RISING SUN Japan Takes the Non-German Approach

Japanese Prime Minister Shinzo Abe hopes to spend his way back to growth. It's the opposite approach to the one taken by Germany and so far, the verdict on his efforts is mixed at best.
Tokyo's port - Mr.Abe wants to increase exports.

Big Japanese corporations are finally playing into the hands of Prime Minister Shinzo Abe and his policies to revive the nation's long-stagnant economy.

Last week, the Bank of Japan’s quarterly economic barometer indicated the nation’s industries plan to spend more – and do their part for Mr. Abe’s reform plans after two years of aggressive monetary and fiscal policies.

For Mr. Abe, the news comes at a critical time. On Tuesday, his government decided on a stimulus program that is almost exactly the opposite of the strict savings approach that Germany demands from countries saddled with high debt in Europe – an approach that was firmly rejected by Greek voters in a referendum on Sunday.

Unlike Greece, however, Mr. Abe still has the confidence of markets and he’s hoping private investors will give him the benefit of the doubt for at least another few years, while his government continues to spend more than it takes in.

It is important to understand that Japan is not at a turning point but at the edge of a cliff. Yoshimitsu Kobayashi, Chairman, Mitsubishi Chemicals

The prime minister has said he will fulfil a promise that his predecessors made to the world in 2010 to produce a primary balance surplus by 2020 – that is to say, a balanced budget when excluding the high interest payments on its debt.

But until then, over the coming three years, Mr. Abe has rejected the idea of shrinking the state’s budget. And this in a nation that is already the world’s debt leader, with obligations amounting to 250 percent of GDP.

He hopes that such “daring investments” and “intensive reform” will catapult Japan out of an economic crisis it has suffered for the better part of two decades.

“There is no fiscal health without economic revitalization,” he says.

Mr. Abe has made two concessions to his more German-thinking ministry of finance. The increase in government spending will be limited to ¥1,600 billion in the next three years – about €11.7 million or $13 million – mostly by capping social spending. In addition, he holds out the prospect of increasing value added taxes again in 2017.

But by not cleaning up the government’s finances sooner, Mr. Abe is taking a huge gamble with markets, who could turn on the country and its debt burden if Mr. Abe’s policies don’t show success.

“It is important to understand that Japan is not at a turning point but at the edge of a cliff,” said Yoshimitsu Kobayashi, chairman of the chemical giant Mitsubishi Chemicals. He is also acting chairman of the Keizai Doyukai trade association and one of Mr. Abe’s advisors.


Japan’s Economy-01


“In order to maintain the trust of the financial markets, Japan must reach its reform goal,” he said.

Government economists have stirred doubts over whether the ambitious plan can work, and whether Mr. Abe can bring the budget back in line by 2020 as promised.

According to an estimate by the cabinet office earlier this year, Japan’s primary budget deficit will still amount to about €70 billion by 2020, even if the economy grows by about 3 percent, as calculated by the government. With 2 percent growth, the deficit could remain as high as €120 billion.

Mr. Abe argues that the higher growth will also bring in higher tax revenues. Motoshige Itoh, Mr. Abe’s advisor and economics professor, explained the approach as increasing “tax elasticity.”

Up to now, the balance sheet on “Abenomics” has been mixed. The biggest problem is that Mr. Abe’s plan depends upon forcing the economy back to an inflation rate of 2 percent with a glut of money. If he can manage that, he would be halfway towards taking down the country’s massive debt burden.

But after initial successes, Japan is in danger of sliding into deflation again.

It is true that industry is starting to play its part. In June, the confidence index of big manufacturers rose unexpectedly for the quarter, from 12 to 15 points. Above all, the bank’s so-called Tankan Report showed manufacturers plan to increase investments by nearly 10 percent through March of next year.

But consumer spending is not increasing as strongly, because the real income of the Japanese people continues to decline, despite Mr. Abe’s hopes. In addition, an increase in the value added tax in April 2014 helped push Japan into recession, though the economy was growing again at a rate of 1 percent in the first quarter of this year.

So “Abe-euphoria” seems limited to large corporations for now. Time will tell whether it eventually grips the entire country.


Sinologist Martin Kölling moved to Tokyo as the East-Asian correspondent for Financial Times Germany in 2000, where he remains, reporting on political, economic, technological and cultural trends in Japan, North- and South Korea and China. He has been working at Handelsblatt since 2012. To contact the author: [email protected]