Japan Institute for National Fundamentals

　　　　　Prime Minister Shinzo Abe's Abenomics economic policy has been criticized noisily. Critics are preoccupied with short-term stock and currency market fluctuations and make unconstructive arguments seeking immediate results. The Japanese economy may take much time to recover from a long slump that lasted for two decades. More important at present is to seize the last economic revitalization opportunity brought about by Abenomics, promote constructive policy discussions on how best to take advantage of Abenomics and make utmost efforts to implement specific measures.

Stock and currency markets in correction phase
　　　　Given that stock market fluctuations in the past month included the Japanese market's rapid decline that fell short of causing any global stock market drop, we can naturally interpret the Japanese market as having entered a correction phase after an excessive upsurge. The yen's exchange rates with other major currencies might have reflected long-term interest rate changes caused by U.S. monetary easing rather than Japanese easing. This indicates that we should not exaggerate the solo influence of the Bank of Japan on financial markets or the effects of its monetary easing.
　　　　The 225-issue Nikkei Stock Average on Nov. 14 last year, a day before Mr. Abe as the president of Liberal Democratic Party prior to his return to the premiership indicated he would ask the central bank to introduce an inflation target accompanying unlimited monetary easing, was at 8,664. It rose to as high as 15,627. Even after a fast drop from the peak, it stood at 12,686 on June 14. The percentage rise during the seven-month period reached 46%, far faster than a stock market rise in any other major country. During the same period, the dollar rose from 79.90 yen to a peak of 103.74 yen before falling back to 94.07 yen. The dollar thus gained nearly 18% against the yen. The first of the “three arrows” of Abenomics (monetary easing) can be said as hitting a target.
　　　　As a result, the Cabinet Office on June 20 said Japan's gross domestic product grew by a revised 4.1% in real terms on a seasonally adjusted basis during the January-March quarter. The revised economic growth rate was higher than a preliminary 3.5% and the largest among the Group of Seven major industrial countries. Capital investment posted a narrower drop of 0.3% than a preliminary 0.7% decline. The growth rate remained at 0.9% for private consumption, 1.9% for private residential investment and 3.8% for exports. In addition to a recovery in consumer and business confidence, Japan saw the ratio of job offers to applicants hitting a five-year high, an indication of job market improvements. The trend of high economic growth driven by private consumption and exports has been maintained.

Structural reforms required for economic revitalization
　　　　Monetary easing represents a reform on the demand side. Supply-side reforms are required for revitalizing the Japanese economy. The significance of Abenomics is that demand is expanded first to pave the way for a political environment where painful structural reforms can be implemented. Policy management to this end is very difficult, accompanied by the risks of bubble collapse and financial disaster.
　　　　I would like to see the Abe administration to courageously implement structural reforms, as demonstrated by its bold decision to participate in the Trans-Pacific Partnership free trade negotiations. At the June 17-18 Group of Eight Summit in Northern Ireland, Prime Minister Abe should vow to achieve economic growth and fiscal consolidation in order to get international cooperation in structural reforms and domestically demonstrate his determination not to retreat.

Yujiro Oiwa is Planning Committee Member of JINF and Professor at Tokyo International University.