x Abu Dhabi, UAEThursday 27 July 2017

Hopes for new leader as Japan gets ¥10tn stimulus

The bullish mood in the air in Japan is all about "Abenomics" - a reference, as dubbed by experts and market players, to Shinzo Abe, the shoo-in comeback prime minister when Parliament votes next week.

Hopes are high in Japan Inc for the new prime minister. Stocks are recovering. The central bank is set to supercharge an already loose monetary policy. The soaring yen, a big minus for exporters, is reversing course.

The bullish mood in the air is all about "Abenomics" - a reference, as dubbed by experts and market players, to Shinzo Abe, the shoo-in comeback prime minister when Parliament votes next week.

But experts are already wondering how long that celebration is going to last.

"This is just the honeymoon," said Masaaki Kanno, the chief economist at JP Morgan in Tokyo.

Mr Abe has made reviving the economy a priority, and is pushing for a 2 per cent inflation "target," double the central bank's "goal" now.

That's designed to fight a problem that was until recently relatively unique in the world – deflation, or continually dropping prices, which deadens economic activity. The Japanese economy has been stuck in deflation for two decades.

The Bank of Japan, ending a two-day policy board meeting Thursday, further loosened its super-easy monetary policy, pumping more money into the financial system by expanding its asset purchase programme by about ¥10 trillion for a total of ¥101tn.

The bank has now eased monetary policy five times this year. Japan's benchmark interest rates are already at zero.

The central bank also paid respect to Mr Abe. It said it will consider pricing goals and report back at the next meeting in January.

Mr Abe's pro-business, conservative Liberal Democratic Party was voted back into power in a landslide in Sunday's elections.

Before a change of power in 2009, the party ruled virtually without interruption for a half-century, engineering Japan's stellar growth into the world's third-largest economy.

Besides generous promises to boost public-works spending – by as much as ¥10tn, according to party officials – Mr Abe is pressuring the central bank to work more closely with the government.

Such pressures are a departure from the past. But they are also growing in other parts of the world, including in the US and parts of Europe.

What remains unclear is exactly how the 2 per cent inflation target will be achieved. A weakening yen, though favourable for Japanese businesses, is likely not enough to get a lagging economy back on course.

In the long run, Japan needs widespread economic reforms, opening up of markets and freeing up of tight protective regulations, to get new life back into the economy, analysts say.

Job growth in recent years has been limited, often in low-pay part-time sectors. Hopelessness among the young generation is intensified by the prospect of having to foot the bill for one of the world's most rapidly aging societies.

"Getting out of deflation can't be done by monetary easing alone. It's not a fix-it-all. It's not a magic wand," said Katsuyuki Hasegawa, chief market economic at Mizuho Research Institute. "You need a whole package of measures."

* AP