Three new economic arrows – Japanese Government experiment By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

October 13, 2015 | Posted by bobbysrinivasan << back to blog

Japan currently struggling with deep recession which has lasted over two decades and is desperately trying to find a solution to get the country out of this low inflation and low economic growth. On September 24, 2015 Mr. Abe Japanese Prime Minister fired off what he called three new arrows in service of abenomics namely monetary easing, fiscal stimulus and far reaching structural reform. The recent economic data released about the Japanese economy are less than heartwarming. The GDP shrank 1.2% on an annualized basis in the second quarter after expanding in the first. The industrial production for August 2015 continued to fall suggesting a similar performance in the third quarter. In addition for the first time since the government embarked on Abenomics in April 2013 prices in Japan are falling again. The key gauge of inflation CPI fell by 0.1% in August.

The central bank of Japan is committed to pushing the inflation rate to atleast 2%, which they have failed and so will be in a quandary as to what to do next. They are likely to come under pressure to expand their quantitative easing program in the next few months. Unfortunately this policy will be challenged because the sovereign debt has reached 246% of GDP which incidentally made the standard and poor to downgrade their debt on September 26.

Japan has a major issue with its structural reform which will require huge financial commitment. Mr. Abe has promised greater financial support for families in Japan in order to raise the low birth rate as well as extra nursing facilities for the elderly. He repeated a pledge to stop the population falling below 100 million which currently appears to be in vain. On current trends Japanese population of 127 million is set to fall to 87 million by 2060.

Japanese economy which one time was expected to closely follow the US GDP has hit a road block. The consumption is dropping, investment is negligible and the government indebtedness is sky rocketing. What really has gone wrong for them? Perhaps one possible answer could be with regards to immigration. Maintaining Japan for ethnic Japanese only is back firing. The workforce is shrinking because of demography. They need to allow immigrants of other ethnic groups. Currently large number of Syrians and Iraqis are looking for new home and Japan could very well attract them to make Japan their country. It is perfectly clear that unless something out of the ordinary is done Japan will move into a permanent recession out of which it will never be able to come out. Besides Japan has to look out for a new trading alliance. Perhaps a free trade agreement with its neighbouring countries to absorb all their excess production seems appropriate. But such changes in policy will always lead to a political struggle. It is not clear as to whether Mr. Abe is in a position to introduce unusual policies but then who knows. Time will tell.

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