THERE seems to be rising optimism that Japan’s fresh economic policy measures could lead to the resurgence of the country as an economic force in the international arena. That would be good news to Asean countries, especially Malaysia, as the region stands to benefit the most from a resurgent Japan, which has long been a major trading partner and a source of foreign direct investment.
But first things first, after two lost decades and now still battling with the effects of global economic woes can Japan really reverse its fortunes this time round?
Bill Witherell, the chief global economist of US-based investment advisory firm Cumberland Advisory, seems to think so.
Bullish on Japan’s economic prospects, Witherell said in an interview with Yahoo’s Daily Ticker early this month, that “2013 could be the year Japan’s economy turns around”, hinging his argument on the present government that is seemingly more “committed to really do something dramatic to get the (country’s) economy turned around”.
According to several economic observers, the new policy measures introduced by Japan’s recently re-elected Prime Minister Shinzo Abe seem to be “more focused” this time in addressing the country’s key structural weaknesses. Dubbing his efforts the “Abenomics”, economists say Abe’s plans could potentially be the answer to the country’s long-crippled economy.
“The content of Abenomics thus far centres on a few key economic policies believed to be critical in giving the Japanese economy a much needed boost,” writes Kay Shimizu, an assistant professor of political science at Columbia University and a Research Fellow at the Tokyo Foundation, in his recent note for Washington-based non-profit organisation Center for Strategic and International Studies.
In the note entitled, “2013, Year of Japan’s Revival? Abenomics and the Politics of Growth”, Shimizu argues “While foreign policy concerns continue to lurk in the background, Abe’s early and repeated statements emphasising key economic targets signifies that he has placed economic revitalisation front and centre in his second prime ministership.”
The main goals of Abenomics, as Shimizu highlights in his note, are to end Japan’s long-term deflation, to devalue the yen, and to achieve a nominal growth rate of roughly 3%, and the main policies include a 2% inflation target, a rapid increase in public spending, and a renewed focus on increasing Japan’s economic competitiveness.
Winners and losers
According to economists at RBS Securities Japan Ltd, Abe’s emergency economic measures, which were approved early this month, seem very reasonable from the viewpoint that they focus on corporate activities, unlike past fiscal spending on public works. Abe’s emergency package is valued at 20 trillion yen (RM670bil), of which 10.2 trillion is actual fiscal expenditure.
“As households face many burdens, such as one or more consumption tax hikes and a gradual increase in social securities fees, we see the Abe administration’s decision to introduce job creation measures as meaningful, both to support consumer spending and to stimulate inflation expectations,” RBS’ economists argue in their Japan Economics Weekly report.
“Depreciation of the yen would not boost exports as in the past, but could well help push up the inflation rate into positive territory,” they explain.
Abe’s plans to reflate Japan’s economy could have two main effects a structurally weaker yen and stronger domestic demand that could have important implications for the rest of Asia, Credit Suisse economist Santiram Sathirathai says in his report.
In his analysis on the potential winners and losers from Japan’s reflation, Sathirathai argues that Asean economies, including Malaysia and Indonesia, are generally better positioned among the rest of Asia to benefit. He notes that South Korea’s exports are likely to be most vulnerable to a sharp depreciation in yen, while the exports of Asean countries and China are typically less affected (or may even benefit) because Japan serves as their supplier rather than a competitor.
“Being downstream producers’ for Japan, Asean economies’ exports are unlikely to be negatively affected by a weaker yen and may even benefit from cheaper intermediate goods imports,” he explains.
“In addition, countries that export a large share of end-users products’ to Japan, like Indonesia and Malaysia, are likely to benefit from stronger Japanese domestic demand growth,” he adds.
Sathirathai’s analysis found Indonesia, followed by Malaysia, as the most leveraged to Japanese domestic demand, largely reflecting both countries’ exports of fuel and lubricant products.
“In terms of percentage of GDP (gross domestic product), however, Malaysia and Thailand are more leveraged to benefit from stronger exports to Japan, given that they are more export-dependent than Indonesia,” he points out.
Credit Suisse notes that while there is a risk that a weaker yen would reduce the motivation of Japanese firms’ to invest abroad, it remains doubtful that such is an imminent threat.
“The costs of production in Asean are still lower than in Japan, especially in countries with well-established industrial clusters; and Japanese firms would want to keep their production facilities geographically diversified amid more frequent natural disasters,” it reasons.
Recent weeks have seen Japan stepping up its effort to build stronger ties with Asean countries, in what many observers say, is a strategic move to counterbalance the economic rise and military power of China.
Japanese Foreign Minister Fumio Kushida, for one, made an official tour to Singapore, Brunei and the Philippines, early this month. This was followed by Abe who kicked off his four-day tour to three other Asean countries (Indonesia, Thailand and Vietnam) over the week.
Abe has reportedly set his eyes on the growing potential of Asean, which many Japanese firms also see as a better alternative to investment in China. Abe has reportedly said that the upcoming regional integration of Asean to form a single market and production base by 2015 could provide significant opportunities for Japan to boost its growth.
Be that as it may, the outlook for Japan’s economy remains weak at the moment despite the market’s high expectations for “Abenomics”.
According to recent estimates released by the World Bank, Japan’s GDP would only grow 0.8% this year. This compared with the projected GDP growth of 1.9% for 2012 for the country’s economy, which shrank 0.7% in 2011.
Indeed, the journey of economic revival is unlikely going be entirely smooth sailing for Japan, after being trapped in a deflationary mode for decades. The country also has unfavourable demographics, with a shrinking and fast ageing population.
But when the sun does rise on Japan again, there will be many economies that could reap the benefits. And of these, Asean seems to stand out the most. –CECILIA KOK, email@example.com
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