Despite his strong determination to revive Japan’s economy, ongoing discussions over Prime Minister Shinzo Abe’s economic policies appear somewhat misguided noted in the recent report of Citigroup Inc. (NYSE:C). His economic policies dubbed “Abenomics” have three “arrows,” and Citi think the third one, the Growth Strategy, should consist of measures to shore up Japan’s longer-term growth potential.
However, the recently announced additional Growth Strategy proposals (tax breaks for capex) have raised doubts whether the Administration can remain on the right track to achieve the longer-term goal.
Three Arrows Of Abenomics
Abenomics consists of three arrows of bold monetary easing, flexible fiscal spending and a growth strategy.
1. Monetary easing
From a macroeconomic viewpoint, Citigroup Inc. (NYSE:C) believe this is an appropriate policy mix to get Japan’s economy out of decades-long deflation. To this end, the economy needs bold monetary easing to spur demand and close the output gap while lifting persistently low inflation expectations of economic agents. The first arrow is supposed to serve to this purpose.
2. Flexible fiscal spending
However, the extent and the timing of monetary policy effects are uncertain, especially when the zero bound on interest rates leaves policymakers with non-standard policy options only. Against this backdrop, the government counts on flexible fiscal spending, the second arrow, to complement monetary policy. However, Citigroup Inc. (NYSE:C) believe there is much room for argument whether its fiscal action has been consistent with boosting longer term potential growth. Indeed, not a few projects funded by the supplementary budget for FY 2012 went through insufficient scrutiny of their longer-term implications.
3. Growth strategy
The key to enhance longer term growth potential is a growth strategy—in other words, structural reform. Unless the government manages to lift the current below-1 percent potential growth rate, Japan will likely see a protracted period of low growth or undesirable inflation pressure in the long term.
Citi cautious about Abenomics
Various opinion polls indicate that the public generally has given positive assessment on Abenomics to date. Yet Citigroup Inc. (NYSE:C) remain cautious as to whether Abenomics will be able to put Japan back on a longer-term growth path for several reasons.
Effect of monetary policy is uncertain
Bold accommodation is indispensable for Japan to overcome deflation. However, the effect of non-standard monetary policy remains quite uncertain as noted above. Citigroup Inc. (NYSE:C) believe it is quite difficult to achieve a 2 percent inflation goal within two years, at least with the existing quantitative and qualitative measures alone. Therefore the BoJ is likely to take additional easing steps (mainly more risk asset purchases) once its bullish FY 2013 inflation forecast becomes unlikely to be met. They expect the central bank to move sometime around late 2013 or early 2014.
Issue of policy consistency
There is an issue of policy consistency in FY 2014 onward. As noted above, the BoJ is committed to maintain aggressive easing in FY 2014 to achieve the stated goal. On the other hand, fiscal policy may be tightened in FY 2014 because public works are expected to drop from an elevated level (¥5.2 trillion) in the above mentioned supplementary budget and the consumption tax is scheduled to rise from current 5 percent to 8 percent in April 2014.
Policies in the Growth Strategy seem somewhat misguided
Citigroup Inc. (NYSE:C) think the Japan Revitalizing Strategy lacks drastic enough policies to spur longer term potential growth. Indeed, many look like industrial policies in which the government is involved in fostering specific businesses while structural reforms to enhance potential growth are generally absent.