IMF Consultation Looks to Challenges Ahead for Abenomics and Japan
Facing a rapidly aging population, a shrinking working class, and an alarmingly low interest inflation rate, Japan was called upon by the International Monetary Fund (IMF) this week to revamp Prime Minister of Japan Shinzo Abe’s flagship economic policies aptly named “Abenomics.” The remarks came as IMF Chairwoman Christine Lagarde met with Japanese Prime Minister Shinzo Abe in an “Article IV Consultation,” where the IMF assesses member-countries financial and economic health and development.
Since the beginning of his second tenure as Prime Minister over six years ago, Abe has pushed his “Abenomics” to jumpstart the stagnating Japanese economy through aggressive monetary easing and shifts in the tax burden from firms to individuals — in this case cutting corporate taxes and raising the consumption tax. His announcement of introducing a stringent consumption tax years ago occurred when Japanese corporate profits were rising and corporate savings was high; however, he strategically postponed pushing a consumption tax hike until October 2019, well after the recent LDP leadership election and the upcoming coronation of a new Emperor of Japan.
Undoubtedly, Abenomics has seen success in multiple sectors of the Japanese economy. During the press conference, Lagarde listed that “first of all, the risk of deflation has receded. Second, the fiscal deficit has been significantly reduced. Third, unemployment is very low. Fourth, a significant number of women have joined the workforce.”
Lagarde credited Abenomics for bringing the economy “significantly above potential,” with forecasts showing a 1.1% in growth, with a diminished number of 0.9% next year; however, inflation remains well below target, public debt is not sustainable, and household income is stagnant. Statistics show that the problems will only exacerbate, and that population and economy will most likely shrink by 25% over the next 40 years.
The primary focus seems to be restructuring Abe’s three arrows of Abenomics, being fiscal policy, monetary policy, and structural reform. When asked about the sale tax hike, Lagarde commented that there should be steady increases, eventually reaching beyond 10 to 15 percent. Lagarde noted that it is imperative that consumption tax hikes be accompanied with “mitigating measures” to protect growth momentum and prevent further delay on fiscal consolidation. Furthermore, Japanese policymakers’ “New Plan to Advance Economic and Fiscal Revitalization,” announced in June, has done little to bolster the foundations of Japan’s fiscal framework. A well-constructed consolidation plan during a time of uncertainty would increase public confidence in government capabilities to manage the financial costs of the demographic transition.
On the monetary front, there seems to be a consensus with the Bank of Japan (BOJ) on adopting a risk-averse approach to reach its inflation target since the introduction of Yield Curve Control back in Sept. 2016. The BOJ’s strategy of utilizing flexible long-term bond yields and the introduction of forwarding guidance on interest rates seems to be a strong foundation for a monetary policy framework.
Finally, the revival of Abenomics heavily relies on reinvigorating structural reforms in Japan. In particular, economists should focus on labor markets to strengthen worker productivity, allow demand stimulus to pass through to wages and prices in order to feed into inflation. Labor market legislation was recently passed through the Diet, centered around equal pay for equal work, driving up women’s participation rates in labor, and legislating for an increase in foreign labor; however, the effectiveness and credibility of the legislation is entirely dependent on the implementation.
As Abe looks toward another three years in power, the additional dimension of foreign economic ties also weighs on the future economic development of Japan. How Abe handles negotiations with the United States, European nations, and neighboring Asian countries in the near future — especially among the trade tensions stoked by a recalcitrant ally in Washington — will be a crucial determinant of economic success for Japan for years to come.