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Editorial: Upper house election voters should watch for Abenomics' potential minuses

"I'd ask the Bank of Japan (BOJ) to get the rotary presses running and print unlimited quantities of banknotes," said Liberal Democratic Party (LDP) leader Shinzo Abe, now prime minister, shortly after the House of Representatives was dissolved in November 2012 for a snap general election. Abe took over the reins of government after his then opposition LDP scored a landslide victory the following month.

Although the Abe administration was not yet a reality, Abe's pre-election comments powered a stock market rally in anticipation of changes in Japan's monetary policy. This effectively marked the start of "Abenomics," the economic policy mix the current Abe government has been promoting since it came to power a little over 6 1/2 years ago.

As to the purposes of urging Japan's central bank to fire up the money presses, the LDP stated in its campaign pledge for the late 2012 general election that it would set a clear inflation target of 2% and establish a framework for strengthened cooperation between the government and the BOJ to carry out drastic monetary easing to hit this goal. This is Abenomics' "first arrow."

By threatening to seek revisions to the BOJ Act, the Abe government attempted to force the central bank to reach the 2% inflation target over a short period.

Japan is still far from getting to that 2%. The BOJ forecasts that Japan's inflation rate will likely reach 1.6% by fiscal 2021, although this is regarded as overly optimistic.

As this policy was initiated by his administration, Prime Minister Abe is obliged to explain its achievements and future prospects. Nevertheless, the LDP's campaign pledge for the July 21 House of Councillors election makes no mention of "overcoming deflation" or a specific inflation target.

With regard to whether the policy should be changed, the prime minister told a debate between main political party leaders at the Japan National Press Club on July 3, "The matter is something that should be handled by experts, so the government shouldn't say anything arbitrary."

He also says that the real aim of his administration is to expand employment opportunities.

Prime Minister Abe frequently points to an increase in the ratio of job offers to job seekers as one positive Abenomics outcome, and the LDP's upper house campaign machine is keen to emphasize that the ratio is "the highest level in about 45 years."

However, one cannot help but wonder whether Abenomics has all that much to do with the current "sellers' market" employment environment.

Actually, the rise in the ratio of job offers to job seekers began sometime around 2010 when the now defunct Democratic Party of Japan was in power. At the time, economic recovery from the 2008 global financial crisis and a sharp contraction in the working age population were progressing simultaneously.

In the job-openings-to-applicants ratio, the number of job seekers is the denominator and the job offers the numerator. The ratio rises as the denominator decreases as a result of ongoing population decline. Moreover, the numerator is now rising. With a rapid increase in the population of elderly people, job offers in social security-related industries are increasing, but there are not enough people to fill the posts as the longstanding low birthrate has led to labor force contraction.

The situation is not an "achievement" that the Abe government should take pride in, but rather a "challenge" that is becoming increasingly serious.

The fact that the number of overseas visitors has been growing at a faster pace than projected is a standout feature of the Abe administration's time in power. These foreign visitors are supporting domestic consumption and energizing regional tourist spots. However, there are fears that the labor shortage could hinder further growth in foreign visitor arrivals.

Company earnings certainly recovered under the Abe administration. Brisk corporate performance is supported largely by robust overseas markets. In the meantime, there is little to no wage growth in Japan despite the labor shortage, leading many workers feeling there is no economic recovery underway at all.

No administration can necessarily fulfill all of its policy goals. However, the Abe government's inflation target is markedly different from ordinary policy goals.

The 2% inflation target is too high in the first place and not something that the Abe government should stick to. The problem is that the government sought to achieve the inflation goal very aggressively, creating potentially destabilizing factors for the Japanese economy as it tried to hit 2% in a mere two years.

Japan's interest rates have declined to unprecedentedly low and even negative levels as a result of the ultra-easy money policy, under which the central bank buys massive quantities of government bonds. If the government issues 10-year bonds under this policy, it actually makes money rather than paying interest on them. Such an abnormal situation has been going on for some time now.

What is worrisome is that interest rates could rise sharply in the future. If that were to happen, it would cause the low-interest system to collapse, immediately forcing the government to review the debt-ridden state budget and threatening the stability of the social security system. Concerns remain that such a situation could throw financial markets into chaos and spark runaway inflation.

Abenomics' negative legacy is likely to continue accumulating beneath the surface. If concerns grow that economic condition will deteriorate, it could increase political pressure to further ease the central bank's monetary grip.

No one can predict when and how such negative legacy will manifest. Therefore, it is difficult to make the matter a point of contention during the ongoing election campaign.

Still, if we only take a short view, we could make electoral misjudgments. Our ability to shed light on potential price of Abenomics is being tested.

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