According to Goldman Sachs Bank, there are several determining factors before the end of the year, which will be a key determinant of the success of the program Abenomics, such as change of cabinet, the possibility of expanding the program aggressive easing by the Bank of Japan (BOJ), and the decision whether to raise taxes for the second time in 2015.
“Abenomics approaching a decisive moment, with a very important decision that a tax increase in next year,” said Naohiko Baba, chief Japan economist at Goldman Sachs in a report. The government is scheduled to determine the increase in the consumption tax from 8 percent to 10 percent – in December.
Inability to increase taxes can be interpreted not only as a failure Abenomics program, but as a failure of fiscal consolidation in the field, said Baba, a risk that will be faced by foreign investors involved in the economy with debt-gross domestic product (debt-to-GDP), the largest in the world.
Revenues and exports must increase and rate the level of support for the cabinet should be high in the coming months in order to be successful Abenomics – all of it is a big enough challenge, Baba added.
Abe replace his cabinet on Wednesday, an effort to revitalize the economy and security agenda amid slump support for the cabinet. Replacement is done by replacing the cabinet ministers were incompetent and scandal – to ensure that the government can progress in a wide range of policies. He maintains key ministers, including the finance minister, foreign minister, and minister of the economy, and appointed five women to equal the record of the first cabinet of Junichiro Koizumi in 2001, according to AFP.
Abenomics, the term given to the massive economic program launched last year, including monetary easing, fiscal stimulus and structural reform. However, so far the economy does not show a positive response, as had been anticipated by various parties.
The increase in the sales tax from 5 percent to 8 percent – were implemented in April – dropping the economy into the worst decline since 2011, while the economy is still grappling with sluggish wage growth declining inflation.
The consumer price index (consumer price index) rose 3.3 percent nationally in July, but remained under the Central Bank’s inflation target after taking into account the impact of the tax increase.
These factors refer to Abenomics failure, according to Charles Dumas, chief economist and chairman of Lombard Street Research, who said that the inflation target will not be achieved without a devaluation of the currency and / or expansion of quantitative easing (QE) Bank of Japan. “Kuroda had to choose between devaluation, with the risk of the commitment to QE will end up with a financial crisis, or ignore Abenomics,” he said, pointing at the BoJ governor.
Three Important Indicator
According to Baba from Goldman Sachs, Abenomics is at the intersection, with three indicators – wages, exports and cabinet approval rate – the key to success. “These elements become essential to neutralize the negative effects of the consumption tax hike recently, the pursuit of the need to raise taxes again in 2015, and encourage structural reform measures to achieve sustainable economic growth,” said Baba.
Nominal wages rose 2.6 percent in July, due to a salary bonus in the summer. Bank estimates that wage growth will be steady at 1 per cent in the coming months.
Exports did not increase; much of the growth is expected to compensate for weak domestic demand. According to Reuters, in June, exports fell 1.9 percent compared to the same period last year.
The level of support for the cabinet, dropped below 50 percent in many polls that were held in the summer, with a few things on the political agenda – such as reforms to collective rights to self-defense – does not have the support of the masses. However, the level of support remains high by historical standards including, meaning the political situation remains stable look, according to Goldman Sachs.