Japanese Prime Minister Shinzo Abe [File photo]
When Japan's new prime minister Shinzo Abe took office, he put forward three “arrows” in economic policy to revive Japan’s economy. They are expansion of government spending to stimulate economic growth, implementation of positive monetary policy and regulatory reform-dominated growth strategy. Its core is to control deflation which is an important factor for a long-term downturn. The measures is the so-called Abenomics.
The first two arrows have been shot. Japan invests 10 trillion yen in fiscal year 2013 in infrastructure investment to increase domestic demand and stimulate economic growth. The second is to break the independence of the Bank of Japan and set a 2 percent annual inflation goal directly to it, and to start the machine to print money and control the yen devaluation considerably. The growth strategy of the third arrow will not be revealed until June before the Senate election.
Is Abe’s economics a magic drug to really save the Japanese economy? In fact, Abe’s first two arrows are nothing new and they have been proved effectively by Japanese government over the past two decades. And the difference is that he uses a higher dose of the drug this time.
First of all, Abe’s stimulus plan uses the largest amount of funds in the history, although it brought temporary prosperity, Japan's debt will further expands.
Secondly, after the Group of Seven's Plaza Accord in the mid-1980s forced appreciation of yen exchange rate, Japan took a round of easy monetary policies to hedge the pains caused by the appreciation of the yen, but it pawned huge asset bubbles. Abe seems to have greater courage this time to initiate infinite quantitative easing and use artificial inflation as an engine to spur economic growth.
Last, the big rate of depreciation of the yen with such a fast speed is rare in recent years and the impact should not be underestimated.
Larger doses of drug will cause higher toxicity. Problems caused by Abe’s economics are more than those which have been solved. First, Japan's debt has been among the highest in the world, more than twice its GDP. Measures of expanding government spending to stimulate economy make its debt problem even more serious. They are not sustainable.
Second, Abe’s hope to use inflation to help Japan’s economy go out of the stagnancy can only help to improve the balance sheet and stock market. It is unable to penetrate into real economies. The move will raise deficit, shrink people’s wealth, lower purchasing power and hit the fragile financial system again. The IMF estimates that Japan’s budget deficit is equal to 8.6 percent of its economic output.
Third, devaluation of the yen harms its neighbors and causes huge impact on international financial order.
Fourth, devaluation of the yen has not solved the Japan export-import imbalance.
According to figures from the Japan’s Ministry of Finance, Japan's trade deficit in February hit record high of 777.5 billion yen, which may be the tip of the iceberg of the bad results caused by Abe’s economics.
For the weak Japanese economy, Abe’s economics cannot cure diseases but sinking deeper and deeper into the mire.
The story is written by Wu Zhenglong, vice director of China's National Committee for Pacific Economic Cooperation.