Abenomics' Last Shot?

A Fiscal U-Turn for Japan

Japanese Prime Minister Shinzo Abe in Tokyo, November 2014. Toru Hanai / REUTERS

Japanese Prime Minister Shinzo Abe faces a major economic challenge. Pay increases have disappointed; consumer sentiment remains poor; equity markets have continued to tumble; and the yen has risen to the highest level against the dollar in nearly 18 months, putting a dent in corporate profits. Forecasters have predicted that GDP data from the first quarter of 2016, which will be released on May 18, will show that Japan's economy has barely avoided a second consecutive quarter of contraction. All these signs suggest that Abenomics, the prime minister’s policy program for sustainable growth, is close to failure.

In a bid to rescue Abenomics, Abe appears to be considering a U-turn in which Tokyo would abandon fiscal consolidation in favor of fiscal stimulus aimed at spurring near-term growth. In practice, that might entail offering a stimulus package as large as 10 trillion yen (around $94 billion) and holding off from introducing the two percent consumption tax increase that many observers believe is essential to putting Japan’s finances on a sustainable path—and which Abe has already put off once.  

Voters won’t be too angry if Abe goes back on his word as long as doing so advances policies they favor.

Such a policy would effectively require the Abe government to abandon its long-standing commitment to balancing the Japanese budget by 2020. But Abe has few other options. It is clear that monetary policy alone cannot trigger the growth Japan needs: Bank of Japan Governor Haruhiko Kuroda has maintained the bank’s annual 80 trillion yen ($750 billion) of government bond purchases this year and even introduced a negative interest rate in January 2016, but growth has been anemic, and thanks to falling energy prices, inflation has dissipated. The bank’s choice at its April 27–28 meeting to leave monetary policy unchanged suggests that it is running out of room to maneuver. Nor does currency devaluation seem to be on the table. The Abe administration has resisted the temptation to intervene in foreign exchange markets so far, in large part

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