Blame for the return to recession has almost universally fallen on the decision by Abe's Administration to hike the country's sales tax earlier this year, which, as many predicted at the time, has hammered consumer confidence and aborted the recovery.
The arrow that has misfired was fiscal reform. Abe put up the sales tax from 5 per cent to 8 per cent in April, in an attempt to put Japan's public finances on a sounder footing and to slash the country's large fiscal deficit, which is running at around 7 per cent of GDP.
The broader aim was to persuade the international bond markets that Japan was prepared to take serious measures to rein in its vastly swollen national debt pile, which is equivalent to more than 245 per cent of its annual output. The gamble was that the economy would be able to ride out the shock higher sales taxes would inflict on consumption levels, and that Japan could have fiscal tightening and growth simultaneously.
It now looks as though the gamble has failed. Household consumption fell off a cliff in the second quarter of the year, declining by 5.2 per cent on an annual basis, and eked out only a 1.5 per cent annualised increase in the third quarter. The Japanese consumer has taken flight, leaving domestic demand deflated.
Abenomics' other two arrows - structural reforms and monetary easing - have not inflicted such grave self-harm. But they have not hit the target either. Structural reforms to the sclerotic Japanese labour and services markets have yet to make any discernible impact on activity or expectations of higher future incomes. The drive to open up the workplace to women has yielded few tangible results. The Government has begun the legislative process on a range of measures, including opening up the health sector, allowing the employment of foreign housemaids in some areas and shaking up corporate governance, but there seems to be little urgency, according to Rob Wood of Berenberg Bank.
The most successful of the trio of Abenomics arrows has been monetary policy. The Bank of Japan has said it will do whatever it takes to raise consumer price inflation to 2 per cent by 2015, ending years of deflation. To that end, the central bank has been buying up government bonds and all manner of other assets as well including exchange-traded investment funds. Its balance sheet has shot up, rising by 50 per cent in two years.
That stimulus has pushed up consumer price inflation from minus 0.9 per cent in February 2013 to 2.2 per cent in September.
And as a handy side-effect, the easing has pushed down the value of the yen against the US dollar, helping Japan's exporters. The yen has dropped almost 50 per cent against the dollar in the past two years, from US$78 to US$116. But domestic price growth expectations have been subsiding in recent months. And nominal GDP growth, which is the key metric when it comes to the sustainability of Japan's public finances, is running below official plans according to Monday's data. NGDP actually fell by 3 per cent on an annualised basis in the third quarter.
The Bank of Japan's governor, Haruhiko Kuroda, was sufficiently alarmed by the signs of slippage last month that he pushed through another increase in the target for the central bank's balance sheet expansion. That was a close-run thing, though. Kuroda only squeezed the expansion through the bank's nine-man board by a five-to-four margin.
Other changes will have to be made if Abenomics is to survive.
- additional reporting AP
