Introduction to Japan’s Economic Challenges
Boosting economic growth while combating the rising cost of living has been at the top of Japanese Prime Minister Sanae Takaichi’s agenda since he took office in October. Takaichi, 64, wants to avoid the fate of her predecessor Shigeru Ishiba, who was in power for barely a year before being ousted amid widespread public discontent over stubborn inflation and other problems.
Abenomics and Its Impact
An admirer of former Prime Minister Shinzo Abe, Takaichi has vowed to continue her mentor’s "Abenomics" – a series of measures that include ultra-loose monetary policy, fiscal stimulus and structural reforms to pull Japan out of its decades-long deflationary spiral of falling prices and weak consumer spending. Japan’s economy, the world’s fourth-largest, shrank in the third quarter, increasing pressure on Takaichi.
Economic Stimulus Package
Her government last month announced a major spending spree to boost growth and help Japanese families. The package, worth $135 billion, includes cash payments to parents and energy subsidies. However, experts are skeptical about the effectiveness of this package in stimulating economic growth.
Expert Opinions on Economic Growth
Werner Pascha, a Japan expert and professor emeritus at the Institute for East Asian Studies, believes that the economic stimulus will not significantly promote economic expansion. Margerita Estevez-Abe, a Japan expert at Syracuse University’s Maxwell School, also believes that most items in Takaichi’s budget will do little to accelerate growth. She argues that higher spending is "the wrong cure" for Japan’s problems, which she says stem from "structural challenges" such as an aging and shrinking population, inadequate investment in public education and a misallocation of capital to inefficient sectors.
Japan’s Public Finances
Japan’s public finances are in poor shape, with the country having the highest debt burden among advanced economies, at about 250% of its total economic output, or gross domestic product (GDP). However, the country has so far managed to avoid a debt crisis, largely due to the structure of its debt. All government bonds are denominated in the Japanese currency yen and over 90% are held by Japanese institutions, more than half of which are held by the central bank.
Rising Yields and Stubborn Inflation
The weakening economy and recent spending spree have raised debt costs, and the interest rates investors charge to hold Japanese government bonds have risen in recent months. Yields on Japan’s 10-year government bond jumped to 1.92% last week – the highest level in nearly two decades. Inflation, meanwhile, remained consistently above the central bank’s 2 percent target. The resource-poor country relies heavily on foreign food, energy and raw materials to fuel its economy, and a weak yen contributes to price pressure by making imports more expensive.
Fears of "Carry Trade" Decreasing
The combination of higher interest rates and better yields on Japanese government bonds has raised concerns in financial markets about the impact on the so-called carry trade. For decades, global carry trade investors have been borrowing cheaply in Japanese yen and using the borrowed money to buy higher-yielding assets abroad, such as U.S. stocks and government bonds. However, if Japanese interest rates and bond yields rise and the yen strengthens, the carry trade could weaken, potentially triggering market turmoil and negatively impacting asset valuations worldwide.
