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Analysis: ‘Abenomics’ has Japanese corporate profits and GDP growth soaring as emerging markets sputter.
NEW YORK — The headlines read like epitaphs last year when China’s economy overtook Japan’s, which had held the No. 2 spot behind the United States for 42 years.
“Falling Behind,” read Isahi Shimbun, one of Tokyo’s most authoritative dailies.
“Sayanora Japan … ni hao, China!” read a more irreverent report from Barclays, Britain’s second-largest bank.
It all fit very nicely with the tale of the BRICS — the surging economies of Brazil, Russia, India, China and South Africa — along with other once-exotic places that became darlings of global investors and macroeconomists after the 2008 financial crisis left the old industrialized giants a smoldering wreck.
Since then, however, growth in all five BRICS, dependent largely on Western demand for their exports and commodity prices, has faltered, in some cases badly.
But in Japan, following the election of Prime Minister Shinzo Abe and his Liberal Democratic Party (LDP) last December, a radical change in monetary and fiscal policy has reversed a three-decade decline and put a little pep in the country’s step again. Corporate giants like Sony, Toyota, Nissan and Panasonic have seen profits soar, and earnings for the second quarter of 2013 reported Thursday exceeded expectations across the board.
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Earlier this month, the International Monetary Fund raised its 2013 economic growth projection for Japan by a half-percentage point to 2 percent — an enormous expansion in Japanese terms, and in real terms, given the huge size of the country’s economy.
Dubbed “Abenomics,” the prime minister’s policies have rested largely on government infrastructure spending and on a compliant central bank, the Bank of Japan (BOJ), printing enormous quantities of Japanese yen and thus devaluing the currency on global markets. This has made Japanese products more competitive and jump-started hiring and construction. It’s also led to some roller-coaster rides on the country’s Nikkei stock exchange.
Perhaps most important of all, Abenomics has stoked inflation.
Inflation’s generally regarded as more of a curse than a blessing. But Japan’s economy was so damaged by the bursting of its real estate bubble in 1990 that deflation — downward pressure on prices — had plagued it ever since. This meant banks wouldn’t (or in many cases, simply couldn’t) lend. Businesses couldn’t raise prices and profits. The government had to subsidize employment and much else. In short, the economy languished.
What’s more, because Japan built its economy on export earnings, the emergence of cheap manufacturing rivals like South Korea, China, India and Vietnam destroyed the model. Its once-mighty trade surplus has fallen into deficit. As the Japanese got older on average, their pensions, health care and other costs eventually led to a world-beating national debt, now standing at some 230 percent of GDP. (For comparison, the US debt-to-GDP level that has Washington so exercised is about 104 percent.)
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Two weeks ago, Abe’s party won a stronger voice in Japan’s lower house of parliament. The vote was seen as a popular endorsement of his policies, which also include amendments to Japan’s postwar pacifist constitution that would allow a Japanese military more given to defending its national interests.
But the economy seems paramount. Abe is now poised to unleash his so-called third arrow: a sweeping slate of market reforms, including lower corporate taxes, deregulating some industries and embracing the Obama administration’s proposed Trans-Pacific Partnership free trade zone.
The apparent revival of Japan’s fortunes come at an awkward moment for the BRICS. While Japan was overtaken by China three years ago, the would-be club of future superpowers is having its own problems right now: a real estate and credit bubble in China; decelerating growth, corruption and drift in India; labor violence, commodity price collapse and capital flight in South Africa; political unrest and central government bloat in Brazil; and a slow-but-steady sinking toward kleptocratic, oil-dependent autarky in Russia.
The IMF last month lowered its 2013 GDP growth projections for all the BRICS. China’s growth projection was trimmed by 0.3 percent to 7.9 percent. That’s still robust but many economists believe the actual figure could be lower —and that it’s likely to fall further still next year.
Others fared worse. India’s growth forecast fell to 5.6 percent, following anemic growth last year. Russia’s dropped to 2.5 percent (down 0.9 percent). Brazil, the IMF says, grew at less than 1 percent in 2012 and will be lucky to reach 2.5 percent this year. South Africa took the biggest relative hit — nearly a full percentage point — and is now expected to grow only 2 percent this year.
So were the reports of Japan’s economic demise wildly premature? Probably. Japan’s economy, regardless of China’s breakneck growth, still supports a far more affluent population — albeit one that’s aging.
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It’s worth remembering that none of the economies “gaining” on Japan’s No. 3 position have any hope of overtaking it in the next decade — and probably longer. Trailing the United States, China and Japan are, in order, Germany, France, Brazil, the United Kingdom, Italy, India and Russia.
Japan, whose annual economic output is more than $5.8 trillion, will doubtless lose more ground to China. Germany (around $3.6 trillion) is not growing fast enough to overtake Japan anytime soon. Brazil ($2.8 trillion) and India and Russia ($1.8 trillion each) are very far behind, and the rest are seen as likely to shrink as to grow.
But could Abenomics still turn "Abepocalyptic"?
The debate is raging among economists and bloggers with long, impassioned arguments. In particular, economists of the right, who advocate austerity, are incensed at Abe’s loose money policies and predict doom on a grand scale.
“Public debt is reaching ridiculous levels and spending will only grow from here,” observes Bawert.net, a well-read blog dedicated to the seminal Austrian School economist Eugen von Bohm-Bawerk. “When big bulges of old people start to retire they will be dissaving and it will be impossible for the big banks to use excess deposits to roll over government debt. Collapse is at this stage inevitable.”
That’s the true danger. Abe’s supercharged version of quantitative easing could eventually bankrupt the entire Japanese economy if the mix of reforms and stimulus falters.
China should be particularly worried: It overtook the United States as Japan’s largest trading partner in 2007, and exported $189 billion last year — 9 percent of its total.
Of course, Japan’s prosperity, if not its growth, has survived for decades in defiance of such predictions. For now, everyone agrees that Abe’s policies have given his country a jolt, but the long-term effects remain to be seen.
Michael Moran is foreign affairs columnist at GlobalPost and vice president, global risk analysis at Control Risks, an international political, security and integrity risk consultancy. The opinions expressed in this column are his own and do not necessarily reflect the views of Control Risks.