Japan.- Shinzo Abe reelected, despite not so abenomics for everyone and fiscal risk

Abe becomes this way the longest lasting PM in Japan after World War II

Eva González Tokyo (Japan), 23 October, 2017

Shinzo Abe has swept in the general elections for the parliament held in Japan today.
Shinzo Abe has swept in the general elections for the parliament held in Japan today.
Despite this, the conservative coalition (Liberal Democratic Party + Komeito) led by Abe hardly obtained the 2/3 mayority needed to reform the Article 9. of the Japanese Constitution, with 313 seats in the Lower House (the coalition held 318 before the elections).

The victory of the leader of the Liberal Democratic Party and its coalition allies gives Abe the needed support to keep on facing North Korean menace and going further in the move from the defensive to the active military policy already started off in 2015.

Left.- Abe attending the annual Hiroshima Peace Memorial Ceremony in 2007.© Cabinet of the Prime Minister of Japan. Right.- PM of Japan Shinzo Abe visits NATO in July 2017. On the image Abe shakes hands with NATO Secretary General Jens Stoltenberg.© NATO

The reelected PM of Japan has called for anticipated elections. Many say that he was more thinking about its own electoral profit than in Japan needs. Rising poverty and inequality in wages between formal and unformal workers, as well as the fact that economic growth is maily favoring large companies, as well as some corruption cases would have damaged Abe’s electoral appeal. But then they came the increase in North Korean nuclear missile launchings. Facing North Korean Government has driven Abe’s popularity up. Perhaps this fact could have driven the PM to dissolve the Parliamenta and call for anticipated elections in October.

Abe has been reelected and the new military active approach is being commented here and there, but the fact is that abenomics to date has proved effective but not as expected as well as not so inclusive.

Changing Japan’s pacifist Constitution and mind, an opportunity and a political risk

Among the plans of the today re-electer PM of Japan they are: an increase in military spending by a 5% for the 2014-2019 period; a deep reorganization of its national security and intelligence structures (moving towards greater centralization); as well as deepening Japan’s strategic ties both with the US and regional partners such as Korea Russia, Australia, ASEAN and Indi) and international partners including NATO, EU, UK and France.

Tne emmergence of Japan as a military active power along with its strategical location in the Pacific Ocean would change the status quo in the region. It is still to be seen how this changes are received by China, a country with the same interests as Japan on the point of the more and more frecuent tests with atomic missiles carried out by North Korea but still pending the conflict on the Sensaku islands between both Asian countries.

In this context the balancing action by the USA is essential but this diplomatic action can’t be taken for granted, being Donald Trump at the Presidency of the United States of America.

Growth above OECD and IMF forecast, but inflation under projections

Following the latest economic survey and prospects on Japan published by the OECD in Summer this year, economic growth is projected to edge up to 1.4% in 2017, aided by stronger international trade in Asia and fiscal stimulus.
The latest survey on Asian economy prospects carried out by the International Monetary Fund (IMF) says that this Asian country enjoyed growth sustained above-potential for six consecutive quarters through the first half of 2017. The country is expected to grow to 1.5% in 2017 driven by a pickup in external demand, as well as consumption supported by fiscal transfers.

OECD forecast on Japan 2017. © OECD

As fiscal support is expected to fade in 2018, prospects for next year published by the IMF in October 2017 foresee that economic growth in Japan will refrain to the 0.7%. The OECD outlook was a bit more optimistic with prospect for 2018 at 1.0%.

Labour and capacity shortages and record-high corporate profits will support employment and business investment, keeping growth close to 1% in 2017. Headline inflation will reach 1% by end-2017, due to ongoing monetary easing, says OECD.

Reaching inflation target, top need

Achieving the inflation target is the top priority, according to OECD outlook, as nominal GDP growth is also essential for fiscal sustainability. Now Japan’s State debt level is over the 200% of its GDP.
the Bank of Japan made an “inflation-overshooting commitment” to continue expanding the monetary base until CPI inflation (excluding fresh food) exceeds the 2% target and stays above it in a stable manner. Such a commitment should help lift inflation expectations, which are currently well below the target.

Odd Per Brekk (Deputy Director, Asia and Pacific Department at IMF) said on this point just few days before elections in Japan :”…the expected inflation of 0.4 percent in 2017 supported by higher energy prices, slowly building wage price pressures, and a narrowing output gap, and significant reforms to reduce duality and to engender a stronger focus on nominal wages versus job security would be needed to generate stronger wage related pressures. Although, we see low unemployment for Japan, but for this to feed through to wages there needs to be reform in the labor market.

OECD forecats on Japan 2017. © OECD

Against this background, we advise that the Bank of Japan’s accommodative monetary policy stays accommodative. We have welcomed the new monetary policy framework introduced in September last year. By deemphasizing qualitative targets or focusing on interested target, and it puts monetary policy on a more sustainable footing. So, we think this is the right approach given the situation.”…in n our medium-term projections we have inflation continue to edge up to something like 1-1.5 percent over the medium term.”

Abenomics, not so for SMEs and workers, specially for women

Despite growth momentum and labor shortages, wages are not rising at the pace the economy grows. In IMF’s expert Odd Per Brekk (Deputy Director, Asia and Pacific Department) wiew: “Although, we see low unemployment for Japan, but for this to feed through to wages there needs to be reform in the labor market.”
The labor market reform aimed to reduce poverty through narrowing the wage gap between regular and non regular workers (38% of total people employed) shoul include, as underlined by OECD: relaxing employment protection for regular workers and an expansion of social insurance coverage and training for non-regular workers; and removing obstacles to the employment of women.

The government initiative for “equal pay for equal work” could help reduce wage gaps and reduce firms’ incentives to hire non-regular workers.
Improving the availability of affordable childcare and improving work-life balance, would help mitigate the decline in the working-age population and promote inclusive growth, specially for women, who are in a vast majority non regular workers. This makes of Japan the country with the 3rd highest gendr gap (27%) among OECD countries.

Poverty reducction and the increase in salaries is needed to push domestic demand, and reduce Government gross debt now at 220% of the GDP of Japan. OECD underlines that a comprehensive fiscal plan is needed to maintain confidence in Japan’s fiscal sustainability.

Japanese girl working with a laptop. Photo by MJ/TR (´・ω・). Published on Flickr, http://www.flickr.com/photos/mujitra/3473642198/sizes/l/, under CC BY 2.0 lisesnse agreement. To watch the original photo on Wikimedia, click here 

The fiscal plan should, in OECD’s view, also include reforms to contain the growth of social spending by shortening hospital stays, increasing the use of generic drugs, reducing long-term care insurance coverage for those with less severe needs, fully applying macroeconomic indexation to pension benefits and raising the pension eligibility age. Despite this Abe has announced the increase in social spending by its Government.

Another point for inequality and a barrier to higher growth in Japan is that although the country has become increasingly integrated in global value chains, especially in Asia, the benefits of international trade are concentrated just in large firms.

Just few small and medium-sized enterprises export, thus contributing to the large labour productivity gap between large and small firms.

The number of SMEs that export is rising gradually, but policies to help SMEs enter international markets would support a more inclusive growth. Reducing the high level of support to farmers, in part by lowering trade barriers, would also deepen Japan’s integration in the world economy.

Downside risks, specially the high State debt

Both OECD and IMF forecast that growth GDP momentum will continue in Japan.
through 2018.
Upside factors that could drive growth over expectations, include faster-than-projected world trade growth, which would boost exports and business investment, and larger wage gains as firms face increasing labour shortages.

Despite this there ares some downside risks including heightened geo-political tensions in Northeast Asia and trade protectionism.

On the domestic side, Japan’s unprecedentedly high level of public debt is a key risk, says OECD. Unless a more detailed and concrete strategy to stabilise the debt ratio is implemented, Japan could face a loss of confidence in its fiscal sustainability, which in turn could destabilise the financial sector and the real economy, with large spillovers to the world economy.

The primary deficit in 2018 is projected to remain well above the government’s benchmark of 1% of GDP, leading to a further rise in the ratio of government debt to GDP.

To sustain confidence in Japan’s public finances, setting out and implementing a more detailed consolidation path, including gradual increases in the consumption tax rate, is a priority. Continued structural reforms to boost productivity and employment, especially of women, are important to support inclusive growth. Faster growth is essential to stopping and reversing the run-up in the public debt ratio.

Image over the headline.- Shinzo Abe (PM of Japan).© Cabinet of the Prime Minister of Japan.

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