China Research

Japan, the third largest economy in the world, has set up strategies for economic growth plans, namely Abenomics in an attempt to resolve its specific economic problems. Ongoing discussions on desirability of their strategic economic growth plans and concerns on their influence on the neighboring economies in the Asian region and on the globe are hanging albeit some of their macroeconomic indicators show arguable signs of heading to the right direction. This article takes a brief look at the cores of the strategic growth plans of the giant economy and evaluates Abe’s economic growth plans in 2013, addressing challenges of Abenomics that are lying ahead.

Abenomics to bounce back

Abenomics which is named after the Japanese prime minister Shinzo Abe got off to a start after the won the re-election in December 2012 with proposing economic growth plans including 1) carrying out aggressive expansion of the governmental expenditure; 2) supporting continual monetary easing via QE (quantitative easing); and 3) running structural reforms to enhance competitiveness of the whole country. The Keynesian-inspired economic growth plan of Abe is aimed at sparkling life into the economy from the 15-year-long deflation through monetary, fiscal and structural policies. This stimulus package along with structural reform worth above $200 billion is focused on government spending with infrastructure projects for building bridges, tunnels, and earthquake-resistant roads, which was already approved by the cabinet in January 2013. The Bank of Japan (BoJ) is embracing the stimulus plan and has set an inflation target of 2 percent (from an earlier target of 1 percent) in January 2013, which it commits to achieve via quantitative easing of buying up mostly short-term government debt that is due to start in 2014.

How will the plan reflate Japan’s economy – and what has been done?

It was hoped that the aggressive monetary expansion will weaken the Japanese Yen, which would give exports a major boost, leading to a rise in corporate earnings, boosting the stock market, resulting in higher wages, thus increasing private consumption and finally escaping from the trap of deflation. As was hoped, the weakening yen against the dollar has taken it to reach to the five-year-low of 105 against the dollar, making yen depreciation against the dollar by 19,9 percent in 2013. [1] As the benefits of a weak yen started to take effect, Japanese exports rose in 2013 along with an increase in sales of cars and electronics to the United States, Europe and Asia, where some signs of recovery in overseas demand are being shown. The stock market rally also followed. Nikkei 225 reached a six-year high and took around 50 percent gain in 2013. News on ‘end of deflation’ followed.

According to the statistics announced by the government in October 2013, Japan’s core consumer price index (excluding food), rose by 0.7 percent in September compared with the same month a year ago, making the fourth monthly gain in a row. Including food prices, the index increased by 1.1 percent. Furthermore, in an survey of 1,000 Japanese retail investors done by Goldman Sachs Asser Management in 2013, 56% percent of respondents replied that they expected deflation to end soon. Based on these indicators as above, Shinzo Abe’s economic policies have achieved success so far. However, there are challenges lying ahead.

Challenges lying ahead

The success of Abenomics so far in large part is indebted to the weakening of yen, which involves two risks. First, weakening yen itself has a downside for the Japanese economy. According to the data of Ministry of Finance released in July 2013, for example, imports to Japan rose 19.6 percent in July 2013, a three-year high, due to a jump in the cost of imports for crude oil and liquefied natural gas. As a result, Japan has an increasing trade deficit, exceeding 1 trillion yen. These rising costs of imports for energy and raw material may press down Japanese corporate profits, which would be negative for Japanese economy.

Second, there is a growing concern over the ripple effect of decline in yen over the globe. In the Asian region including South Korea and Europe are wary of competitive devaluation of countries to boost demand for domestic industry by maintaining domestic currencies weak. In other words, the success of Abenomics depends on other countries not jumping on the wagon of depreciating their currencies, thereby maintaining competitiveness in the international arena.

However, there are economies that start to react to the yen decline. The central bank of Korea already cut its benchmark interest rate by surprise in May 2013, Australia cut its key interest rate to a record low in August 2013, and the same trend in interest rate cut was also followed in Thailand. The world export-led economies in the world like Germany and China are clearly worried. Especially regarding China, the yen decline gets intertwined with even more convoluted China-Japan conflicts.

As was mentioned above, the third core of Abenomics include structural reforms and joining the Trans-Pacific Partnership (TPP) [2] for liberalization measures with its major trading partners. The sovereign disputes over the Diaoyu/Senkaku between Beijing and Japan in the East China Sea have spilled over into Sino-Japan relationships including the economic relationship, which got even exacerbate worse due to Abe’s visit to a shrine that honours Japan’s war crimes including some convicted war criminals. China takes 20 percent of Japan’s trade and thus how successful Abenomics will be in the coming years cannot be free from its economic relationship with China. Abe’s hawkish and nationalistic approach not only distracts the agenda for economic reforms but jeopardizes also economic and political relationships with neighboring countries.

Critics on Abenomics also put Japan’s enormous public debt at the forefront of many criticisms. Japan’s national debt, which exceeds 10 trillion US dollar is more than twice its GDP, is even too large to afford a moderate rise in interest rates. Concerns of some investors who are anticipating inflation is that rising interest rates would have a negative impact on the trade deficit and fiscal position of the government. Such a concern was expressed by Martin Feldstein who wrote in project syndicate that “…the combination of exploding debt and rising interest rates is a recipe for economic disaster.”

Summing up, Abe’s economic plans have shown signs of success in 2013. However, there are growing concerns as to feasibility of its continuing success in the coming years due to the risks that Abe’s policy takes including what is-so-called ‘currency war’, tremendous public debt and disputes with influential economic partners in the region. Whether Abenomics is a success and whether Japan really has bounced back will be tested again with challenges lying ahead in 2014.

 

 

 

 

 

 

Hyunjoo Kim Karlsson
Senior Lecturer, Linnaeus University

Editorial board

 

Back to Start Page

Global investment has skyrocketed in the past decade. Worldwide gross capital formation – i. e. private and government investment in machinery, equipment, buildings and inventories – climbed from US$ 7,000 billion in 2002 to more than US$ 17,000 billion in 2012. This contrasts with an absolute increase of a mere US$ 1,500 billion during the previous decade, 1992 to 2002. Moreover, in the latter part of that period, 1995 to 2002, global capital formation stagnated at a more or less constant level of US$ 7,000 billion.

Figure 1
Global investment
Nominal domestic capital formation (US$ billions)

Sources: IMF; own calculations

As a result of this mighty investment boom, which took off in 2002, the global structure of capital formation has changed enormously (Figure 1). While only a quarter of global investment went to emerging markets and developing economies in 2002, this share surged to slightly more than 50 percent in 2012. For the first time in the modern age, the global investment volume was allocated to emerging and advanced economies in equal parts. This shift in weighting has accelerated in the last couple of years as investment in advanced economies has been impaired by the global financial market crisis. Investment in the industrialized countries has not yet regained the level of 2007 and 2008. By contrast, the financial market crisis has barely hit emerging economies. Their investment boom has continued almost unabated, reaching a new peak of US$ 8,700 billion in 2012.

The emerging market and developing economies contributed 70 percent of the total global increase in investment (US$10,000 billion) in the decade from 2002 to 2012. In the previous decade, distinctly moderate growth had been driven by the advanced economies. A closer look reveals that the latest global investment boom was powered by the emerging market and developing economies in Asia in particular. Among emerging markets Asian countries played a dominant role as an investment target. Around US$ 4,500 billion, or 45 percent, of the total increase in investment can be attributed to the emerging economies in the Far East (i.e. excluding the advanced Asian economies of Japan, Korea, Hong Kong, Taiwan and Singapore).

Of course, this can partially be explained by the high population of this region. In 2010, almost 4.2 billion people, or around 60 percent of the world population of almost 7 billion, lived in Asia. Even if the five advanced countries are excluded, Asia’s share of the world population still amounts to 58 percent. Figure 2 shows that the other emerging regions were virtually eclipsed by the Asian performance. This was especially true of the absolute increases in investment between 2002 and 2012 in Central and Eastern Europe (US$ 258 billion) and in Africa (US$ 215 billion), while the member countries of the European Union (US$ 1,162 billion ) still outperformed the Latin American and Caribbean countries (US$ 921 billion).

Figure 2
Structure of the global investment boom
Change of domestic gross capital formation 2002 to 2012 in US$ billion

1) Asia excluding Japan, Korea, Hong Kong, Taiwan, Singapore.
Sources: IMF; own calculations

Emerging and advanced economies are diverging not only regarding investment dynamics but also with respect to the significance of investment in the domestic use of gross domestic product (GDP). However, this divergence has in turn contributed to the economic convergence of both country groups. While investment accounts for less than a fifth of GDP in advanced economies, the investment ratio (gross capital formation as a percentage of GDP) amounts to a third in emerging market and developing economies. Moreover, at 19 percent, the investment ratio of the advanced economies in 2012 was slightly lower than a decade ago (20 percent). In the European Union the ratio declined from 20 to 18 percent. In contrast, over the same period investment in emerging markets increased more or less steadily from a quarter to a third of GDP.

The Asian emerging market and developing economies dominate the overall picture (Figure 3): The Asian investment ratio was already by far the highest in 2002. From 2002 to 2012 the investment share of GDP climbed from 31 to 42 percent. This development reflects the enormous efforts made by Asian countries in capital formation and their preference for investment over consumption. The investment ratio of other emerging regions showed only a moderate increase. On average, investment as a percentage of GDP increased by only 2 percentage points. Moreover, the investment ratios in Central and Eastern Europe, Africa and Latin America are not markedly different from the values observed in the advanced economies.

Figure 3
Regional investment ratios
Domestic gross capital formation as a percentage of GDP

1) Asia excluding Japan, Korea, Hong Kong, Taiwan, Singapore. Sources: IMF; own calculations

Current forecasts predict that, on aggregate, the divergence of global investment activities between emerging and advanced economies illustrated in Fig. 3 will continue. In 2013 investment is expected to decline in some of the largest European economies, such as Germany, France, Italy and Spain. Japan may achieve at best a small increase. The USA, Canada and some Scandinavian countries can be expected to provide a modest contrast.

In most of the emerging economies, though, the investment boom is expected to continue. However, it cannot be taken for granted that the investment cycle in the emerging market and developing economies will be sustained: Some emerging markets will have to fight hard to remain an attractive location for investment. Several sizeable emerging markets in Asia, Africa and South America have benefited from the increasing global demand for natural resources and the resulting price increases. It is a moot point whether these countries can compensate for a possible cutback in their present growth driver with stronger domestic demand or exports of other goods. Certain other emerging economies, e. g. China, have already gained momentum from flourishing exports of manufactured goods. However, it remains debatable whether these countries can offset a possible deceleration in this segment – triggered by falling demand from Europe and the USA. The critical question is how flexible those economies are in adjusting their economic structures.

On the whole, the growing population in the emerging market and developing economies and their desire to catch up favor ongoing investment. If their standard of living is to continue to rise, there is no alternative to increasing capital formation and the capital-labor ratio.

 

 

 

 

 

 

Michael Grömling
Professor, Cologne Institute for Economic Research (IW) , International University of Applied Sciences, Bad Honnef / Bonn

 

Back to Start Page