A strong economy, a strong Japan | Asia| An in-depth look at news from across the continent | DW | 17.05.2013
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A strong economy, a strong Japan

Prime Minister Shinzo Abe is reforming Japan’s economy. Strong growth for this quarter has corroborated his “Abenomics” strategy, which also has nationalistic motives.

Until recently Abenomics, Japan's new economic strategy, was considered in the West as an attempt on the part of Tokyo to conduct a currency war. However, now the world is amazed by the success of this idiosyncratic path out of Japan's ongoing crisis.

In the quarter to March, Japan's gross domestic product rose by 0.9 percent in real terms in comparison to the previous quarter. With an annual rate of 3.5 percent, Japan is doing better than other G7 nations.

The upward trend is being attributed to a weaker yen and the higher stocks, which are both consequences of the new prime minister's strategy of hyper-easy monetary policy and high government spending. The yen has lost a fifth of its value since the beginning of January and stocks have surged. Export companies' profits have also grown considerably as a result.

Barack Obama shakes hands with Japanese Prime Minister Shinzo Abe (REUTERS/Larry Downing)

Abe told Obama Japan had to remain strong

More exports and consumption

The upturn at the beginning of the year was partly created by exports which rose by 3.8 percent. However, this figure does not fit with the rather patchy monthly export figures. Japan will also have profited from the devaluation of the yen as well as the economic recovery in China and the US. Moreover, Japanese consumers increased their spending between January and March by 0.9 percent by comparison with the previous quarter.

Analysts attribute this to the first results of the asset price effect - capital gains and currency gains in foreign and Japanese shares and bonds are sometimes invested into luxury items. The employees of export firms received higher bonuses this year and these seem to have flowed into consumption. This also explains why consumer confidence has grown to a pre-crisis level.

Three Arrow reforms

Abe's strategy wants to bring an end to deflation and revive the economy with "three arrows" - fiscal stimulus, hyper-easy monetary policy and structural reforms.

In January, his government unveiled a stimulus plan worth 10.3 trillion yen (78 billion euros). Abe said the measures were intended to spur a 2 percentage point rise in real economic growth and create some 600,000 jobs.

Workers assemble Toyota Motor Corp.'s third-generation Prius hybrid cars (+++(c) dpa)

Japanese exports rose in the first quarter of this year

Japan's government debt was at 230 percent of its gross domestic product, the worst among the industrialized nations, at the end of 2012.

At the beginning of April, the Bank of Japan announced it was entering a new phase of monetary easing in terms of "quantity and quality."

The central bank's new governor Haruhiko Kuroda plans to double its monetary basis within two years and to create an inflation rate of 2 percent by 2015. By buying up government bonds and other assets, the central bank is pumping 1.1 trillion euros into the economy thus helping long-term inflation rates to decrease and allowing companies and private individuals to take out lower loans.

More than a flash-in-the-pan strategy

At first glance, this strategy could be seen as a flash-in-the-pan because the devaluation of the yen and the increase of state expenditure has its limits. However, the critics of Abenomics should not underestimate Japan's strong will to pull itself up by its own bootstraps.

For the first time since the real estate bubble burst 23 years ago, Japan's elites seem to have reached a consensus - a strong economy will help strengthen Japan in face of China's strivings towards hegemony.

Tokyo Skyline (© lassedesignen)

Consumer spending rose in Tokyo and other cities

The conservative new head of state said Japan had to remain strong when he visited the US earlier this year, first in economic terms, then in defense terms.

For this, the deflation has to fall and the strong currency has to be devalued. Secondly, the economy has to grow by 2.5 percent in this fiscal year so that VAT can be increased in April 2014. Japan will only be able to rein in its debts and protect this Achilles heel with higher tax revenues.

Skeptical companies

However, Japan's new "now or never" policy is not without its risks. The worst-case scenario would be capital flight and debt collapse, although this are both a long way off still. Abe has to convince Japanese companies that the yen will remain weak and the upturn will continue. Otherwise, companies that are lowering their investments and do not dare increase salaries could be the reason for the failure of Abenomics.

The prime minister's third arrow is to improve conditions for companies. The first step was free trade with the EU and neighboring countries in the Pacific. Better childcare so more women can work is the second. And thirdly, there will be a massive investment in technical innovations. He's putting forward a whole package of structural reforms in June.

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