Yearender: Japan's economy desperate for high-impact reforms following death of"Abenomics"

Japan has unleashed a volley of so-called economic solutions centered around Prime Minister Shinzo Abe's once-revered "Abenomics" economic policy mix, but the latest installments of the somewhat tired and rhetoric-based panacea have hit a wall, with the world's third-largest economy as it stands now grappling at elusive growth drivers as it heads into a demographic crisis.

DEATH OF "ABENOMICS"

Japan's economy expanded in the third quarter far less than initial estimates according to the latest revised data released this month, with the government forced to subtract numbers on account of the fact that capital expenditure, a mainstay of the nation's economy had been more sluggish that initial estimates and that private inventories had also shrunk.

And while Japan's Cabinet Office has said that Japan's economy grew an annualized 1.3 percent, from a preliminary estimate of a 2.2 percent expansion in the July-September period, with the revised growth coming in well below median market expectations for expansion of 2.3 percent, it was the drop in capital expenditure that was one of the major factors in driving down growth, with business spending retreating 0.4 percent in the quarter.

The government's economic policies under Abe and the central bank's own efforts to underpin the economy while stimulating spending, have, worryingly this year, not inspired businesses to spend or invest, and, perhaps more worryingly, as economists have attested, this is a harbinger of what is to come.

"Some big businesses have had a bumper year this year, but the profits are staying in the company and not being filtered down to the staff. Wages here have increased negligibly this year, or have been frozen; bonuses capped and other perks basically erased," Hisao Katayama, a senior equity analyst at Nomura Securities Co., told Xinhua.

"What has to be focused on are the reasons why. And it comes down to confidence. Companies are going to hang on to their profits, so long as they feel unsure about economic situations ahead, and this has been the case for the entire year and will tick over to next year," Katayama said.

He went on to say that nowadays in business spheres and in society the term "Abenomics" not only lacks all meaning, but has become something of a tired expression that causes eyes to roll, and for industry insiders, a future economic path is coming into view based on this year's more than subdued economic performance, that will be far more taxing, literally.

From this point of view "Abenomics" should be put out to pasture and left to be a footnote in the future annals of Japan's 21st Century economic malaise, or put simply, as analysts have said, it's time for "Abenomics" to Rest In Peace.

Of particular note this year, Katayama said, households are not spending. This is a troubling sign and this pattern has seen no change since Abe came into office in 2012. Private consumption which accounts for around 60 percent of Japan's GDP is a significant economic driver in a nation that is quickly running out of them.

When the people of Japan decide to stop spending, as has been the case this year, you know the economy is in trouble, the expert said.

"Falling exports on the yen's strength and a lack of overseas demand on the one hand, and a slumping domestic demand for Japanese goods as profits aren't being converted into increased wages impacting purchasing power, means that the public has no choice but not spend," he said.

"Rather than Abe's virtuous' cycle, this is a vicious cycle' with massive, adverse implications for the future course of Japan's economy," said Katayama in no uncertain terms.

FEEDBACK LOOP

Japan's public debt stands at the highest in the industrialized world at more than 240 percent of the size of its economy and coupled with this, despite the Bank of Japan's ardent reflationary efforts and bid to hit a 2 percent inflation target in as many years, prior to overhauling its entire system this year to claw back two embarrassing delays to its target date, the situation remains so dire international economists and the International Monetary Fund (IMF) had to weigh in this year

Earlier this year globally-renown economist Nouriel Roubini warned Japan that its economy would continue to face increasingly strong headwinds throughout the year and into the foreseeable future.

Roubini, 57, co-founder, chairman and chief economist of Roubini Global Economics, an independent and global macroeconomic research firm, told a press gathering at the Foreign Correspondents' Club of Japan (FCCJ) that Japan's economic policy decisions have had a "ripple effect" and may well have impacted net income margins and, as such, have been "counterproductive."

"Japan is not at the center of global concern as such, but certain policy decisions including the BOJ adopting a negative interest rate recently have had a ripple effect following similar moves in Europe, with banks there also going negative," Roubini, also a professor of economics at New York University's Stern School of Business, explained.

"The notion of a negative interest rate started to have bad connotations and in Europe has killed banks' net income margins, which is ineffective and could be counterproductive," Roubini said, although added that the use of minus interest rates by central banks "shouldn't be entirely ruled out."

He went on to explain that in his opinion the announcement in Japan was "botched" and as such indirectly, Japan has thus become part of a broader global problem and not a solution, adding that central banks, including Japan's, flooding the markets with money to stabilize volatility is also leading to banks' future policy ammunition running out, Roubini said.

As for Japan specifically, the expert proffered that as the likelihood of entering a further recessionary phase looks highly likely, the government may be advised not to botch its plans for its next tax hike.

Roubini suggested that the government here and the BOJ need to urgently implement a new blend of policy responses to mitigate this scenario, including monetary easing to loosen financial conditions, circuit breakers to restore market confidence, and fiscal easing and structural reforms to support current, future and potential growth ahead of the tax hike.

"The BOJ can unroll more easing measures, but a properly managed negative rate could create more lending in the real economy and a combination of three policies is ideal, as there are drawbacks of choosing just one," said Roubini.

Roubini Global Economics, for its part, has downgraded its growth and inflation outlook for Japan, and believes that the prime minister's "Abenomics" economic policy mix is "not gaining traction," while the recent rise of the yen has led to a "tightening of financial conditions" with the nation possibly facing another "debilitating feedback loop."

But it's the public that will be left to pick up the pieces of this "debilitation feedback loop" and many economist believe that relying so heavily on public bailouts is ill-advised, as, not only does it hammer confidence, a similar move when consumption tax was first hiked under Abe's administration from 5 percent to 8 percent in April 2014, resulted in little more than plunging the economy into a technical recession.

Hence, the second installment of the hike from 8 to 10 percent was delayed by Abe twice, from 2017 to late 2019, with the Japanese leader, somehow betting that the nation's already wary consumers are going to play ball and start spending again, a scenario which would necessitate a significant uptick in wages, which goes back to the cycle of tepid business spending, lackluster exports and demands, and less-than-robust industrial production.

Japan's economy relies heavily on domestic consumption, or, put differently, the Japanese government is attempting to rely more heavily on the public to pay off its debts and bail it out of decades of deflation, and, essentially bankroll the financial burdens related to a rapidly-aging and shrinking society.

SILVER TSUNAMI

In September this year, Renho Murata, the leader of the main opposition Democratic Party, accused the prime minister of lying to the electorate and carrying on with his "Abenomics" economic policies "charade," despite the fact that not only has no tangible headway been made in terms of economic growth through "virtuous cycles", but rising disparities in society had transpired.

"Abe's slogans are cycling around, but it's about time for him to face up to the reality that the economy hasn't reached a virtuous cycle at all," Renho said, blasting Abe in an upper house debate.

"Individual consumption will start moving when we remove the anxiety about education, employment and retirement that Abenomics' has left unresolved," she said, as her party along with three other opposition parties have agreed in principle to join forces to better keep Abe's ruling Liberal Democratic Party-led coalition in check ahead of future elections, like the imminent lower house election.

Opposition parties have slammed Abe's decision to further delay a planned consumption tax hike as being deceitful and breaking pledges he had made earlier to people voting.

The tax hike, already delayed, had been pitched to voters as a vehicle for his government to drive the economy clear from recession by generating more public revenue. The economy, however, has essentially remained stagnant since Abe assumed office and the nation is still mired by deflation with the central bank's recent policy shift being described as "vanilla" by a number of leading economists.

With the Japanese currency continuing to remain firm against its major counterparts which is hampering exports and stifling production, and corporate earnings not being converted into wage increases, which has choked private consumption, under Abe, Japan economy is also buckling under an ever-increasing demographic crisis.

Japan's senior citizens are continuing to increase in numbers while the birthrate has dropped off drastically in a social phenomenon being dubbed Japan's "silver tsunami".

The silver tsunami has seen social welfare costs skyrocket and push up government debt and seen Abe this year lambasted for his inadequate social welfare policies, as more and more elderly people are struggling to survive financially in society.

Abe needs to do more to safeguard the most vulnerable in society as the economy teeters on failing, and this includes making provisions for both the young and the elderly in society, as two of its most vulnerable components. Thus far his policies have been wholly "insufficient", Rheno said.

"The is the most pressing problem facing Japan's economy now, and it's been coming for a long time so it's not as if it crept up on Abe slowly. The welfare costs involved in catering for Japan's growing numbers of senior citizens are immense and Abe's "third arrow" of structural reform policies was supposed to address this," Akihiro Hoshino, a senior quantitative strategist at Nomura Holdings Inc. told Xinhua.

"But the evidence here remains worryingly elusive, as this demographic issue weighs harder and harder, with no clear growth drivers in the economy to provide a counter balance, with the only solutions seemingly being to raise taxes and force an increasingly poor public to pay for the government's ineptitude," Hoshino said.

ECONOMIC GAMBLE

With the support rate for Prime Minister Shinzo Abe's Cabinet dropping to 54.8 percent in a recent national poll this month and nearly 70 percent of respondents opposed to a contentious law steamrolled through parliament to allow casino gambling in Japan, it would seem, despite the very real threat of gambling addition becoming a social malady here, that the government under Abe is grappling at any means to secure revenue, even at the cost of social harmony-- a facet Japan has always prided itself on.

Abe's ruling bloc believes the scrapping of the current gambling law and the opening of new integrated resort casinos will be capable of generating revenue well beyond the uptick expected from tourism related to the Tokyo Olympics and Paralympics in 2020, although political end economy watchers close to the matter believe that it would be highly unlikely that any casinos would be operational before the Olympics.

While some analysts believe the integrated resorts could generate revenue of up to 30 billion U.S. dollars, rivaling gambling meccas like Las Vegas and Macau, and could be the kind of "shot in the arm" Japan desperately needs economically, many said the resorts would not be open for business until well after the Olympics, with some forecasting a 2030 opening at the earliest.

Casinos aside, Abe's administration has turned its eye of late to the potential revenue that tourism could net Japan, which some analysts have described, in light of Japan's complicated relationship with the international community and loosely-veiled dislike of foreigners in Japan in general, as "desperation" in the face of a dire lack of existing economic growth drivers.

But the facts this year and for the foreseeable future remain thus. And the picture is bleak.

Without high-impact reforms, potential growth is projected to decline from about 0.5 percent in 2015 to close to zero by 2030, given the demographic overhang," the International Monetary Fund (IMF) said in a recent report on the matter, adding that Japan is also forecast to be the weakest growing G7 economy this year

The Organisation for Economic Cooperation and Development (OECD), meanwhile, has warned that Japan's debt pile could jump to 400 percent of GDP within three decades, if policymakers do not implement structural reforms. Enditem