Abenomics: Have the arrows missed their target?


Shinzo Abe came to power as Japan’s Prime Minister vowing to remake the country after decades of little or no growth, deflation, and structural decline with an ageing population and arthritic industries.

Abe, leader of Japan’s centre right Liberal Democratic Party (LDP), that has dominated Japan in the post-war years, promised to stimulate the economy, provide the appropriate monetary policy setting, and structural reform at the microeconomic level. These so-called ‘three arrows’ of the Abe’s economic strategy became known ‘Abe-nomics’ a term the PM did not make up himself, but embraced as a way of selling his economic message to a sceptical Japanese public who had seen it all before (one drawback of having an ageing population with very long memories).

But what has happened since? Despite four years of economic stimulus, Japan’s economy is only 2.2% bigger in real terms than when Prime Minister Shinzo Abe came to power and promised reforms with his three arrows. The 4th quarter for 2015 saw the economy shrink, down 0.4% on a quarter on quarter basis. Nominal GDP is rising as prices rise, and GDP per population is increasing as the population ages. But not all Japanese companies are responding to the Government’s call to expand investment. It could be that some of the arrows of Abe-nomics have misfired.

Australia has more than a passing interest in the success or otherwise of Abeconomics. China is now the main driver of Australia resource export development, indeed it plays a similar role now to that played by Japan in the 1960s and 1970s, and other trading partners, including India under Prime Minister Modi, are on the march as well. But the economic ties between the Japan and Australia are still close.

A little over a year ago, the two nations signed an Economic Partnership Agreement, a comprehensive form of Free Trade Agreement. There’s plenty on offer with the Japan Australia Economic Partnership Agreement (JAEPA), particularly in agriculture and services. Australia had been seeking cuts in tariffs and non-tariff barriers and more openness in Japan’s previously closed rural and services markets for some time whilst Japan needs energy security from Australia, particularly in terms of liquefied natural gas (LNG) given stiff competition from both South Korea and China. Both nations are seeking to expand investment in each other’s countries through JAEPA. While it’s too early to be conclusive, both nations believe the FTA has delivered some early promise and various surveys including the DHL export barometer suggest more Australian exporting businesses are looking at the Japanese market than ever before.

Then there is foreign direct investment. Whilst Japan is a major investor in Australia, Australian companies could invest more in Japan. And with a more open Japanese economy there should be more opportunity for Australian businesses to work in-market in Japan.  According to research by the Australian Bureau of Statistics, only 3016 Australian businesses export goods to Japan (compared to 5853 to China, 5294 to Hong Kong and 6181 to Singapore), and according to Sensis 14% of all Australian exporting small and medium enterprises  sell to Japan. Furthermore, very few Australian companies base themselves there. Fewer than 100 Australian businesses have offices or investments in Japan (compared to over 3000 in China for instance). despite Japan having a long-held position as Australia’s number one export destination until very recently.

There is also potential for stronger financial sector ties.Even a decade ago, in the midst of then PM Junichiro Koizumi’s reform of the services sector, Japan was aspiring to be with Australia a leader in financial services in the region. In fact, as pointed out by Huw McKay and Malcolm Cook in a 2006 paper for The Lowy Institute Japan: Ripe for Re-assesment, Australia and Japan were the leaders of the region when it comes to the size and sophistication of their financial markets but had not become substantial exporters of financial services beyond their respective borders. The fact that this is still to happen nearly a decade later shows how much potential there still is in this sector.Japan and Australia could play a key leadership role in financial issues facing the Asia Pacific region, particularly as there have been frequent calls for reform of the world’s major economic institutions such as the International Monetary Fund, the World Bank and the G20.

Like many nations, Japan underwent an astonishing transformation in the post war decades. But since the deflation of the 1990s, the country has struggled to find a durable path to sustainable growth. If the negative growth recorded in Q4 marks an unfortunate return to form, Japan’s regional trading partners and even the global economy will also feel the impact.

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