Q&A: Abenomics, panacea or peril for Japan?

Friday, May 31st, 2013 | Finance News

TOKYO (AP) — Recent turmoil in financial markets is raising worries over Japan's economy and the deflation-busting "Abenomics" policies championed by Prime Minister Shinzo Abe. Below are some questions and answers about Abenomics and its implications:

WHAT IS ABENOMICS?

Prime Minister Shinzo Abe is promoting policies nicknamed "Abenomics" to help revive Japan's economy after two decades of stagnation, raising public spending and easing monetary policy by an unprecedented extent to stimulate demand and investment, along with reforms aimed at making Japanese business more competitive.

WHY DOES JAPAN NEED A CHANGE?

Japan's growth stalled and never fully recovered after its credit bubble burst in the early 1990s. The global financial crisis and lingering troubles in Europe have sapped the appetite for Japanese exports, while the population is aging and shrinking — both challenges beyond the scope of Abenomics — weakening demand at home.

WHY IT MATTERS:

Japan is the third biggest economy after the U.S. and China. Its financial markets are among the world's biggest, and assets held by its huge banks, insurers and corporations have an outsized influence in world markets. A stronger Japan can help drive global growth, generating demand for imports and creating jobs overseas, while helping keep markets stable.

HOW IS THE ECONOMY DOING SO FAR?

Japan's economy grew 3.5 percent in the last quarter, and officials say they see signs that a sustained recovery is imminent. So far, though, the results of Abenomics have been mixed. Similar to the policies adopted in the U.S. and Europe, the central bank is seeking to end deflation, or falling prices, by expanding Japan's money supply through purchases of Japanese government bonds and other assets. That has driven down the value of the Japanese yen against the dollar, euro and other currencies, helping exports. Consumer prices have remained flat, though, with scant progress toward Abe's 2 percent inflation goal.

WHY IS MARKET TURMOIL SHAKING CONFIDENCE IN ABENOMICS?

Japan's share prices had gained 70 percent in the past six months before several big one-day declines, on hopes for a recovery and expectations that the weaker yen will improve the exports and overseas earnings of Japanese companies. The recent stock market sell-offs suggest confidence in Abenomics may be shaky, especially since yields on long-term Japanese government bonds will inevitably rise if the government succeeds in sparking inflation, vastly increasing the burden of repaying public debt that is already twice the size of the economy. Traditional strengths such as vast trade surpluses have reversed as Japan imports more oil and gas, while nuclear plants are idled in the aftermath of the Fukushima disaster.

WHAT TO EXPECT NEXT:

Supporters of Abenomics say they expect a recovery by mid-year, as the economy enters a "virtuous cycle" of rising prices, rising wages and surging demand thanks to a recovery in corporate investment. Skeptics question whether companies will raise wages and investment, and whether the recovery can prevail over the blows to demand from two looming sales tax hikes, even if Abe succeeds in pushing through politically difficult deregulation and other reforms needed to improve competitiveness and sustain growth in the long run.

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