Doubts over Abenomics as Japan’s economy stalls

Data shows that Japan’s economy stalled in the April-June quarter. It has missed the market forecasts and reignited worries about the government’s bid to prop up economy. Tokyo stocks fell after hitting their highest levels for over two months in the previous session.
Japanese Prime Minister Shinzo Abe recently announced a massive 28 trillion yen ($276 billion) package aimed at kickstarting growth. It seems, even this has failed to charm the market.
Growth in the world’s third largest economy is flat at 0.0 percent on-quarter, falling below economists’ expectations for a modest 0.2 percent expansion, as weak exports and a fall in business spending dented activity.
It puts a question mark on Abe’s strategy to revive economy. And economists increasingly write off PM’s years-long bid to cement a lasting recovery, dubbed Abenomics. Abe’s plan —a mix of massive monetary easing, government spending and red-tape slashing—initially brought the yen down from record highs and set off a stock market rally.
But promises to cut through red tape have been slower, and Abe’s plan to buoy Japan’s once-booming economy has looked increasingly unrealistic.
Now the data is quite disappointing. The situation is becoming tougher and tougher. There is the rally in the yen and worries about Japan’s prospects in overseas markets. And so companies are becoming more pessimistic about making investments.
Inflation dropped for a fourth straight month in June, delivering a fresh blow to Abe’s war on deflation. Business confidence has slumped to levels last seen when he swept to power in late 2012 on a ticket to fire up an economy beset by years of falling prices and weak growth.
The second quarter drop in business spending comes as the strong yen threatens corporate Japan’s bottom line aggravating broader concerns about growth. Investors tend to buy Japan’s currency as a safe bet in times of turmoil or uncertainty. But it makes its exporters less competitive overseas and hits profits at Japan Inc. The problem was highlighted recently as many of the county’s best-known firms, including Sony and Toyota, reported lower profits in the three months to June.
On the other hand, the central bank disappointed markets at its late July meeting when it opted to leave its 80 trillion yen annual bond-buying programme unchanged, amid worries that expanding the scheme could spark volatility in Japan’s debt markets.
Policy makers are struggling to find a strategy to produce consistent growth. Businesses and consumers have been tight-fisted, resulting in negative GDP numbers in five quarters over the past three years. The data keeps pressure on the Bank of Japan to consider more monetary stimulus at its September meeting while increasing the need for the government to tackle structural obstacles to growth.
The sluggish growth calls for the need of some strong policy must be in place. In the latest move Abe reshuffled his cabinet after easily winning upper house elections, and vowed to speed up his battle with deflation.
Public works spending will be the only support for the economy as the fiscal stimulus package will be carried out later this year. The Bank of Japan will probably have no choice but to take some easing action at its September meeting.