Hope in Japan as 'Abenomics' appears to turn things around

Prime minister Shinzo Abe's gamble shows signs of reviving the exuberance of the '80s

After years of grinding malaise, Japan suddenly has some of its bling back. A humbled Sony – once a titan of Japan Inc. – recently sprang back into the black for the first time in five years, courtesy of a plunging yen. Honda, another corporate icon, triumphantly announced a return to Formula One racing, rejoining an exclusive club of high-performance carmakers after having slinked away when cash ran low.

Even some of Japan’s wary consumers are beginning to indulge. At the plush Takashimaya department store in Tokyo’s financial district, a clerk reported that $20,000 watches have become hot sellers. And a cut-rate sushi chain, which flourished in difficult times, just started a line of upscale restaurants for customers newly able to afford “petite extravagances.”

The reason for the exuberance? Early – and some say deceptive – signs that new Prime Minister Shinzo Abe’s economic shock therapy, called Abenomics, might just be working. His plan, one of the world’s most audacious experiments in economic policy in recent memory, combines a flood of cheap cash (doubling the money supply in two years), traditional fiscal stimulus and deregulation of Japan’s notoriously ingrown corporate culture. The hope is that this will yank Japan from a debilitating deflationary spiral of lower prices and diminished expectations, stirring what Keynes called the “animal spirits” of investors and consumers.

And so it has. The stock market has soared more than 70 percent over the past year, and the yen has lost more than a quarter of its value, lifting corporate earnings in a country that is heavily dependent on exports.

Last week, Abenomics got its first report card. Japan’s $5 trillion economy grew at a robust annualized pace of 3.5 percent in the first quarter and – most important for Abe’s notion that consumer confidence is key – household consumption accounted for the lion’s share of that growth. Although there were some signs of weakness, most notably a drop in business investment, the numbers were a promising sign that the good news was not confined to financial markets.

“Young people even in their 40s don’t remember Japan’s good times,” said Hiroshi Sato, a 64-year-old executive treating himself to one of Takashimaya’s fancy watches. Choosing one from a black velvet tray, he explained his purchase as a bet on Abe’s success after two decades of his predecessors’ failures. “I’m hopeful,” he said, “that this one is finally the real recovery.”

So far, that optimism appears to be largely limited to the nation’s well-to-do, including its tiny stock-holding class, and the weakening of the yen is creating tensions with its Asian neighbors. But if it spreads, Japan will have taken a crucial first step toward recovery, persuading its famously cautious savers to spend their money to help revive the economy.

“This is Japan’s best chance in 20 years to escape from its deflationary mindset,” said Hajime Takata, chief economist at Mizuho Research Institute in Tokyo.
That Japan would try such a seemingly radical policy path after years of political paralysis reflects a newfound feeling of urgency. With China’s economy and territorial ambitions growing, the Japanese have begun to see the potential dangers of resigning themselves to what many have called a “genteel decline.”

Ever-lower prices

The fear has given Abe, who took office in December, some room to maneuver, even as he promises to take on entrenched interests through deregulation and to raise inflation. A pickup in the inflation rate would cause pain for Japan’s legion of politically active retirees, but nudge people to spend before their money loses value – reversing the deflationary psychology of delaying purchases in anticipation of ever-lower prices.

It has also thrust him into an unusual role for a Japanese prime minister, a generally colourless bunch who make decisions behind closed doors. Abe, 58, has become his country’s cheerleader in chief, proclaiming to audiences that “Japan is back” and even sharing personal details most Japanese politicians eschew. Referring to his own humiliating departure from his first term as prime minister, brought on by a stress-related illness, Abe tells people that they, too, can recover.

“It is my job to awaken Japan from the spell of prolonged deflation and lost confidence,” the prime minister declared in a recent speech to business leaders in Tokyo. Despite the signs of success for Abenomics, skeptics abound.

Many economists say it will be impossible to judge Abe’s performance until he shoots the other two economic “arrows” in his quiver, particularly the politically divisive structural changes they say are necessary to shake up Japan’s sclerotic business interests and encourage entrepreneurship and competition. They also warn that unless the new wealth is more widely spread – through rising wages, for example – the current revival could fizzle like earlier ones or, worse, plunge Japan into the painful stagflation of runaway prices without growth.

“Without a revival of the real economy, this is all just voodoo economics,” said Yukio Noguchi, a professor of finance at Tokyo’s Waseda University. Many Japanese, in fact, complain that their wages continue to fall even as prices have started rising.

“The only people benefiting from this boom are foreign money managers and the rich,” said Yuichi Magata, a taxi driver who waited for a fare on a recent weekend night in Tokyo’s upscale Ginza bar district. More people are indulging in after-work dinner and drinking, but he groused that they still refuse to splurge on a cab home as they did a decade ago, during a similarly buoyant but ultimately short-lived rally.

Still, Abe has an enviable approval rating of 70 percent. And after years when Japan seemed only to be a hard-luck story, the foreign financial media have begun to gush again, with one declaring that Japan had its “mojo” back. Some business leaders have even picked up Abe’s hopeful, “we’re all in this together” tone. In a scene reminiscent of Japan’s bubble-economy years in the 1980s, Honda positioned three Formula One racing cars in front of its headquarters in downtown Tokyo before the announcement that the company was rejoining the sport.