Japan’s faltering recovery

ShinzoAbeJapan’s economy grew very moderately in the final quarter of last year, and fundamental questions have been raised about the nation’s recovery strategy. Here we go though the state of Japan’s economy and analyse the effects of ‘Abenomics’.

What is Abenomics?

Japan’s Prime Minister, Shinzo Abe, swept into office at the start of 2013, on the back of a campaign promising robust economic recovery. This recovery plan, comprising of quantitative easing money of over £100bn, a re-inflation of the Yen, and an increase in exports, has been dubbed Abenomics.

Initially this had an immediate and positive effect. In the first two quarters of 2013, the economy grew by almost 3% consecutively. But this slowed down noticeably in the third quarter – July, August, September – to 1.8%, and finally to 1% in the final quarter.

Has Abenomics failed?

In a word, no. It is far too early to draw any conclusions. In the three month period to December, the economy had been expected to grow by 2.8%, but – as mentioned above – this growth was only 1%. This represents a short fall of almost two-thirds, but this must be taken into consideration within context.

This 1% increase in GDP – although a modest figure – does represent the fourth quarterly expansion in a row. This also represents a Japanese economy that has been in steady expansion for the past two years, and is expected to continue growing above 1% in the current quarter. It has also been hurt by weak export figures, caused by an uncertain global market.

Causes for Concern

There are various reasons to fear for the trajectory of Japan’s economy, as all of the economic levers and policies begin to show their long-term effects.

Weak Exports + Weak Yen = Huge Trade Deficit

Japan has one of the biggest trade deficits in the developed world, which now tops 11.5 trillion Yen ($112bn – £68bn); a 65% increase from 2012. This has been largely caused by a weak Yen, which has fallen in value by almost 20% since the start of Abenomics. A weak Yen means a higher price for imports, and since closing all of its nuclear reactors after the Fukushima disaster in 2011, Japan now imports 60% of its energy in Liquefied Natural Gas.

The hope was that a weak Yen would considerably boost exports – which has always been a major driver of the economy – as it would be cheaper for the rest of the world to consume Japanese products. Unfortunately this has failed to materialise and in the final quarter of 2013, exports only grew by 0.3%, while imports increased by 3.5%.

Like many other developed economies, Japan also has to construct a stimulus exit strategy. It remains unclear how the economy will respond to a decrease in the level of liquidity available, but this does not appear to be on the agenda in the immediate future – see below.

Looking ahead

Looking ahead on the horizon, it remains a very mixed bag for Japan. In an attempt to service the nation’s deficit, Mr Abe has pushed through legislation due to take effect in April, which will increase consumption tax from 5% to 8%. Forecasts suggest this will cause GDP to shirk as a result. This looming tax rise saw home purchases grow by 4.2%, consumer spending by 0.5%, and company investments by 1.3% in the last quarter.

On the other hand, economies across Europe, the US and Britain are showing promising signs of life, as the gold rush to the emerging markets begins to subside. These advanced economies have traditionally been the biggest consumers of Japanese products, and could certainly aid Japan’s faltering exports.

The Bank of Japan has also just boosted two of its lending programmes, pledging a further 7 trillion Yen ($68bn-£41bn), doubling the size of the programmes. The central bank has also extended the availability of the programmes by a further 12 months. The markets have responded positively to this move.

If Japan can also find a domestic solution for its energy problems – Mr Abe and his party are pushing for the reopening of most of the country’s nuclear plants – although the future does remain uncertain, it is by no means lost.