Abe's big bang has birthed a new Japan

Japan's radical policy approach to deflation appears to be paying off, with manufacturing activity positive for the first time in a year. European policy makers should be watching closely.

Here is something that hasn’t been heard for a while – the Japanese economy is strengthening. 

While the paint is not yet dry from the policy redecoration implemented by Japanese Prime Minister Shinzo Abe when he took office late last year, there are some encouraging early signs that his policy Big Bang might be getting traction. Mr Abe swept to power on a radical economic policy agenda that was designed to end the decades of deflation and economic funk via the implementation of massive fiscal and monetary stimulus. Abe also restructured the Bank of Japan and gave it an inflation target of 2 per cent.

All of these changes were radical policy steps and all were completely at odds with the policy approach in Japan for the past 15 to 20 years.

The early evidence of the success of the massive policy stimulus showed up with the Japanese Cabinet Office monthly economic update. The report, released yesterday, upgraded Japan’s economic outlook and at the same time the Reuters Tankan survey showed signs of a broad based lift in activity. The Tankan survey for manufacturers rose to 7 index points in May from -4 in April to register the first positive reading in a year.

The Tankan non-manufacturing index was even more impressive with a jump in the index to 19 points in May from 12 in April. The non-manufacturing index is at its highest level since October 2007.

This rapid improvement in Japan’s economy is important and is positive for Australia and the world. Japan is Australia’s second largest trading partner. Last year, Japan imported from Australia just under $18 billion worth of coal, around $11 billion of iron ore and $1.5 billion each of beef and copper.

For the global economy, Japan remains the third or fourth largest economy in the world, depending on which measure one cares to use. Either way, Japan still has a significant impact on global economic conditions, particularly when it shows a sharp turn in its business cycle.

A strong Japan is good for the world and of course, good for the people of Japan. 

There is other high profile evidence of the success of ‘Abenomics’, as the stimulus measures have been dubbed, in a range of recent market and economic indicators.

An obvious one is the rise in the Japanese stock market. The Nikkei 225 has risen for 10 straight months to be a stunning 75 per cent above the levels of mid-2012. This stellar rise could be the start of some long overdue asset price inflation. In turn, this should boost household wealth and engenders a degree of confidence in an otherwise depressed economy.

In the March quarter, GDP rebounded at an annualised pace of 3.5 per cent, a strong result albeit from a weak base. The main source of growth in the quarter was a sharp lift in exports which no doubt owes a lot to the 20 per cent fall of the yen, which in turn is the direct result of the policy that doubled the money base.

There is even evidence that the domestic rate of inflation is edging higher (lesser deflation perhaps) with Finance Minister Akira Amari noting that core inflation, which excludes food and energy, is about to turn positive after almost 15 years of decline.

This recent experience in Japan is, for the moment, in contrast to the rolling economic depression in the eurozone.

With the European Central Bank still contemplating interest rate cuts and yet to fully embrace quantitative easing, it is little wonder that GDP has fallen for six straight quarters, with the unemployment rate a record high of 12.1 per cent and near record low inflation.

The ECB’s policy response has been slower than tardy.

The recent experience of mass policy stimulus in Japan may present some lessons for European policy makers. If Europe is serious about kick starting economic growth and tackling unemployment, interest rate cuts and more proactive QE would seem likely.

Alas for the 25 million people unemployed in Europe, the German policy hawks are unlikely to embrace such a policy stance in Europe, which will condemn the eurozone to another year of falling GDP and rising unemployment.

In the meantime, Japan may well be getting its economic act together through a radical policy approach that just might work.

Related Articles