IMF Report Calls for Japan to Consider "Fresh Look" at Abenomics Policy Strategy

11 October 2018

The world’s third largest economy should consider taking a “fresh look” at the economic policy strategy known as “Abenomics,” according to a report issued by the International Monetary Fund (IMF) last week on Japan. While noting that Tokyo has played a “leadership role” on trade liberalisation, the Fund noted that additional structural reforms are needed to ensure the Japanese economy remains on track. 

The IMF “Article IV Consultation” comes just weeks after Shinzo Abe ensured the continued leadership of his party, and therefore his position as prime minister, through 2021. The Japanese premier, who was briefly prime minister from 2006-2007, has been continuously in office since late 2012. (See Bridges Weekly, 20 September 2018

The IMF holds these consultations with its member countries as part of its efforts to minor the health of their economy, looking at areas such as monetary and fiscal policy, institutions, risks factors, and related subjects. IMF Managing Director Christine Lagarde told reporters last week in Tokyo that the Fund was specifically interested in seeing how demographic challenges were affecting the domestic economy, along with possible ways forward. 

The Fund has projected that Japan’s economic growth will hit 1.1 percent this year, which it said was “above its estimated potential,” while noting that inflation is not yet at the desired levels. It also expressed concern over public debt levels and household incomes. 

“These challenges will only grow as Japan’s population ages and shrinks – by a projected 25 percent over the next 40 years,” the report says, with these same challenges posing adverse implications for economic growth. Productivity growth may also be muted unless the country undertakes reforms of its labour market. 

The Fund assessment makes recommendations in a series of areas, building them partly around the three “arrows” of Abenomics, namely fiscal stimulus, monetary easing, and structural reforms. 

“The strategy of Abenomics remains appropriate, but reinvigorated and credible policies are needed,” the IMF said. Structural reforms should receive a “heavy emphasis” in this process, including taking measures to bring in more women, as well as workers from abroad and older workers, into the labour force, while taking a series of policy steps to tackle gendered barriers to work. Taking more steps to support small and medium-sized enterprises (SMEs) is also key, the Fund said. 

Moreover, the IMF warned that risks may loom on the horizon, including from “heightened uncertainty” fuelled by “trade or geopolitical tensions.” Combined with a reduction in global demand, the Fund suggested that these factors might ultimately “undermine growth, trigger yen appreciation and equity market shocks, and renew deflationary risks” in the short-term. 

The Fund report also said that “further removal of tariff and non-tariff barriers in the context of multilateral trade agreements would boost Japanese investment and growth.” 

Inking new trade deals has already been a significant component of Abe’s economic agenda since retaking office nearly six years ago. Indeed, the report came just days before Abe expressed continued interest in expanding an Asia-Pacific trade pact’s membership, along with bringing to a close a separate regional negotiating process. 

CPTPP: Abe courting new partners?

On the trade front, Abe said this week that the UK would be a welcome addition to the Comprehensive and Progress Agreement for Trans-Pacific Partnership (CPTPP), speaking to the Financial Times. The CPTPP is a landmark trade pact that currently has 11 members, spanning parts of North and South America, as well as Asia and Oceania. The CPTPP has been signed, but is not yet in force, pending ratification. 

The UK cannot negotiate trade deals on its own behalf until after exiting the European Union next March, and the CPTPP can only take on new members after the accord has entered into force, meaning that the UK’s entry may take years. Additionally, all CPTPP members would need to endorse membership and London would need to negotiate its way in. 

However, the statement from Abe, who leads the largest economy in the CPTPP, has prompted excitement from several stakeholders, particularly as the EU and UK work to resolve some of the thorniest issues in the Brexit talks, such as how to deal with Ireland and Northern Ireland, ahead of key leaders’ level meetings planned for this month and next. (See Bridges Weekly, 4 October 2018

The Asia-Pacific coalition is moving closer towards the ratification threshold needed for entry into force, as signatories work to advance its approval through their legislatures. Australia’s legislature is currently considering the CPTPP, with its House of Representatives endorsing implementing legislation in mid-September and the Senate expected to consider the relevant legislation in the near term, while Vietnam’s prime minister has said that the country’s legislature is on track to ratify the deal next month. 

For the CPTPP to enter into force, at least half of the signatories, or six of them, need to have ratified the deal. To date, Japan, Mexico, and Singapore have ratified the accord and notified New Zealand, which is serving as the accord’s depositary, accordingly. Others, such as Canada, are working their way through the legislative process. 

Abe also met with Prayuth Chan-ocha, Thailand’s prime minister, this week, where the subject of Bangkok’s possible accession to the CPTPP was reportedly endorsed by the Japanese premier. The two sides also discussed efforts to advance a set of outcomes from the Regional Comprehensive Economic Partnership (RCEP) talks, involving the Association of Southeast Asian Nations (ASEAN) and its six free trade agreement partners, including Japan. RCEP negotiators are due to meet on multiple occasions this month and next, in a bid to achieve that goal before year’s end. 

ICTSD reporting; “Vietnam to approve TPP-11 by November, prime minister says,” NIKKEI ASIAN REVIEW, 7 October 2018; “UK would be welcomed to TPP ‘with open arms’, says Abe,” FINANCIAL TIMES, 7 October 2018; “Abe pledges to promote free trade with Thailand, offers legal and political assistance to Cambodia,” THE JAPAN TIMES, 9 October 2018. 

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