Slings and arrows

IT IS crisis mode in the Kantei, the office of Shinzo Abe, Japan’s prime minister. A succession of awful data has pummelled his economic programme, which consists of three “arrows”: a radical monetary easing, a big fiscal stimulus and a series of structural reforms. On September 8th revised figures showed that GDP shrank by 1.8% in the second quarter, or by 7.1% on an annualised basis, even worse than the initial estimate of 1.7%.

Architects of Abenomics had issued dire warnings against raising the consumption tax from 5% to 8% in April. The increase, aimed at improving Japan’s parlous finances, was decided in 2012 under a previous government. As in 1997, the last time politicians dared to raise the tax, consumer spending has wilted.

The government also misjudged the effects of the Bank of Japan’s huge asset purchases (quantitative easing, or QE, in the jargon). It is buying ¥7 trillion ($65 billion) of Japanese government bonds a month, and now owns a fifth of the government’s outstanding debt. A weaker yen, one of QE’s chief consequences, has failed to produce the boom in exports that the government had assumed would help offset the harm done by the consumption-tax hike.

That, in turn, is because the trend among big firms to move production overseas has accelerated of late. In a few years Japanese carmakers will be making more vehicles elsewhere in Asia than at home. The waning appeal of electronic gadgets from the likes of Sony, Panasonic and Sharp has also weighed on exports. And many firms have unhelpfully opted to use much of the extra revenue from the yen’s weakness to pad profit margins instead of lowering their prices abroad to boost their market share, which would have benefited domestic suppliers.

At home, despite healthy earnings, a tight labour market and months of hectoring by the government, big firms have fattened their employees’ pay-packets only marginally. Workers’ basic pay has been edging up by less than 1% year-on-year. After accounting for inflation (chiefly due to the tax increase), base salaries are falling by around 3% a year. Small wonder, then, that consumer spending has slumped.

Meanwhile, Mr Abe has been slow to fire his third arrow. Overhauling social spending and making the labour market more flexible would help spur firms to invest at home and lift wages. Tackling Japan’s demographic problems head on, by encouraging both immigration and procreation, is also a must.

All now hinges on whether the economy rebounds in the current quarter. Private economists are forecasting annualised growth of 4%. Yet soggy summer weather has already dampened retail sales and car purchases are still low. A rare piece of good news was that total wages for permanent employees jumped by 2.6% year-on-year in July, the fastest pace in 17 years, as companies have raised bonuses. There are also some signs that firms are starting to hire more permanent workers as well as cheaper, temporary staff.

Unless growth continues to disappoint, Mr Abe will probably stick with a second scheduled rise in the consumption tax, from 8% to 10%, in October of next year. A reversal might stir alarm about Japan’s huge public debt, which stands at more than 240% of GDP. Another tax rise, however, combined with continued sluggish growth, would deepen the public’s disapproval of Abenomics, says Naohiko Baba of Goldman Sachs, a bank. Mr Abe’s poll ratings could fall, lowering his chances of winning parliamentary approval for third-arrow reforms.

Meanwhile, the BoJ is still well short of its inflation target of 2% (after stripping out the effects of the tax rise). Upward pressure on prices is expected to abate in the coming months as the effect of the weaker yen wears off. The bad news of recent weeks has added to expectations that the bank will announce another round of QE in the autumn. The answer to the disappointing results of Abenomics thus far may simply be more Abenomics.