The coming of Abegeddon | South China Morning Post

Jan 1, 2014About Kishore Mahbubani

Until Christmas, Shinzo Abe’s eponymous Abenomics programme to rescue Japan from decades of deflation and low growth was an important success, according to most economic commentators. Among their ranks were the International Monetary Fund, investors on the Tokyo stock market, who took it to a six-year high and 55 per cent gain in 2013, and Japan hedge fund investors, who were the world’s best performers.

But on December 26 – on the first anniversary of taking over as prime minister – Abe in a fit of hubris or nationalistic fervour visited the controversial Yasukuni Shrine where war criminals are honoured along with 2.4 million ordinary Japanese war dead.

In the space of an hour Abe changed the economic and political equation – from Abenomics to the risk of Abegeddon. He sparked a new verbal war with Japan’s neighbours, but with his visit he risked something hotter that could cause his economic programme to crash in flames.

Respected former diplomat and commentator Kishore Mahbubani declared that Japan and China “seem locked in an irreversible, dangerous downward spiral”, in an article published by Bloomberg.

Among the concerns is Abe has taken his eye off the economic goals that should be his priority

Among the concerns arising from the shrine visit is that Abe has taken his eye off the economic goals that should be his priority. In spite of the successes of the first year of Abenomics, there are big challenges ahead.

The stock market rose sharply, in tune with the weakening yen, which has fallen to five-year lows of 105 against the US dollar, helped along by the Bank of Japan’s determined quantitative easing to haul Japan out of deflation. This policy also seemed to be succeeding, with the core consumer price index for November showing inflation of 1.2 per cent.

David Lipton, first deputy managing director of the IMF, has given his approval to what Abe and the Bank of Japan have accomplished so far. In an interview with the Financial Times, Lipton said the policies had changed Japan’s economic trajectory.

But he cautioned that Abenomics is supposed to consist of three arrows – monetary easing, fiscal stimulus and structural reform – and that it is important to fire all three, not just the easy one of monetary easing. The IMF deputy expects Japan’s growth to be 1.2 per cent this year.

Some domestic critics are less supportive, and have coined puns on Abenomics to describe his policy. Some say it is “awanomics” – where “awa” means “bubble” – a fear that monetary easing is just helping Japan’s big corporations to enjoy the cream of bigger export earnings from the weaker yen and higher asset prices without real growth underpinning them. Others use “ahonomics” – where “aho” means “stupid” – and predict that the policy will crumble from its own contradictions.

In April, Japan will raise its consumption tax from 5 to 8 per cent, still low by world standards, but the increase could stifle growth, anger consumers and derail popular support for Abenomics.

The average Japanese has seen few benefits from Abenomics. According to a Bloomberg poll of 16 economists, Japan’s labour cash earnings will rise by 0.6 per cent in the year from April, whereas consumer prices will rise by 3 per cent, or five times as much, thanks to the consumption tax increase.

Abe has asked companies to raise wages. But why should they? As Wolf Richter put it in his blog: Japanese companies are “sitting on the Abenomics gravy train: more government money, lower taxes, a devalued yen that inflates earnings from exports and overseas operations, and an asset bubble, particularly in the stock market. They get all this while paying their workers less. It’s corporate nirvana”.

Abenomics is particularly vulnerable because there is little sign of the third arrow – structural reform – being prepared for release. If anything, Abe has shown signs of backing down before the vested interests.

In addition, he is being distracted by his nationalist agenda. One of his own aides claimed that there was a struggle going on inside Abe’s head between the nationalist and the economic reformer. In the last few weeks the nationalist Abe has had the upper hand, with a secrecy law rushed through parliament, with a new national defence programme, a plan to amend school textbooks to add patriotism – and then the visit to Yasukuni.

That visit is ultimately dangerous for Japan because it has badly upset key neighbours. Trade with China accounts for 20 per cent of Japan’s overall trade.

Japan’s Asahi Shimbun last week claimed that business leaders had lobbied against the Yasukuni visit, but no one in business circles is big enough to challenge the prime minister. Japan waits with trepidation to see whether China will react with more than a verbal war.


Source: The coming of Abegeddon | South China Morning Post