It is not foreign to people around the world that the Japanese economy has been in a stagnant state since the beginning of the 1990s when its financial bubble ruptured. Effects of deflation, debt burden, and lack of competitiveness have prevented the Japanese economy from picking up steam and becoming the powerhouse many envied during its rise in the 70s and 80s.
Nonetheless Prime Minister Shinzo Abe has taken strides to revamp the sluggish economy. It has pressured the Japanese Central Bank to increase inflation targets to 2%, and a constant execution of quantitative easing to generate demand. Fiscal stimulus of $107 billion has also been passed for construction of infrastructure, especially in the disaster area affected by the massive 9.1 earthquake of 2011.
Positive effects are seen. Confidence has risen since the election of Abe as shown by the Tankan confidence index of Japanese Manufacturing firms by almost 5% according to The Economist. The Japanese stock market has been in a rise with a 40% increase in the Nikkei since November; a rise the for example could be taken advantage by investors with shares of index funds pegged to the Nikkei Furthermore the yen has depreciated from around 77 yen/dollar to almost 100 yen/dollar (April 11, 2013 12:33pm), which is positive for the export-oriented Japanese economy when repatriating currencies back home, as well as for investors with shares in global companies like Toyota.
Yet despite these positive signs Japan still has to face immense problems. Many analysts have said that quantitative easing is the wrong path to take for the Japanese economy, because the root of the problem is not a lack of demand, but a lack of competitiveness. The Japanese government has an aging workforce that is contracting every year. Immigration regulation, one of the strictest in the world, doesn’t allow the revitalizing of the economy through new immigrants as is the case in the American economy. However the most fatal error committed by the Japanese economy was that it failed to understand that high purchasing power nations need to purchase the imports of other countries, so that other countries have money to buy your exports, as mentioned by Anthony Pantaleon of Pantaleon Consultants.
Defiants to Paul Krugman’s belief of borrowing now and paying debt later when the sluggish economy is back on its feet, claim that the Japanese economy will not be revitalized and that further borrowing will only generate more debt; a debt ratio that is already above 200%. They believe that an economy cannot be pushed into a path it doesn’t want to go, and that Japan needs to create an environment of competitiveness by opening its economy for foreign investment to revamp its inefficient financial sector as mentioned by James von Moltke of Citi group.
Beyond its inefficiencies, nonetheless it is time for Abe to step to the plate. Even if quantitative easing doesn’t work in the long run, it can be helpful by providing him time to make the Japanese economy more competiveness through liberalization. It is time for “Abenomics“ to become more than a catchy phrase, but a new economic open market/liberal/pragmatic view for Japan.
By: Luis Alfonzo Chacin
