Risky 'Abenomics': Can Japan Jumpstart Its Economy?

By Wieland Wagner

Photo Gallery: Japan's New Economic Strategy Photos
DPA

Japanese Prime Minister Shinzo Abe's economic plan has rallied the Nikkei index and offered hope to those weighed down by the country's economic problems. But critics fear it could lead to national bankruptcy.

It's Saturday afternoon in Tokyo, and there's the usual hustle and bustle in the shopping district of Akihabara. Young Japanese women with blond hair and brightly colored costumes are dancing in the streets. They are promoting manga cafés, where occasionally even the customers are dressed as cartoon characters.

In a high-rise building towering above the milling masses of consumers, a brokerage house has invited housewives, pensioners and employees to a seminar for small investors. They are fervently seeking tips for how they can lucratively invest their savings, and every seat is taken. The hot topic up for discussion: "Abenomics -- who has profited, who will be the next to profit?"

"Abenomics" is a Japanese term coined from the family name of Shinzo Abe, the recently-elected Japanese prime minister, and the English word "economics." Scenes like the one here in Tokyo can be witnessed all across Japan as investors flock to such events to earn from the "Abe economy," the new doctrine of salvation from their head of government.

Fresh off a Comeback

Indeed, the 58-year-old politician succeeded in making a comeback last December that virtually no one believed he and his Liberal Democratic Party (LDP) could achieve. After a series of failures and health problems, he stepped down as prime minister in Sept. 2007. He has reinvented himself, and is presenting himself as Japan's savior who will lead the country out of its ongoing economic misery.

For a long time, Abe primarily made waves by intending to amend Japan's pacifist constitution. Now, however, he has recognized that his country first has to arm itself economically to catch up with rivals like China and South Korea.

Abe received a fitting strategy to achieve this from Koichi Hamada, a professor emeritus of economics at Yale University in the US, who now is serving as a government adviser.

Hamada believes that one entity is primarily to blame for Japan's malaise: the Bank of Japan (BOJ). For years, the central bank was unable to halt the country's chronic deflation. Since prices were dropping, companies were earning less or even going bankrupt. This in turn caused wages to decline. The Japanese hardly had any money left to buy goods and services.

As a result, companies' profits fell even further. In order to break out of this deflationary spiral, Abe forced the nominally independent BOJ to capitulate. He appointed a new central bank governor, Haruhiko Kuroda. The 68-year-old began his career in the Finance Ministry and occasionally likes to relax by reading Western philosophers such as Aristotle. Among central bankers, he stands out as being unusually talkative -- and just as unusually willing to experiment.

Taking Risks

Indeed, the new head of the BOJ has targeted an inflation target of two percent. In expectation of rising prices, at least according to the theory, companies will boost their investments and consumers will spend more money again.

Kuroda hopes to achieve his objective within two years -- and he promises "to do everything possible" to make it a reality. In other words, the central bank intends to print yen practically without restraint and to double the amount of money in circulation. On top of that, the bank plans to purchase Japanese sovereign bonds at the astonishing rate of over 7 trillion yen (over €50 billion/$65 billion) per month -- roughly twice as much as before. In the future, the BOJ wants to purchase over 70 percent of all newly issued sovereign bonds -- pushing down yields in the process.

It's a risky strategy. Japan has amassed a Fujiyama of debt, more than twice the country's entire annual gross domestic product (GDP). In contrast to Greece, Japan has borrowed most of its money from its own people -- over 90 percent of the bonds are held by the country's citizens. But now Japan's monetary watchdogs are joining the gamblers. For instance, the new head of the central bank is considering purchasing an increasing number of risky securities such as real estate funds.

This abundance of Japanese liquidity is threatening to spill over to Europe. Indeed, to avoid the prospect of falling yields, Japanese investors could rush to place their capital in foreign bonds. In anticipation of the new trend, lending rates in European countries like Spain have already begun to fall.

Psychology and the Economy

Until now, the Abenomics strategy has been mostly just words, but they have had quite an impact. They have seemingly erased the financial gloom that has pulled down Japan, once Asia's top economy, since the inflated real estate and stock prices of the late 1980s and early 1990s burst, marking the end of the so-called Japanese asset price bubble.

Even during the election campaign, Abe underscored the enormous degree to which the economy is influenced by psychology. With his threat to take away the central bank's independence, he kindled hopes of an enormous flood of money, causing large numbers of investors to dump their yen and buy dollars.

The yen, which has long made Japanese cars and televisions expensive abroad, has fallen by over 25 percent against the dollar since last autumn.

Not surprisingly, the cheaper yen has boosted entire sectors of the real economy. It's suddenly worthwhile for export companies like Toyota to manufacture in Japan again. The automotive giant is considering ramping up its domestic production from April to September by 200,000, to a total of 2.5 million vehicles.

The prospect of higher company profits has created a bullish mood on the Tokyo Stock Exchange. Since the beginning of the year, the benchmark Nikkei index has risen by over 25 percent to its highest level in four-and-a-half years. And it's primarily foreign funds that have rediscovered Japan as an investment objective.

Expensive Imports

But Abe can't cure Japan's economic woes with the low yen alone. In fact, he's running the risk of being drawn into a devaluation race with countries like South Korea, which are afraid that their exports may now no longer be competitively priced. But not all aspects of falling exchange rates are a bonanza for the Japanese. The lower the yen falls, the more expensive their imports become -- particularly fossil fuels to generate electricity. After all, 52 out of the country's 54 nuclear reactors have been shut down since the disaster at Fukushima.

Now, Japan is nearly totally dependent on foreign oil and gas. In order to put more money into consumers' pockets despite this development, Abe recently intervened in the annual wage negotiations between companies and workers. He called on companies to pay higher wages to the "hard-working people." A number of sectors, primarily large supermarket chains, obediently decided to reward their workforces with increases in pay for the first time in years, although it often amounted to only one-time bonuses.

Such good deeds win supporters for Abenomics -- and Abe needs all the support he can get if he is to win a majority in the upper house of parliament, the House of Councillors, as he hopes in the upcoming election in July.

Other countries are anxiously watching his economic experiment. Will the third largest industrial power on earth once again become the global engine of growth? The US economist and Nobel laureate Paul Krugman praises Abe's government for "finally doing what Japan should have done a long time ago." Nevertheless, billionaire investor George Soros warned of an "avalanche" if Japanese investors transferred their savings abroad out of fear of a weak yen.

'It's a Bubble'

There are also prominent dissenters in Tokyo who fear that all the fuss surrounding Abenomics is merely wallpapering over Japan's structural crisis. "It's a bubble," says Yasunari Ueno. Ueno, the chief market economist at Mizuho Securities in Tokyo, has been urging structural reforms for years.

In his office in the Tokyo banking quarter, Ueno mulls over the latest statistics -- and they look grim. Japan's population is rapidly aging. By the year 2040, nearly one-third of all Japanese will be over the age of 65, and the number of inhabitants is expected to decline by 20 million.

"Who will ensure the necessary economic growth?" he asks. Ueno contends that supporters of Abenomics deny that the demographic decline is the main reason for deflation -- and he says that they offer no recipe for reversing the trend.

In June, the government is planning to complement Abenomics with a long-term financing concept and growth strategy. But many Japanese companies lack new ideas and innovative products -- and that's not something that Abe can simply ordain.

The once proud electronics giant Panasonic is suffering bitter losses from its production of televisions. Its competitor Sharp is simply fighting to survive. It's been forced to share sections of its production plants with Apple and the Taiwanese cut-rate manufacturer Foxconn. And Sharp was so strapped for cash that it recently had to sell an equity stake in the company to Samsung, its feared rival from South Korea. Sharp plans to halve its workforce to 700 at its headquarters in Osaka.

Forecasting Bankruptcy

The cheaper yen can hardly stop this decline. Abenomics came ten years too late, at least according to Takeshi Fujimaki, who has predicted in his new book that the Japanese state will soon be bankrupt. The title of his book is "Hitotamari mo nai Nihon," or "Helpless Japan."

The author receives his guest at his modern villa in Tokyo which, including the garden, offers enough space for half a dozen normal Japanese single-family dwellings. Fujimaki knows how to make money. He worked for years as the star trader at the US financial firm J.P. Morgan, and he now runs his own investment company.

Abenomics, says Fujimaki, is accelerating Japan's downfall. He calmly calculates that Tokyo will have to sell new sovereign bonds worth 44 trillion yen every year to finance its budget. But he argues that if the central bank fuels inflation, the interest rates for the sovereign bonds will also rise -- along with Japan's mountain of debt.

To avoid defaulting, he predicts that the BOJ will ultimately have to print more money. "This will cause hyperinflation like there was in Germany in 1923," he says, pointing out that there are also advantages to a national bankruptcy. "Our young people won't have to pay off any more debts, and will instead be unencumbered to rebuild Japan."

Translated from the German by Paul Cohen.

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