Three major paradoxes show failure of “Abenomics”

The Japanese government on Wednesday said that the country’s economy increased an annualized 1.7 percent in real terms in the first quarter of 2016 and that this corresponded to a 0.4 percent growth from the previous quarter, attributing the increase to recovering private consumption.

However, the readings are not as positive as they look. In nominal terms, domestic demand dragged down GDP by 0.2 percent and private consumption slipped 0.1 percent in the reporting period, marking the second consecutive quarter of decrease.

The real term GDP is calculated based on the price factor in 2005, while the nominal GDP is adjusted based on the price factor in the first quarter of 2016. It means that Japan is actually still mired in deflation as prices in the reporting period decreased compared to that of 2005.

Three and a half years on, Prime Minister Shinzo Abe’s economy policy mix dubbed “Abenomics” has failed to propel Japan out of prolonged deflation, despite the central bank’s ultra-loose monetary easing moves and the negative interest rate adopted recently by the bank.

The Japanese yen’s rapid appreciation and volatile stock market here triggered by an unexpected sharp plunge in oil prices since earlier this year exposed the weakness of “Abenomics” against a backdrop of a changing global economic situation.

The key issue is that “Abenomics” from the beginning wrongly estimated the entire Japanese business environment in which business leaders are hesitant when it comes to increasing investments, due to the country’s decade-long stagnancy and, therefore, when “Abenomics” was introduced, it was impaired by its own self-constructed paradoxes.

WEAKER YEN HELPS BIG COMPANIES AT COST OF SMALL ENTERPRISES

One of the fundamentals of “Abenomics” is to issue more currency so as to depreciate the yen’s value in order to improve competitiveness of Japanese goods. A weaker yen has helped many export-oriented big companies and spurred the skyrocketing of the stock market here since the policy mix was introduced in early 2013.

However, behind the bright earning reports of big companies are an increasing number of bankrupted medium and small-sized enterprises that heavily depend on imports. The yen’s retreat helped push up the prices of imported materials.

According to the Teikoku Databank, as of December 2015, raw materials for the wholesale sector jumped 52.9 percent on year, while the cost of clothing materials surged 71.4 percent on year. The number of bankruptcies related to the yen’s depreciation increased in 2015 for the second straight year.

Monthly reports by the databank on Japanese bankrupted enterprises also showed that more than 50 percent of Japanese businesses that went bankrupt are medium-sized and small companies that account for 98 percent of all Japanese enterprises.

“This is endemic of the failure of ‘Abenomics.’ The prime minister’s policies were tailor-made to support big business, whereas economists maintain that it’s the smaller industrial businesses (not blue chips) that have for decades been propping up Japan’s economy. The business failure rate of small and medium-sized businesses is a very worrying harbinger of what’s in store for the broader economy,” said David McLellan, a professor emeritus of postgraduate Asian Studies.

BIG COMPANIES RELUCTANT TO INCREASE INVESTMENTS

Although big companies have benefitted from the BOJ’s large scale monetary easing and the central bank adopting a series of policies to create a better investment environment, they prefer to hold cash and securities and not follow the prime minister’s plan to increase their investments.

According to government data, the investment growth by Japanese big enterprises in the last quarter in 2015 was negligible, compared to the third quarter, but in the meantime, capital and securities held by the companies rose 3.7 percent and 4 percent respectively.

Another survey showed that compared to a decade ago, the amount of capital held by big companies increased 32.4 percent in fiscal 2015, while their investment in permanent assets only grew 16.3 percent during the same period.

The only reason for the backward trend is that the “Abenomics” has not yet helped restore prosperity in business circles, which is still impacted by weak exports and domestic demand punctuated by prolonged deflation.

Meanwhile, big companies also maintain that the depreciation of the Japanese yen is not enough for them to give up their overseas production systems and reproduce them in Japan, as the yen could appreciate at any time.

Recent facts have proved their choices correct. According to a Japanese finance ministry survey, Japanese enterprises’ investment are expected to drop by 6.6 percent due to the fast appreciation of the yen and the plunge in the stock market.

THE PUBLIC FEELS NO BENEFIT FROM “ABENOMICS”

Since the introduction of “Abenomics” in early 2013, the prime minister never adopted a crucial policy to address Japan’s economic structural problem of weak demand and more social welfare expenditure brought about by the country’s rapidly aging society.

A middle aged female going by the name Kojima told Xinhua that she is reluctant to spend money due to her worries about her pension in the future. “The government hasn’t fixed the problem yet,” she said, “the number of young people are declining, which means people who pay the endowment insurance are declining.”

Meanwhile, the big companies that have benefitted greatly from “Abenomics” also neglected the government’s constant urge to raise employees’ salaries. The world’s top automaker Toyota agreed to raise monthly payment to its employees by 1,500 yen (about 13.7 U.S. dollars) and Panasonic also made a similar decision.

Without income increases and with another planned consumption tax hike, households remain under a critical financial burden. “Salaries and bonuses are frozen, which means consumption will be further stifled, which will continue to drive the economy in the wrong direction,” said McLellan, adding that “coupled with this, the planned further tax hike is contributing to households becoming increasingly unwilling to spend.”

A recent national survey by Japan’s Kyodo News showed that 81.4 percent of respondents did not feel the economic improvement from “Abenomics” and 64.6 percent of the Japanese public oppose the sales tax rate from 8 percent to 10 percent planned for April 2017. (Xinhua)