Upward revisions of economic growth in Q1 2015 indicate that Japan’s economic recovery is gaining momentum and that Prime Minister Shino Abe’s multi-pronged economic reform program, known as ‘Abenomics’, is starting to bear fruit
Japan’s economy experienced an annualized growth rate of 3.9% in Q1 2015, well beyond the previous estimations of 2.4%. On a quarterly basis, economic growth was 1%, beating the initial estimate of a 0.6%. This was the second consecutive quarter of positive growth after last year’s recession following the controversial VAT hikes introduced by Prime Minister Shinzo Abe.
Growth came on the back of unexpected increases in private business spending, which was up 2.7% quarter to quarter (compared with previous estimates of 0.4%) and 11% year on year. The Government expects companies spending power to increase further in the medium term thanks to a new corporate governance code and a series of planned tax rate reductions that will reduce corporation tax from the current 35% to below 20% in the coming years.
Meanwhile exports and public spending remain sluggish and continue to hinder growth, while other important indicators such as retail sales, auto registrations and machinery orders show that overall demand remains weak and the impact of the VAT hike has not completely worn off.
Nevertheless the 3.9% expansion indicates that the economic recovery following last year’s recession has gathered pace and that ‘Abenomics’, the name given to a series of economic policies implemented by Prime Minister Abe, is working.
“A rise in inventories and a pickup in private non-residential investment provided significant contributions to the latest acceleration, an indication of growing corporate confidence,” Moody’s has stated. A stronger economy, it said, “would increase tax revenues and facilitate steps toward fiscal consolidation, including a planned hike in the consumption tax in April 2017” and that “recent government and trade-union data also suggest that wage growth may finally be starting to gather momentum, highlighting the potential for a gradual increase in consumer demand.”
Moody’s forecasts real GDP growth will pick up to 1.5% in fiscal 2016, up from 0.5% in fiscal 2015, but sustained robust expansion would largely depend on the implementation of a “strong package of strong package of growth-enhancing structural reforms over the medium term.”
The Government expects to exit deflation this year thanks the Bank of Japan’s monetary easing policy, the depreciation of the Yen, low crude prices and real wage increases, a result of successful workers’ union offensives last year which has lead to an estimated 2.23% average wage increase. The weakened yen has also helped to boost tourism arrivals and prompted some companies to bring jobs home, as well as making Japanese goods and services cheaper for importers, which should have a positive impact on exports in the medium term.
Meanwhile, with tax revenue up and dependency on Japanese government bonds declining, the Government says that it is on target to reduce the deficit to GDP ratio to -3.3% in FY2015 (compared with -6.6% in FY2010). The administration of Mr. Abe plans to achieve a primary surplus by 2020 by advancing it fiscal consolidation plan this summer and implementing its planned consumption, another integral part of his ‘Abenomics’ strategy.
Introduced when Mr. Abe came to power in December 2012, ‘Abenomics’ is a multi-pronged economic reform program which aims to boost economic growth following 20 years of stagnation by increasing the nation’s money supply, boosting government spending and enacting reforms to make the economy more competitive.
Aside from the aforementioned fiscal reforms and monetary easing, dubbed the first ‘two arrows’ of Abnenomics, there is also the ‘third arrow’ which comprises of a series of structural reforms that the OECD – echoing Moody’s – says is key for a sustained and robust recovery.
"The unprecedented use of monetary expansion and flexible fiscal policies must be supplemented by rigorous implementation of Abenomics’ crucial third arrow – structural reforms,” OECD Secretary-General Angel Gurría said at a recent event in Tokyo.
“Ambitious action is needed to raise productivity and boost Japan’s long-term growth potential, including by increasing women's role in the labour market and stimulating innovation, to ensure higher living standards while ensuring the public debt burden remains sustainable."
Firing the third arrow
The third arrow of Abenomics puts particular focus on the overhaul of agriculture, energy, healthcare, and the labor market. The package of structural reforms in agriculture include: the first major deregulation of the sector in 60 years; an overhaul of the Agricultural Cooperative System to encourage entrepreneurialism and new market entrants; removal of the Rice Production Adjustment program; consolidation and optimization of farmland use; and new initiatives to boost exports.
The Government says that reforms in healthcare are “a shot in the arm to energize the industry”. These reforms aim to accelerate the commercialization of regenerative medicine, create a new system for combining insured and uninsured medicals services, and promote business alliances though a new healthcare corporation system.
The government points to a few recent cases as evidence that the healthcare reforms are working, such as pharmaceutical venture SanBio’s decision to transfer its headquarters from California to Tokyo, and Terumo Corporation’s entrance into the regenerative medicine market. Israel’s Pluristem Therapeutics and British company ReNeuron are also said to be interested in investing in Japan.
Like the agricultural sector, the energy sector is undergoing its first major overhaul in 60 years. Full liberalization of the retail electricity and gas markets is expected by 2017, allowing new players into the arena. The reform package for energy will also see the expansion of the national grid, deregulation of prices, and the unbundling of electricity generation, transmission and distribution and gas infrastructure by 2022.
Reforms in the labour market rest on three main pillars that aim to relax requirements on expatriate workers, increase childcare leave salary, increase the number of women in management positions to 30% by 2020 and create a new working system which evaluates workers based on professional skills and performance instead of working hours.
As part of the third arrow, there is also a series of eight pilot initiatives that will cultivate regional economic growth. This entails the setting up of centres to foster international business, innovation, entrepreneurialism and reform of agriculture, education, the employment system and medical care. The third arrow of structural reforms also focuses on promotion of foreign direct investment through a number of initiatives that aim to attract more foreign businesses to Japan.