Japan’s recession is not paving way for sustained growth. It is prolonging new debt and liquidity and thus deteriorating fiscal discipline.
In the last quarter, Japan’s economy fell into recession. In the West, it was characterized as “unexpected.”
The realities are precisely the reverse. With its third ’lost decade,’ Japan has entered an era of massive monetary expansion that it not adequately supported by the fundamentals of its economy.
The decision by Japan’s Prime Minister, Shinzo Abe, to call a snap election barely two years into a four-year term demonstrates a degree of political flexibility other world leaders can only envy.
Abe did not need to go to the polls until 2016. Instead, he announced on November 18 he would dissolve the lower house of the Japanese Diet a few days later and hold a general election on December 14 2014. There are several reasons behind the decision, including the failure of Abenomics to revive the Japanese economy.
On 17 December 2013, Prime Minister Shinzo Abe issued Japan’s first National Security Strategy (NSS). The document declares that Japan will make a more ‘proactive contribution to peace’ based on the principle of international cooperation. It also outlines three basic goals for Japan’s national security — ensuring the nation’s territorial sovereignty, improving the security environment in the Asia Pacific region by cooperating with the United States and other regional partners, and active participation in global efforts to maintain international order.
Despite extreme money printing and aggressive growth targets, the Bank of Japan has failed to bring Japan into growth as the world’s third-largest economy falls into recession.
Data released on Monday showed that the nation’s GDP fell 0.4% in the third quarter of 2014, causing an annualized economic contraction of 1.6%. A combination of higher taxes and demographic pressures are being blamed for the slump.
The Bank of Japan surprised the markets on October 31, and probably surprised itself just as much. The BOJ meeting was initially to update macro forecasts, but it soon became clear to Governor Kuroda that inflation expectations were being slashed. This reportedly pushed Kuroda into action.
The Bank of Japan sent a new shock-wave through financial markets last week when Governor Haruhiko Kuroda announced another massive round of monetary expansion (Quantitative Easing or QE). The additional boost to the Japanese money supply was accompanied by a sharp lift of 4 percent in the Nikkei stock market index and the yen falling to a seven-year low against the dollar. Some now fear that the impact of Japan’s monetary expansion will lead to the outbreak of a serious currency war.
The December 2012 election gave Japan’s Liberal Democratic Party control of both houses of the Diet as the electorate sought positive, decisive, energetic leadership out of the malaise of the past two decades. Shinzo Abe offered himself as that leader, with Abenomics as his program. Mid-2016 brings the next elections. If things go well for Japan and Abenomics, Abe likely will continue as prime minister until those elections, and probably until late 2018 when his final LDP presidency term ends.
The effects of Japan’s feed-in tariff (FIT) for renewable energy have been impressive. Since 2011, Japan has seen a massive expansion of solar photovoltaics (PV). The size of the domestic market increased from 1GW in 2010 to almost 7GW in 2013. This solar expansion is expected to continue with the 2020 target for PV installations raised from 14GW to 28GW. But the success of renewable energy should not be taken for granted.
As the second year of Abenomics progresses, Prime Minister Shinzo Abe’s program of coordinated monetary and fiscal stimulus and structural reform has lost some of its lustre. Not only have Abe’s approval ratings fallen below 50 per cent for the first time since he took office in December 2012, but a recent poll in the right-wing Sankei Shimbun found that, for the first time, disapproval of Abe’s economic policies had exceeded its approval ratings, with 47 per cent opposed and 39 per cent in favour.
As Japan seeks to diversify its investments beyond China, an opportunity arises for Vietnam to attract greater international investment.
