Abe's 'three arrows' miss targets

Japan has to look beyond the failed Abenomics and carry out structural reforms to revive the country's economic health

People queue up at a supermarket two small blocks from my apartment in Tokyo every Thursday when vegetables and fruits are on sale. Japan's wage earners have to spend every penny carefully since the consumption tax was raised from 5 percent to 8 percent in April. And the shrinking buying power of their paychecks has dragged down the Japanese economy.

On Nov 18, two days after the Japanese Cabinet's preliminary report on the third quarter signaled the country had slipped into recession, Japanese Prime Minister Shinzo Abe delayed another consumption tax rise until April 2017. In 2012, the Japanese parliament approved the move to raise the consumption tax first to 8 percent and then to 10 percent (in October 2015) to curb Japan's swollen sovereign debt, which, at more than twice the size of the economy, is the largest in the world.

Japan's surprising return to recession highlights the contradictions in Abe's high-profile pro-growth policies, known as Abenomics. Before the third-quarter GDP figures were announced, Japan's economy seemed to be improving. Unemployment was low, big companies were posting record profits, and inflation, which Japan has rarely seen in two decades, replaced corrosive price declines. But the economy started losing momentum after the consumption tax was increased in April.

Abenomics features "three arrows": monetary stimulus from the Bank of Japan, fiscal stimulus through big spending on public works and structural reforms to raise long-term growth potential. And here is Abe's applecart: a weaker yen prompted by an easy monetary policy helps increase exports and improves corporate earnings, and, as a result, domestic production and GDP.

The first arrow, the central bank's ultra-easy money policy caused the Japanese currency to depreciate sharply. Not surprisingly, the stout tailwind of a weak yen is giving Japan's listed companies - most of them being export-oriented - the friendly boost. Exports should have flourished in response, but the trade balance remains stuck in deficit. Japanese manufacturers have shifted their factories overseas to reduce costs and, without being sure of an increase in domestic demand, are reluctant to increase their investment inside Japan, whose population is both aging and shrinking. Also, they have big cuts in inventories.

Besides, a weak yen is pushing up import prices, weighing on household finances and small- and medium-sized enterprises (SMEs). Not only spaghetti and frozen foods are dearer, but also big-ticket items like oil and natural gas cost more. Japanese newspaper Mainichi Shimbun reported that prices of many meat and fish products, which are commonly imported, have risen by 10 to 30 percent in the past year thanks to the weak yen. Still, almost two-fifths of Japan's employees, especially youths and women, are stuck in irregular, low-paid jobs.