If Japanese Prime Minister Shinzo Abe is feeling smug about economic policy right now, he’s got the figures to back him up.
Second quarter GDP growth jumped a full 1.0 per cent in Q2 of the year to reach an annualized 4 per cent, a coup for his policies of raising value added taxes to boost income and stimulate the market.
The latest data beat forecasts of a gain of 0.6 per cent in Q2.
Strong domestic demand helped push industrial and manufacturing growth that contributed to the Q2 bounce. Domestic demand also pushed imports up.
According to official statistics, exports grew for the eighth consecutive month taking advantage of a weakened yen.
Japan’s Ministry of Finance said that exports had increased more than 13.4 per cent year on year, with exports to the US increasing 11.5 per cent from the same time last year.
The data help vindicate Abe’s economic policies, which came to be called Abenomics: focus on increasing government spending, monetary stimulus, and structural reforms.
But Abe’s position wasn’t enviable just 18 months ago. Just as Japan was moving to emerge from the global financial crisis, the nuclear disaster in Fukushima hit six years ago.
This forced the government to temporarily shut down all nuclear energy facilities pending a comprehensive safety review. Many have opened since then, but during their inoperation the government was then forced to resort to significantly increasing oil imports to meet its energy demands.
That inevitably led to a trade deficit just as flow of commodities worldwide was beginning to ebb, particularly due to capital outflow from emerging economies.
Abe was also facing strong opposition for pushing through his program to raise taxes to 8 per cent in 2014 as a means to boost income and stimulate the market (starting with weakening the yen currency to encourage exports) in the wake of dismal economic prospects at the end of 2013.
But the purposeful devaluation of the Japanese Yen had an almost adverse effect. The export market rose only by 0.5 per cent at the time, while imports jumped up by 3.4 per cent, mainly due to a slow growth in other Asian markets.
Enter the Bank of Japan
The BOJ felt the most effective approach was to lower interest rates and weaken the local currency.
That would encourage lending and keep the banks functional but also make Japanese wares and commodities appealing to global markets.
The central bank began fiscal and monetary expansion or qualitative and quantitative easing in hopes to boost the now ravaged economy.
The central bank promptly move to cut interest rates to 0 percent and below much in the vein of what the US Federal Reserve had done in 2009.
It also set an inflation target of 2 per cent.
In July 2017, citing worries about deflation and hoping to keep encouraging lending, the Bank of Japan by majority vote decided to keep interest rates steady at -0.1 per cent.
But it had already changed its fiscal stimulus targets.
It removed its quantitative easing target of 80 trillion yen ($780 billion) a year and instead said it would target 10-year interest rates to keep them at zero.
This new target, or yield curve control means it will buy as many long-term Japan Government bonds to ensure that their yields – or zero rate target – is met.
But some in the G20 have accused the BoJ of manipulating currency markets by intervening to keep the Japanese yen weak to boost exports.
Some have even threatened a currency war. Japanese officials fired back saying the BoJ adopted monetary policy to ease deflation and rejected accusations of currency manipulation.
Year on year, the yen has weakened nine per cent against the dollar. During the same period, the benchmark Nikkei index grew 16 per cent.
But on Monday, it fell to its lowest level since May 2 on fears of increased tensions between North Korea and the US.
By Firas Al-Atraqchi for The BRICS Post with inputs from Agencies