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Abenomics faces an electoral test

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Japan's Prime Minister Shinzo Abe leaves the lower house hall after parliament was dissolved Nov. 21.   © Reuters

Japan's Abenomics project will be assessed at the ballot box.

     Prime Minister Shinzo Abe's grand economic experiment is being framed as the central issue for the population in a lower house vote set for Dec. 14.

     "This election is for the people to decide whether to press ahead with Abenomics or abandon it," Abe told a news conference after dissolving the lower house on Nov. 21. Voter perceptions of the economy and their confidence in the government's ability to improve conditions will be the election's biggest factors.

     "Unfortunately, the economy has not returned to a growth path," Abe said Nov. 18, explaining his postponement of the October 2015 consumption tax hike. Abe used preliminary July-September gross domestic product figures, released Nov. 17, to show the nation's economy shrank for a second consecutive quarter.

     However, not all recent economic indicators are negative. Data from September show industrial production and retail sales may have bottomed out. A drop in inventory, which pushed down July-September GDP, means increases in production and shipments will eventually follow.

     In the two years since Abenomics was launched, the job environment has improved. Future economic direction now hinges on whether weak recoveries in some sectors can be strengthened by wage growth and other developments.

     Not raising the sales tax as planned means a delay in fiscal consolidation. Japan's national debt already exceeds 1 quadrillion yen ($8.47 trillion), more than double the country's GDP. Greece, which has been grappling with a protracted fiscal crisis, has lower debt when measured in this way.

     Abe has promised to raise the sales tax from 8% to 10% in April 2017, without further delay. He has also pledged to return the government's primary balance to a surplus by fiscal 2020. Markets are not fully convinced these promises will be met.

     If confidence in Japan's fiscal future collapses, the value of Japanese government bonds will plummet. Should such a scenario come to pass, it "will cause tremendous damage to the economy by sparking out-of-control interest rate increases," said Ryutaro Kono, chief economist at BNP Paribas Securities (Japan).

Reform essential

One aspect of Abe's economic policy that has not yielded concrete policy outcomes is structural reform to boost Japan's growth potential.

     Exports have not grown, despite the yen's depreciation. The domestic manufacturing sector is weaker than it once was because many companies have invested in overseas manufacturing bases. To bolster domestic capital investment and lure overseas businesses to Japan, the government must lower corporate taxes and implement bold deregulation measures.

     It must also bring down electricity costs, which burden businesses and households alike. Nuclear power stations that pass new safety requirements should be brought back online swiftly.

     Postponing the tax hike is worthwhile if it can buy time to advance the government's growth strategy. But progress on reform has stalled. The National Strategic Special Zone program, which was touted as a pilot project for promoting deregulation in fields such as agriculture and medicine, will be delayed by the election. Bills to expand deregulation in the special zones will not be discussed until a new Diet takes shape.

     Social security reform is also essential. The aging population is expected to push up social security expenditures by 30 trillion yen in 10 years, from the roughly 120 trillion yen projected for fiscal 2015.

     Government after government has tiptoed around unpopular policies, such as drastically scaling back medical and nursing-care subsidies. But "reform cannot be delayed any longer," according to Kazumasa Iwata, president of the Japan Center for Economic Research.

     The prime minister must promise to continue with Abenomics and to accelerate reforms in other areas, including social security. Opposition parties should fight for votes by presenting viable alternative policies.

     Making the election meaningful requires active debate about what policies are truly needed to revive the Japanese economy.

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