News Analysis: Japan's rollercoaster economy likely to continue until structural reforms take hold

Japan, as the world's third-largest economy, has hit a crossroads as far as the value of Prime Minister Shinzo Abe's economic blend of "Abenomics" is concerned, local analysts hold.

The scenario comes as fiscal monetary easing jump-starting corporate capital spending for big firms and the trickle-down effect giving smaller firms a helping hand is wearing off, and industrial output and exports retreating to the point that Q2 here will likely see a significant economic contraction.

Structural reforms promised but yet to come to fruition have thus failed to repair the damage from the hollowed out nature of Japan's mainstay manufacturing industry, the hubs of which were hastily relocated offshore to more economically viable countries as the global financial crash of 2008 pushed the yen and prices up to new records, to the point that Japanese firms could no longer compete, as markets turned to the currency here as a safe haven and looked overseas for Japanese-like goods being made by cheaper competitors.

The central bank and the Financial Ministry here, however, have been working in cahoots under the watchful eye of the prime minister to ensure the deficit in domestic manufacturing output does not overly impact the nation's trade statistics, and while the Bank of Japan (BOJ) pulls out all the stops on its path to aggressively breathe life into a deflated economy, the results as can be determined up until the first half of this year could be described as two steps forward, and one and a half steps back.

"That's a reasonable analogy as far as I'm concerned, Japan has escaped a technical recession and there are a number of positive indicators that may suggest that the economic situation here is improving on a monthly basis -- which in some instances is true -- but that said, we also have a very optimistic BOJ, who would rather say the glass is half full, than half empty," Akihiro Hoshino, a senior quantitative strategist at Nomura Holdings Inc. told Xinhua.

"In its most recent announcement, the BOJ trimmed both its growth and inflation forecasts and all signs now point towards the economy having contracted in the second quarter of 2015. Growth in the year to April 2016 was cut from an initial 2 percent to 1.7 percent and the inflation forecast downgraded to 0.7 percent from 0.8 percent, while monetary policy was left as standard," Hoshino said.

He added that it was crucial for manufacturers here to maintain optimal levels of output, meaning that both domestic and overseas demand needs to remain robust -- despite overseas economies, particularly developing economies, showing some unpredictability as far as growth and demand are concerned -- as a drop in output at this delicate stage could send Japan backward into recession and derail the BOJ's inflation goals.

Contrary to the BOJ opting to continue to feed the public with its unwavering mantras such as the economy is continuing to recover "moderately," the bank is confident in the economy's " underlying growth," and that businesses and homes are starting to experience a "virtuous cycle" from income to spending, a move the bank's chief Haruhiko Kuroda has said is important to win the battle against the public's "deflationary mindset." The reality of the situation is currently somewhat bleaker, experts attest, although may improve somewhat in the second half of the year.

"Data has shown that the median forecast is for annualized growth of 1 percent in the second quarter, but this consensus among economists is now sliding rapidly," Hisao Katayama, a senior equity analyst at Nomura Securities Co. told Xinhua.

"The data due out in the middle of August will likely show that due to output declining, there will be around a 0.3 percent annualized contraction, which may trigger a sense that the nation has fallen back into recession, which could impact CAPEX and household spending, but, in the second half, growth is likely to pick up," he said.

With industrial production, a leading indicator of the economic situation in the months to come, taking a large hit in May, slipping more than 2 percent, with the activity index also off 0.7 percent, combined with sluggish consumption data all round since March, then it's no real surprise that data for the next quarter will be disappointing and will be equal around half a percent of economic contraction, Hoshino said, adding that "fluctuations" in imports and exports have impacted trade data, coupled with an overall softness in production which has also dragged down the economy.

On the issue of nation's industrial production, Hoshino elucidated and explained that the more-than-expected drop in output could be attributed to a slowing demand and production of transport equipment and cars -- the exporting and domestic purchasing of which, along with electronics, as lynchpin Japanese commodities, largely govern the health of the economy.

All signs are pointing to a slowdown in Japan's rebound from recession last year as consumer spending eases along with trade and as uncertainty in the eurozone over the Greece debt debacle continues to pressure markets and the yen, while developing economies oscillate, leading economists attest.

"Japan's economic growth will probably slow considerably in the second quarter, reflecting weak exports and production. Weakness in exports and sluggish car sales in the domestic market are reflected to the decline in production in May," confirmed Yuichi Kodama, an economist at Meiji Yasuda Life Insurance Co.

The prospect has left some analysts divided as to whether the central bank will proactively add extra stimulus in the near future, rather than have to readdress its already lowered inflation forecasts and loose more market and public faith.

Underpinning fundamental fears about Japan's economy, in spite of the odd piece of positive data such as rising retail sales, is the ongoing issue of Japan's debt-GDP ratio which at more than twice the size of its 5 trillion yen economy is the worst in the industrialized world.

What's more, only fiscal rehabilitation through Abe's yet-to-be fully activated third arrow of structural reforms will start to chip away at this mountainous debt burden, Katayama pointed out, saying "rollercoaster economics would continue in Japan until the reforms take hold."

Added to this he said there were concerns in some camps about the nation's currency; specifically while a weak yen benefits exporters and their profits made overseas when repatriated, national power and import costs are adversely affected when the Japanese currency slides or fluctuates too much.

Katayama said such points echo those that had been made recently by Motohisa Furukawa, a former Democratic Party of Japan economics minister.

"The value of a country's currency normally reflects its national power. The yen's further slide would do more harm than good because Japan relies on imports for much of its energy and food and since Abe returned to power in December 2012, the dollar has risen more than 50 percent against the yen," Furukawa said.

"The Japanese currency strengthened a bit as a safe haven during the Greek debt crisis and China's stock-market fall, but... was back trading between 123 and 124 to the U.S. dollar -- close to the weakest point since Abe took power."

"A weak yen will reduce the nation's GDP and per capita income on a U.S. dollar basis," Katayama said, "Adding that in 2014 GDP stood at 4.6 trillion U.S. dollars when calculated based on the average exchange rate for that year, which equates to 6 percent of global GDP, compared to 8.4 percent in 2010 when the yen was far stronger. There are pros and cons of pegging the yen low, but experts on economic policy, like Furukawa are wary," Katayama said.

"China's GDP overtook Japan's in 2009 and now is twice as big when measured in U.S. dollars. While Abe has talked about putting Japan at the center of the global economy, the truth of the matter is that Japan is turning out to be a peripheral country," Furukawa said. Endi