With ‘Abenomics,’ Japan catches a sense of revival


Japanese economy is seeing signs of revival under Shinzo Abe, who took office in December pledging not only to recharge Japan’s economy, but also to change the way Japan thinks about itself. (YURIKO NAKAO/REUTERS)

— After two decades of chronic recession, Japan again feels like a boomtown. Its biggest companies are raking in money. It has the world’s best-performing stock market. The latest forecasts suggest Japan, in the next year, could grow more quickly than any wealthy nation but China.

Consumers — especially the wealthy ones — have caught the spirit. They’re splurging at high-end restaurants, department stores and auto showrooms. Ferrari sales this year are up nearly 50 percent, according to media reports.

The revival is only months old, and its staying power remains very much up for debate. But already it has surpassed what many Japanese thought was possible for an aging country whose decline had started in recent years to feel inexorable.

The architect of this resurgence is Prime Minister Shinzo Abe, who took office in December pledging not only to recharge Japan’s economy but also to change the way Japan thinks about itself. “Japan is back,” he frequently tells audiences. And he has deployed the most radical economic policymaking plan of Japan’s 20-year post-bubble era to make it so.

His strategy, commonly dubbed “Abenomics,” calls for a combination of monetary easing, government spending, and economic reforms — “three arrows,” he says, in reference to a samurai teaching that three arrows bundled together won’t easily snap.

None of the arrows, by itself, is revolutionary, but they reflect a breadth of vision and coordination that no leader until Abe seemed interested in. His ambition for a more vibrant Japan fits with the zeitgeist. Regain lost might, many Japanese think, and they’ll be better equipped to contend with an increasingly boisterous China, which took Japan’s spot in 2010 as the world’s second-largest economy.

Abe’s chief goal is to end a 15-year period of deflation, the vicious cycle of falling profits, prices and wages that squelches consumer appetite and slows economic growth.

So far, only the first two of Abe’s arrows have been fired. In January, Abe signed off on a 10.3 trillion yen (roughly $100 billion) stimulus and, more significantly, pressured the central bank to overhaul its conservative monetary policy. The bank complied last month, announcing a 2 percent inflation target and saying it would nearly double the amount of money in circulation.

Dating back to their early 1990s, more than a dozen Japanese prime ministers have tried to grapple with the nation’s economic woes. But none until Abe convinced the central bank to pursue quantitative easing on such a mass scale. Economists now criticize the bank for its decades of excessive caution, failing to stir investors, and abetting what people here describe as two “lost decades.”

The early returns on Abe’s approach are promising. Since November — the point when investors began anticipating an election victory for Abe’s Liberal Democratic Party — Japan’s stock market has surged some 60 percent. Car sales are increasing at their steadiest rate since 1985. And in the first quarter of this year, the gross domestic product grew at an annualized rate of 3.5 percent.

“I think many Japanese feel this is the last chance for change,” said William Saito, a Tokyo-based entrepreneur and venture capitalist. “After this, there are no more rabbits to pull out of the hat. If we hadn’t lost confidence before this, boy, will we lose it this time if we screw this up.”

A recovery, or just a blip?

So far, Abenomics has worked even better than forecast. The Bank of Japan’s monetary easing helped devalue the yen, which in turn helped the nation’s export-dependent giants sell more (and cheaper) products overseas. That meant inflated corporate earnings and an eye-catching stock market rally. Only one in six Japanese people own stocks, but they still felt a psychological lift: Consumer spending is up in recent months.

For now, shopkeepers aren’t certain whether to credit Abenomics, but they have noticed a difference in recent months. Even in some stores that cater to middle-class customers, profits are up.

“People seem more willing to spend an extra 1000 or 2000 yen,” or $10 to $20, said Mami Tomino, owner of a flower shop along a thriving shopping arcade in the Tokyo suburbs. “I have the same number of customers, but more people are buying the higher-priced bouquets.”

But many economists still fear the pick-up could be brief. For Japan’s economic revival to last years rather than months, companies need to spread their newfound profits by building factories, increasing investment and boosting wages. Consumers need to maintain demand into next year, when the consumption tax is due to increase, potentially dampening spending. The country’s tax base needs to expand, helping the government trim its sky-high debt.

“But so far, not enough of this is happening,” said Yukio Noguchi, an economist at Waseda University in Tokyo. “The real economy hasn’t changed.”

Abe’s speeches about the Japanese economy often sound like pep talks, and for a reason: A prolonged revival depends on consumers and companies reconsidering their deep-seated pessimism about the country’s direction. Those views have taken hold because of what’s happened since the collapse of the real estate and financial bubble in the early 1990s. Since then, for many, land prices have been cut in half, reducing the assets of homeowners. Job opportunities are down. Incomes have stagnated. Household savings rates plummeted. And Japanese have become wary of any plan resembling a quick fix.

“Why is this dramatic change happening so quickly?” said Souichi Umehara, who owns a tea and seaweed shop. “We have to be very careful we don’t get deceived.”

Meantime, corporations are skittish about pouring money into Japan; corporate spending has declined for five quarters in a row. Some companies, including electronics giants Sharp and Panasonic, have been chastened by earlier sunken investments in a nation with high corporate taxes and towering energy costs. Others are waiting to see whether Abe’s reforms — his third arrow — succeed in untangling regulations, increasing free trade or opening the workplace to more women.

Much as the weaker yen has helped Japanese manufacturers, it will also levy a toll, raising the prices of imports — most notably the fossil fuels that power Japan in the wake of a near-total nuclear plant shutdown. The weaker yen will also extend Japan’s trade deficit, eroding Japan’s current account balance. If Japan’s growth soon tapers off, prices still might rise, a crippling scenario often described as stagflation.

“So far the stock market appreciates Abenomics, but there is still plenty of uncertainty on whether this ends well,” said Kazumasa Iwata, president of the Japan Center for Economic Research and a former deputy governor of the Bank of Japan.

Skepticism is ‘ingrained in me’

Abe is a second-time prime minister, and he seems to have taken cues from his first stint six years ago — a short-lived fiasco that saw him resign because of bowel problems, his approval rating near 30 percent. This time, his rating is more than twice as high, and Abe has been particularly vocal about rallying business leaders to help him defeat deflation. In February, he asked executives to raise wages for employees if possible.

Only a handful of companies have complied, but Abe has held them up as examples. When Jin, a national eyewear retailer, gave roughly 6 percent bonus payments to its employees, Abe called the company president to thank him.

With the bonus payments, according to employees and a company spokeswoman, one employee bought a watch. One helped pay for a wedding. One took her mom on a vacation to Guam. Another used the money for a down payment on a French car. For the employees, the payments were a sign of a turnaround — but one that some still fear might be temporary.

“Not since I started working here have I felt something like this,” Koji Hiraoka, 36, said.

“It’s the same for me,” Fumio Mukaidono, 37, said. “The economy is going so fast. It almost makes me concerned. It’s ingrained in me that things won’t go well — that it won’t be easy — because that’s all I’ve known.”

Yuki Oda contributed to this report.

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