe may yet be able to push through reforms where his predecessors failed.

Citi economist Willem Buiter pointed out three in a report last month.

First, Mr Abe's solid political capital and popularity, at a level unseen since Mr Junichiro Koizumi's regime ended in 2006, imply support for his reform drive.

Second, Japan's need for closer relations with nations like the United States to counteract a rising China has made it more amenable to opening up its economy, prodding it to join the Trans-Pacific Partnership for freer trade.

Third, the vocal protests against reforms from the powerful agriculture lobby may soon grow softer, as the sector shrinks.

"We conclude that there may be some chance now, unlike in the past few decades, of one or more meaningful supply-side enhancing reforms, which should count as optimism in the Japanese context," Mr Buiter said.

Whether this optimism translates into economic improvement, however, remains to be seen.

fiochan@sph.com.sg

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