Abe's aides and advisers are promising to forge ahead with painful
structural reforms, while spreading the benefits of "Abenomics" to
regional areas and drafting a long-term vision for addressing
Japan's shrinking population.
But gloomy economic data suggests the plan is not succeeding as
hoped and the only short-term contingency plans appear to be further
central bank stimulus or delaying a second rise in the sales tax set
for October 2015.
"Abenomics is in trouble - because it's not happening fast enough,"
said Robert Feldman, head of research at Morgan Stanley MUFG in
Tokyo, who like many others says Abe must move faster on steps such
as labour market reform to boost productivity.
Failure could leave Japan's economy stuck in a low-growth mode or
worse, unable to begin to curb public debt already more than twice
the size of a $5 trillion economy, the biggest burden in the
Abe's public support, now hovering around 50 percent, depends
heavily on the economy. Most voters favor delaying next year's sales
tax rise to 10 percent after an initial hike in April to 8 percent
from 5 percent dented a fragile recovery.
"Will raising the sales tax a second time just when the economy is
moving toward recovery really be a plus for the people's
livelihoods?" Koichi Hagiuda, an aide to Abe in his Liberal
Democratic Party, said in an interview.
"But there is also a risk to postponing it. Might not Japan lose the
confidence of international society?" Hagiuda added.
The two-stage rise in the consumption tax is Japan's boldest move in
nearly two decades to rein in government debt.
Abe will formally launch stage two of his administration on
Wednesday when he reshuffles his cabinet, although key members are
expected to stay on.
The new cabinet will take over after a slew of troubling data
including an annualized 6.8 percent drop in GDP in the April-June
Potentially more worrisome, real wages have fallen for 13 straight
months as wage growth lags price rises, data on Tuesday showed.
That drop is casting doubt on a central tenet of Abenomics - that
stimulus and higher prices would lift company profits and lead to
higher wages, spurring consumption and making growth
"In order for income effects to work, wages must increase," Etsuro
Honda, a key architect of Abe's reflationary policies, told Reuters.
Honda said the sales tax rise should be delayed until 2017 and only
imposed then if wage rises catch up with inflation and the BOJ's 2
percent inflation target has been met.
Policymakers say that, unlike the initial round of Abenomics, when
the Bank of Japan unleashed an intense burst of stimulus followed by
public works and other government spending, the "third arrow" of
deregulation and other structural reforms will take both time and
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"The growth strategy is not a single arrow. There are many things
that must be done that were put off during 20 years of deflation,"
said one private economist who advises Abe's government on policies.
Abe's aides have made clear they want companies to play a bigger
role in the revival, and not just rely on the benefits of a weak yen
born of the Bank of Japan's easy money policy.
"In a sense, the first arrow of monetary policy easing was a way of
buying time," Vice Economy Minister Yasutoshi Nishimura told
Reuters. "I want companies themselves, led by shareholders, to exit
unprofitable businesses and shift to new growth areas."
Private economists say for that to happen, the government must step
up the pace of deregulation and other changes such as reform of
For now, though, the political calendar looks likely to dictate a
focus on persuading voters outside the capital they have not been
left out of a program that has so far benefited mostly big companies
Abe's LDP faces several elections for local governors in October and
November as well as nationwide polls for local assemblies next
April. A poor showing could affect Abe's chances of winning a second
three-year term in party leadership race a year from now.
That has some Abe advisers worried politicians may revert to
old-style wooing of voters with spending, rather than reform.
"I think they should opt for tough reforms, but politicians may not
see it that way," Heizo Takenaka, an economist and member of an
advisory panel on regulatory reform, told Reuters.
Policymakers are also pledging to draft a vision of how to keep
Japan's ageing population from shrinking into oblivion, holding the
line at 100 million in 2060, a 20 percent drop from now. While such
long-term thinking would be welcome, economists said Abe needs to
speed up efforts to boost productivity.
"Abe must work harder to follow through his 'Third Arrow' by
implementing labour market and other reforms that may prove painful
near-term," said Masamichi Adachi, senior economist at JPMorgan
(Additional reporting by Yuko Yoshikawa; Editing by John Mair and
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