Japan, Australia’s second biggest export market, has fallen back into recession. Prime Minister Shinzo Abe has reacted by calling a snap election for mid-December, a year ahead of schedule, claiming he needs a new mandate to tackle the nation’s economic problems. Trade deals or talk of trade deals between Australia and both China and India should not distract us from the fact that one of the region’s great powers is sick and we are not immune.
Japan buys 16% of Australia’s exports: not as much as a few decades ago but still substantial.
Since 2008, the Japanese economy has contracted in 13 out of 27 quarters. In net terms, this adds up to no growth for six years. In the most recent September quarter, gross domestic product fell by 1.6% in annualized terms, following a revised 7.3% contraction in the previous quarter. Two consecutive quarters of decline defines a recession.
As I wrote in an earlier blog, Japanese domestic consumption remains extremely weak. The adverse effect of the lift in the nation’s consumption tax (GST) from a rate of 5% to 8% in April was greater than the government and most market analysts predicted. Ahead of the tax hike consumers front-loaded their purchasing so that after the rise spending collapsed and has remained depressed.
The consumption tax rise was always seen as risky but necessary in order to start repairing the deficit-ridden national budget. While the legislation to gradually raise the tax passed during the previous administration, the strategy was endorsed by Abe and implemented by his Liberal Democratic Party-led government. Now the Prime Minister has decided to abandon the present course of budget reform.
On Tuesday night he announced that the Diet would be dissolved on 21 November ahead of a Lower House election expected on 14 December and that he would go to the polls pledging to delay by 18 months the next consumption tax increase, from 8% to 10%, originally scheduled for October 2015.
Abe quoted the rallying cry of the American Revolution ‘no taxation without representation’ to justify his decision to call an election on this policy issue, though it seemed an odd analogy since what he is proposing is a ‘no taxation’ platform. At the same time, Abe said the government’s commitment to balance the national budget by 2020 remained solid. His credibility on this point hangs in the balance, since many commentators were predicting Japan would miss the target even with the next scheduled consumption tax rise. Looking less confident than usual, Abe did not attempt to explain how the budget target could be achieved if the tax increase were delayed. ‘I hear voices saying Abenomics has failed,’ he told a nationally televised news conference, ‘but I have yet to see any alternative policy put forward.’ In other words, you’re stuck with me––sink or swim.
In recent weeks, Japan’s central bank has reacted to the renewed weakness in the economy by greatly expanding its fiscal stimulus, the main plank of the administration’s revival strategy over the past 18 months. By printing money to buy government bonds, the bank has been pumping inflation into a chronically deflated economy, so far with little lasting effect. The most conspicuous consequence has been a fall of about 20% in the yen-to-US dollar exchange rate. This has helped exporters back into profits and fed through into modest wage rises for employees in big export-oriented firms. But the weaker yen has also pushed up import prices, discouraging consumers and increasing the raw materials costs of many businesses, large and small. It has all the appearances of a vicious cycle in which the cure seems just as likely as the disease to kill the patient.
Abenomics, the catchy term coined two years ago to describe Shinzo Abe’s program of economic reform, is rapidly acquiring a hollow sound. The program consists of ‘three arrows’ (Abe’s words): fiscal stimulus, monetary easing and structural reform. The first two arrows, fired as soon as he took office, have failed to hit the target. Abe insists there are signs of improvement––the best labour market conditions in 20 years; strong job recruitment of high school graduates––and asks for more time to bring off the fundamental improvement electors were promised. It could also be conceded that structural reform, the ‘third arrow’, necessarily takes more time to deliver, but in this policy area too his government’s performance has been stronger on rhetoric than performance. Abe’s much-touted campaign to boost the role of women in society and the economy fell flat when two of his female cabinet ministers had to quit their posts because of old-fashioned money scandal and election law violations.
Japanese voters will soon have a chance to pass judgement on the past two years. The disorganized and ineffectual state of the nation’s political opposition makes it likely the LDP will be returned to office, despite the poor state of the economy. That, however, is an early assessment. Much can happen in unpredictable times, given an electorate worn-out from hearing unfulfilled promises and as cynical about their leaders as they have ever been since the war. Japan is in trouble, and trouble there means trouble for Australia.
Walter Hamilton reported from Japan for the ABC for eleven years.