Japan reported this week that its economy grew at an annual rate of 3.5% in the first quarter of this year. Abenonmics — the hyperexpansionary set of policies of its new prime minister, Shinzo Abe — may make this the year that the country turns around its long bout with deflation (see chart below).
Consumer confidence has risen as unemployment has fallen but it will take more months before the full effect of a tumbling yen, one of the main targets of the ‘first arrow’ of Abenomics, massive monetary easing, is felt on Japan’s imports and exports. The first increase in public works spending in four years not associated with the 2011 Tohoku earthquake was passed by parliament on May 15, part of the fiscal stimulus measures in the budget, the ‘second arrow’ of Abenomics On May 17, Abe announced ambitious goals for infrastructure and farm exports, along one for with private-sector investment.
As the chart above, based on estimates by the International Monetary Fund, shows, even if Abenomics is successful, Japan still faces modest growth rates in the medium term, in common with most developed economies. That, though, will feel much better to most Japanese than the experience of the 1990s and 2000s.
Whether the country can sustain that growth in the longer term, once the kickstart effects of a weaker yen are spent, depends on the political and economic success of the still fuzzily defined ‘third arrow’ — structural reforms to boost productivity. That is the long, difficult part of Abenomics, requiring deeply entrenched vested interests to be moved — or more likely bought off. Archer Abe is already firing promises of doubling farmers’ incomes in the direction of the deeply conservative agriculture lobby. He promises to say more on other productivity reforms in June.