It would seem when walking around Tokyo that the so-called Abenomics strategy was working its magic. The city is bustling and shops seem to be doing a brisk trade. However, looking underneath the surface, the smaller cities and rural villages tell another story. The edges remain frayed and the dramatic loosening of monetary policy initiated by the Bank of Japan last year has not restored them to their former glory. More sustainable, long term structural alterations are needed for a genuine turnaround in the economy’s fortunes.
These are not only the reflections of my recent visit but also a new report by the International Monetary Fund (IMF). While praising prime minister Shinzo Abe’s efforts, it warned that without additional reforms Japan risks falling back into lower growth and deflation, a further deterioration in the fiscal situation, and an overreliance on monetary stimulus with negative consequences for the region.”
There are concerns that the Premier will fail to deliver which explains why earlier this month the fund cut its growth forecast for Japan for 2014 from 1.7% to 1.4% while investors sensing danger have retreated, sending the previously buoyant stock market down more than 8% this year. The Bank of Japan though is taking another line and has defied calls to increase its cash injections. Instead, it is keeping a steady hand on its monetary policy in the belief that inflation will head progressively towards its 2% target, suggesting no additional stimulus is on the near-term horizon. It has also stood firm in the view that the modest recovery will continue despite a temporary slump in demand caused by a sales tax hike in April.
QE though is only one part of the solution. As the IMF reiterates, the government needs to lower trade barriers and ease constraints on laying off workers in order to inject more dynamism into the economy. Both are proving difficult as evidenced by the failure of President Obama on his recent visit to secure a bilateral trade agreement which was needed to rekindle talks over a broader Pacific Rim trade deal.
Another and equally as challenging impetus would be to create a culture of innovation. It is perhaps difficult to remember that Japan once dominated the global market with its products. The scenario is very different today with the rivalry no longer being between Nagoya versus Detroit but Shinagawa versus Seoul versus Taipei versus Bangkok versus Silicon Valley. Companies can get back in the game but they will need to take a leaf from the book – The Team – written by entrepreneur William Saito. He’s tearing down the traditional top-down decision-making culture and seniority-based system in order to give women and younger people a chance to develop new ideas.
Lynn Strongin Dodds
