Research and analysis

Abenomics: A Bumpy Ride Ahead? March 2014

Published 16 April 2014

This research and analysis was withdrawn on 18 June 2014

This document is no longer current.

There’s been good and bad economic news in Japan over the last month.

Japan’s monthly Current Account deficit hit a record in January of 2.35 trillion Yen (£13.8bn). Sharp falls in the value of the yen over the last year have not yet translated into greater Japanese exports. There are - at least - four potential explanations:

• Japanese industry offshored much of its industrial production during the strong yen, which lessens the impact of currency moves on exports.
• Japanese companies have not lowered their prices for overseas customers as much as expected – meaning that many companies have not gained market share, but have dramatically increased profits in yen terms.
• Some Japanese companies have lost global competitiveness: the auto sector is performing well, but the electronics sector continues to struggle.
• Overall global demand remains weaker than before the crisis, especially among emerging economies.

A significant part of the deficit is also driven by high levels of oil and gas imports, which are priced in US dollars. This makes upcoming decisions on whether and when to restart some of Japan’s nuclear reactors crucial. These will need to reflect the advice of the recently-established nuclear regulator. There is strong pressure from industry for restarts to happen this year. Supporters argue that restarts are needed for both economic and climate change reasons, despite continuing public scepticism.

The other piece of bad news has been a downward revision of Q4 2013 growth figures from 1.0% to 0.7% (annualised rate). We should however see much stronger growth this quarter as consumers advance spending ahead of the rise in VAT this April (from 5% to 8%). The Japanese economy should then contract next quarter as a result. This is being partially offset by a further major stimulus package (1% of GDP). The Bank of Japan (BoJ) is also predicted by analysts to expand its quantitative easing programme either in April or – slightly more likely – in June/ July. Most economists therefore expect the economy to rebound strongly in Q3.

The good news. Deflation increasingly looks like a battle that has been won, at least for now. We are seeing sustained positive core inflation of over 1%. This removes a major disincentive on Japanese consumers to spend, and on companies to invest. It allowed BoJ Governor Kuroda to adopt a steady-as-she-goes stance at the latest governing board meeting on 10/11 March.

Another positive development is the decision in the same week by several major Japanese companies – including Toyota and Panasonic –to increase regular employees’ wages for the first time in years by between 0.5-1%. This follows strong pressure from the government, and should ease the impact of rising inflation and the VAT rise on consumers to some extent (even if SMEs may find it hard to follow suit).

Following successful reforms on electricity markets and rice subsidies at the end of last year, the government has also prepared 30 reform bills for the current Diet session. Although incremental, there is clearly strong determination around Abe to tackle current impediments to growth.

The next key moment will be in June, when the negative-growth Q2 ends, pay packets are increased and workers will receive their “13th month” pay boost. Abe has chosen this as the moment when he will launch his new Growth Strategy, to set off a new round of deregulation and reform.

0.1 Comment

Renewed growth in the world’s third largest economy will boost regional and global economies, and provide new opportunities for UK companies. Sustainable growth will also be essential for Japan to begin tackling its mountain of debt (at 243.5% of GDP, the highest in the OECD).

0.2 Disclaimer

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