Japan’s Abenomics: Time to Take Stock

IMF Blog, October 21, 2013

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Author: Anoop Singh
Date: October 21, 2013
Central question: With Abenomics approaching the one-year mark, is the new strategy working?

Bank of Japan (BoJ) adopted a 2 percent inflation target in January.
New fiscal stimulus measures were introduced early in the year.
Japan decided to join negotiations over the Trans-Pacific Partnership (TPP).
Haruhiko Kuroda became BOJ Governor and introduced Quantitative and Qualitative Monetary Easing—an aggressive plan to reach 2 percent inflation in about 2 years mainly through large-scale bond purchases.
Government agreed to go ahead with the consumption tax increase in 2014 and announced further fiscal stimulus to soften the growth impact.
Discussions on growth reforms were scheduled to follow, with a special Diet session starting in October.

Reported growth: "growth reaching almost 4 percent in the first six month of the year."
Financial and external indicators:
- Rebound in equity markets.
- Yen depreciation.
- Continued low and stable long-term interest rates despite rising inflation expectations and yield curve steepening overseas, especially in the US.
- A fall in real interest rates as nominal rates remain low.
Inflation and monetary transmission:
- Inflation turned positive in June helped by higher energy import costs.
- Long-term inflation expectations have risen.
- Most core prices are still falling.
- Monetary easing has been slow to transmit: "most of the liquidity pumped into the economy is flowing right back to the BoJ in the form of growing bank reserves."
- Some banks have begun to rethink investment strategies and bank lending has begun to rise, but aggregate portfolio rebalancing and capital outflows remain limited.
- Exchange rate has been relatively stable since July.

No clear benchmark for success due to Japan’s history of mild deflation and subdued growth.
Identified key milestones for Abenomics to be judged successful:
- Self-sustaining growth propelled by investment, employment, and earnings growth.
- Re-anchoring of inflation expectations at 2 percent and a steady rise in headline inflation driven by price increases of non-food and non-energy items.
- Falling real interest rates as monetary easing keeps nominal interest rates low.
Current assessment: "Against these metrics, Abenomics has done well, but it also has some ways to go."
Private demand transition: "Private investment has not taken off and labor markets, while tighter, have not generated much wage growth."

Long-term problems to address: raising trend growth and reducing public debt.
Fiscal credibility: The consumption tax increase is cited as a clear signal that the government is serious about fiscal reform.
Urgent need for concrete action on growth reforms, including:
- Labor market reform.
- Deregulation.
- Revamping the agricultural sector.
Recommendation: Japan needs "a signature initiative similar to the consumption tax increase on the fiscal side" to sustain momentum.
Timing: The special Diet session in October provides an opportunity to take action and keep reform momentum going.

One year earlier Japan was entering its third recession in 5 years and the outlook seemed bleak.
Abenomics has generated "for the first time in a long time—a real chance to bring Japan back on the road of sustained growth."
Continued rapid pace of reforms, especially structural reforms, is necessary to avoid getting stuck again.
Note: Japan’s economic prospects were slated to be discussed at an IMF sponsored seminar "Abenomics approaching its one-year mark" taking place in Tokyo on October 29.

Source: Japan’s Abenomics: Time to Take Stock — Anoop Singh, October 21, 2013.

Asia and Pacific Regional Economic Outlook––October 2013 Update
- Asia and Pacific Regional Economic Outlook––October 2013 Update (Markdown version)
- Asia and Pacific Regional Economic Outlook––October 2013 Update (PDF)