Japan’s ‘Abenomics’ faces critical test

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Shinzo Abe1

Reuters.

Japan's Prime Minister Shinzo Abe waves as he arrives for the G7 summit at the European Council building in Brussels June 5, 2014.

Tokyo - Japanese Prime Minister Shinzo Abe's bid to light a fire under the country's long-tepid economy will this month face its most critical test with a long-awaited update to his plans for structural reforms.

Farming and pharmacology, pension investments and immigration, taxes and trade are all expected to be addressed in some way as pressure builds on the premier to make good on his early promise to slough off two decades of economic lassitude.

The reforms are the final tranche of the prime minister's “Abenomics” action plan, which burst into life in early 2013 with a huge public spending bonanza and an unprecedented monetary easing campaign by the Bank of Japan.

That gave the economy a shot in the arm and set off a blazing stock market rally as firms' profitability fattened on the back of a sharply weaker yen.

But his much-touted - and politically more difficult - first attempt at a package of reforms, announced to great fanfare last summer, fell flat, amid accusations they were too timid and did not undo the vested interests Abe had promised to scuttle.

Observers criticised them as little more than a woolly wish list, full of grand ideas such as getting more women into the workforce, but with few details on how they might be achieved.

Now, a year later and 12 months wiser, the reforms update has been rather low-key, with no final date set for an announcement -

although it is expected to be this month - and little concrete detail on exactly what they will entail.

Doubters say that despite his bold rhetoric, Abe will not be able to deliver a wider overhaul of the world's number three economy, including shaking up rigid labour markets and taking on a powerful agricultural sector that opposes free-trade deals.

The 59-year-old premier faces a delicate balance as ordinary Japanese struggle with lacklustre wage growth and rising prices for everyday goods - the result of Tokyo's bid to stoke long-absent inflation and the April consumption tax hike to 8.0 percent from 5.0 percent.

The rise was seen as crucial for bringing down one of the world's heaviest debt burdens, but it also threatens to dampen spending power and further erode support for Abe's turnaround plan.

“The initial enthusiasm for Abenomics has long since given way to scepticism - both in the financial markets and with the public at large,” said Marcel Thieliant of Capital Economics.

“Taxes on spending are going up, prices are increasing faster than wages, and many of the planned tax breaks will require painful adjustments in labour and product markets.”

Last month, Abe vowed that “nothing can stop my reforms” but even his hand-picked central bank governor, Haruhiko Kuroda, is calling for less talk and more action.

Kuroda warned that the BoJ's monetary easing would not guarantee long-term success on its own.

“Implementation (of reforms) is key, and implementation should be swift,” he told the Wall Street Journal.

Abe has pushed through a plans to start deregulating the energy sector and improve access to child care but other changes could be tougher. Among them are opening up the cossetted agricultural sector and a reported plan to let firms cut overtime pay for skilled professionals.

Abe's possible reforms include cutting one of the world's highest corporate tax rates and rebalancing the bond-heavy national pension fund's $1.26 trillion in assets toward equities.

He may also unveil proposals to heavily promote clean energy and robotic technology, as well as scrapping an income-tax deduction for stay-at-home spouses in an effort to bring more women into the workforce.

Despite a low birth rate and an ageing workforce, immigration reforms are unlikely in the largely homogeneous country which has the lowest rate of foreign-born nationals among major industrialised nations.

Abe may, however, loosen permanent residency rules for white-collar professionals and some manual workers, reports said.

But “we are not too optimistic about the resolve of the government to push through radical reforms, particularly in agriculture”, Thieliant said.

Market expectations are “quite low” and given the lengthy timeline for any reforms that Abe does launch, his plans to raise sales taxes again to 10 percent is more pressing in the short term, said Takahiro Sekido, economist at the Bank of Tokyo-Mitsubishi UFJ.

“The focus is soon going to shift to Abe's decision on another consumption tax hike, which will the key issue for the Japanese economy this year.” - Sapa-AFP


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