News Analysis: Protracted economic malaise spells death of "Abenomics" in Japan

Japan's economy contracting in the last quarter more severely than median market expectations, against a backdrop of ballooning social welfare costs connected to an ongoing demographic crisis, has led some analysts to believe that the "Abenomics" rhetoric has run its course.

According to the latest gross domestic product data, the world's third-largest economy contracted an annualized 1.4 percent in the last quarter, which equates to a 0.4 percent fall on an inflation-adjusted basis from the July-September quarter.

Of particular note to analysts here were components of the GDP data showing that the main driver behind Japan's economy, consumption -- which accounts for 60 percent of the economy -- had deceased a real 0.8 percent in the recording period, with wage increases and overall exports also highlighting the inefficacy of Prime Minister Shinzo Abe's fiscal policy blend.

"Monthly wages dropped almost 1 percent in 2015 compared to a year earlier, which is compounding a 'penurious mindset' here, which means that doubly so now, households will tighten their pursestrings because there's no tangible evidence they are better off and until disposable incomes, not just wages in general, increase, consumers will not spend," Akihiro Hoshino, senior quantitative strategist at Nomura Holdings Inc., told Xinhua.

"It would seem that the 'Abenomics' ship has perhaps run its course, as it's based on economic growth translating into increased capital expenditure ensuring that money finds its way back into the economy and into the pockets of workers, but businesses are hedging on a gloomy outlook and despite various easing measures, aren't spending at a pace the government had predicted and are not passing on profits to their workers, who in turn are being thrifty because they have to," Hoshino said.

He went on to explain that both installments of "Abenomics" had, since being instituted, yet to be translated into anything near the "economic miracle" the prime minister has promised, and with another consumption tax hike looming, could lead to further downside pressure and public and market belief that the economy here is stuck in something of a quagmire.

Efforts to combat inflation by expanding monetary supply have only had a marginal impact, despite the central bank's perpetually upbeat stance. The inflation rate has largely flatlined, and the Bank of Japan (BOJ) keeps delaying the target date of its 2 percent inflation goal, Hoshino explained.

He added that the second arrow of "Abenomics," involving the government boosting spending to stimulate the economy had yet to bear fruit, as despite an accommodative market to borrow, a now negative BOJ interest rate to urge businesses to re-park their money in the economy, would continue to miss its mark as long as demand for Japan-made goods continues to wane.

"Exports were off 0.9 percent in the last quarter, as emerging markets' as well as demand from the United States slumped. And perhaps this exposes the biggest flaw in 'Abenomics' as it assumes Japan will be able to continue shipping its goods on a weak yen," said Hoshino.

"Hence it's fair to say that to an extent 'Abenomics' is mere hyperbole and is inflexible in as much as when the yen spikes as investors dump U.S. dollars in favor of safe havens during times of economic turmoil, as we've seen recently with a downturn in the banking sector in Europe and the U.S. amid an ongoing oil glut and falling prices, the prime minister's policy blend is rendered irrelevant," proffered Hoshino.

Government officials including Economics Minister Nobuteru Ishihara have remained upbeat despite the poor GDP data, stating that the nation's economic fundamentals remained sound and an uptick was expected in the next quarter. Chief Cabinet Secretary Yoshihide Suga even went as far as saying that income and spending are solid, despite the latest data suggesting the exact obverse.

Hence, other analysts have suggested that the government's perpetually upbeat "Abenomics-associated" mantra, is beginning to wear thin, and far from the rhetoric encouraging businesses and consumers to spend, a gloomy outlook, which is a known for businesses based on currency rates and export data, and a considered assumption for households based on falling or frozen wages, is eroding faith in the weary maxim.

Pacific Affairs research analyst Laurent Sinclair said that the hyperbole surrounding "Abenomics'" first two arrows, had seen little to no improvement to the actual economy, with further pressure expected ahead. A second round of consumption tax hikes is slated for 2017, the first installment of which plunged the nation back into a technical recession, and the third structural reform arrow is more of a "concept" than a tangible solution.

"The amount the government has to spend on social welfare costs is colossal and as society here continues to both age and shrink, these costs will increase commensurately. Theoretically, Abe's reform plans involving energizing flagging sectors of the economy and getting more people to contribute by offering certain incentives, such as equal pay for equal work, his "Womenomics" idea, and, motivating healthcare workers to stay in their jobs or return to work after maternity leave, for example, are all good in theory," Sinclair said.

"But that's just the point, they are all just theoretical concepts; ideas of what should happen and not clear roadmaps to achieve them," Sinclair added.

Other analysts concurred that perhaps it was time for a rethink of the tired "Abenomics" axiom, as perhaps in lecture halls it made sense, but in reality it was falling far short of its intended mark.

It assumes too much. And lacks logic. For example, why try to incentivize an apathetic healthcare sector, when immigration reforms may well be the golden bullet? Why focus on the fiscal wellbeing of the aged when they're sitting on stockpiles of savings, while the young are living paycheck to paycheck and thus have no disposable income? Quizzed Hisao Katayama, a senior equity analyst at Nomura Securities Co.

He told Xinhua, "The fundamentals need to be addressed both domestically and internationally. A global downturn will see the yen rise, and as long as financial institutions overseas are pressure and there's an ongoing oil glut, this always remains a possibility. This undermines the whole philosophy behind 'Abenomics'."

"Similarly demand for Japan Inc.'s goods will always be in a state of flux depending on the pace of growth in emerging economies and demand from the U.S. and the eurozone, of which both economies have and will hit headwinds. Tangible short, mid and long term goals need to be comprehensively articulated to both businesses and the public. Flooding the market with new money and, telling people 'the situation is improving' when it clearly isn't, while laying out ambiguous plans to deal with an impending demographic crisis, has amounted to nothing."

"So yes, in many respects we are witnessing the death of "Abenomics," and its successor must be a more pragmatic, realistic and viable approach that can deal with the sometimes unexpected downside pressures to both domestic and global economies while tackling long-term reform goals," Katayama concluded. Enditem