|ABE DECLARES DEFLATION END AS GROWTH PLAN CONFRONT SKEPTICS|
Aruba, June 27, 2014 - Prime Minister Shinzo Abe said the deflation that wiped out much of Japan’s growth the past 15 years and so stunted the economy that it slipped to No. 3 behind China, has ended and will be thwarted by new government policies designed to encourage business expansion. “Through bold monetary policy, flexible fiscal policy and the growth strategy we have reached a stage where there is no deflation,” Abe, 59, said in an interview yesterday at the prime minister’s official residence in Tokyo. With the first sales tax rise since 1997 that took effect in April, “this was an extremely difficult time for management of the economy, but I believe we were somehow able to overcome it.”
Abe was speaking before his cabinet endorsed the most specific measures yet to deliver on his growth strategy -- the third part of a campaign to end declines in consumer prices and stoke investment. The government plans corporate-tax cuts, trade liberalization, reduced barriers for agricultural land consolidation, special zones of lighter regulation and the study of casinos as a way of spurring record numbers of tourists.
The steps are part of Abe’s strategy to restore Japan’s influence in a region where China is the dominant power. A strengthened economy would boost Japan’s appeal to nations from the Philippines to India as a counterweight to China, which caused concern among neighbors pressing its claims on disputed territories.
Eighteen months into office, the first two pillars of Abe’s platform -- monetary and fiscal stimulus -- have succeeded in kindling inflation, while failing to raise longer-term growth estimates. Unless companies unleash record cash and increase salaries and capital spending, the danger is that Abenomics ends up hurting purchasing power without reviving the economy. “This may be the last chance for Japan to get out of stagnation -- Abe can’t afford to fail,” said Nobuyasu Atago, principal economist at the Japan Center for Economic Research in Tokyo, who previously worked at the central bank. “A difficult aspect of the growth strategy and regulatory change is that it will take a few years for them to clearly lift the economy.”
What’s now the world’s third-largest economy is 3.5 percent smaller than when Abe took office for the first time, in September 2006, when unadjusted for changes in the price level. The contraction eroded the tax base for a nation with the world’s largest public debt burden at an excess of 240 percent of gross domestic product, prompting Abe’s predecessor to enact a two-step rise in the consumption tax.
The change in the levy put the economy on a roller-coaster in the first half of 2014, with GDP jumping at an annualized pace of 6.7 percent in January-to-March from the previous quarter, when adjusted for inflation. The median estimate of economists surveyed by Bloomberg News is for a 4.4 percent contraction in the quarter through June.
“There was no other way to achieve an escape from deflation at the same time as restoring fiscal health,” Abe said in the interview, referring to what he calls his three-arrow strategy of reflation along with the sales-tax increase. “We want to achieve fiscal health by escaping from deflation and achieving economic growth.”