Since taking office late last year, Abe has sauntered from strength to strength, ticking off the boxes of his policy wish-list while enjoying popularity ratings several times those of his predecessors.
On Thursday, his Liberal Democratic Party claimed its biggest coup since its December parliamentary election win when the central bank surprised markets by overhauling its monetary policy, pledging to double the money supply to achieve a 2 percent inflation target within two years.
The central bank acted "as I had expected," Abe told parliament Friday. "This is truly bold monetary easing on a different level, sending a clear message to markets."
By joining the U.S. Federal Reserve and other major central banks in soaking the economy with money, the Bank of Japan hopes to get corporations and consumers to begin spending more and end a long malaise.
More aggressive monetary easing to end years of deflation is a mainstay of the "Abenomics" platform, along with increased public spending to perk up demand and reforms to improve the long-term competitiveness of the world's third-largest economy.
Whatever deficit spending Japan dares to add to its record public debt already is in the pipeline. Abe has also committed to rebalancing the budget. Now, attention is turning to the toughest part of Abe's program: reforms to make aging Japanese industries and markets more competitive, loosen bottlenecks, and unleash pent-up dynamism and innovation.
Ever since its "Miracle Economy" bubble imploded over 20 years ago, Japan has failed to regain momentum despite lavish government spending and record low interest rates.
Abe's effort to turn the economy around has so far translated into a multi-month rally in the stock market. Investors reacted to the BOJ announcement by pushing the benchmark Nikkei 225 index to its highest level in more than four years Friday.
The Japanese yen, meanwhile, quickly weakened to 96 yen to the U.S. dollar, from around 92 - in line with Abe's push for a weaker currency that can help make Japanese exports more price competitive in overseas markets, while also raising import costs.
"Changing expectations, creating a more upbeat mood, that in itself is an accomplishment. People are feeling more optimistic and we see it. The stock market is up. The yen is down. Abe's popularity is soaring," said Gerald Curtis, a Japan expert at Columbia University.
Investors will be watching closely, though, for progress in ensuring future growth.
"The question is whether there is the political will and the political ability to get it done. I think Abe's done well but there's a degree of 'irrational exuberance' ... about so-called Abenomics," said Curtis.
So far, economic data have not reflected the optimism seen in the financial markets, though the economy did just barely emerge from recession in the last quarter of 2012.
A quarterly central bank survey released Monday, known as the "tankan," showed business sentiment improving for the first time in nine months, though the gains were weaker than expected. So far, the consumer price index has not budged, despite daily newspaper reports of plans for increases in electricity rates, food prices and other daily necessities.
Abe and fellow LDP leaders must make more headway in reviving the economy before an upper house parliamentary election in July that will determine if they will have a strong enough mandate to pursue other goals, such as politically difficult economic and educational reforms and changes to the constitution to give Japan's military a higher profile.
Getting the economy rumbling again will require consumers to spend more. That depends on a "wealth effect" spilling over from the run-up in prices for shares and other assets, and on convincing people to buy and borrow now, at lower prices, to avoid higher prices later.
Making that will work will depend in part on whether families, whose purchasing power has been declining since 1997, feel they can afford to spend more. Higher wages would help, but salary increases this spring were modest. Companies need to be sure the market is turning around before they will boost hiring and wages.
Recent reports suggest some Japanese are stepping up purchases of luxury products at big department stores, but retail sales figures show no signs of a mass spending spree.
"The evidence is that the wealth effect is much more modest than most people would like to believe," said William Grimes, a professor at Boston University.
If fixing Japan's economy sounds a bit like a Rube Goldberg contraption, where everything has to be set up just right for the ball to wind its way toward its final destination, it probably is.
"This is sort of a social experiment," said Masamichi Adachi, an economist with JPMorgan in Tokyo. "If people believe tomorrow will be better than today, then they may start borrowing and spending. If people spend, then corporations will pay higher wages."
But he adds that, "Many people like myself feel this is still uncertain. Also this is a little dangerous to continue this policy because if people don't follow it then asset prices will collapse."
As the yen's value has declined following Abe's election, the surging cost of natural gas and crude oil imports to replace nuclear power generation suspended after the tsunami disaster in March 2011, has tipped Japan's trade balance into the red. For now, the country's current account remains robustly positive and most of Japan's massive mountain of public debt is owned by domestic investors. But if the deficits were to persist for too long, Japan could come to rely on foreign buyers to support its public debt, Adachi said.
"That would be the time many people would require risk premiums and that means interest rates would spike up," he said. "In the short term, it's under control."
In any case, Japan will need plenty of luck, including a stable world recovery, to succeed now where it has failed in the past, and in managing its fiscal balancing act.
Abe says he is determined to push ahead with various reforms to make Japan's economy more modern and competitive. One of the biggest initiatives is Japan's commitment, announced last month, to join the Trans-Pacific Partnership, an Asia-Pacific-wide trading bloc meant to open markets wider to trade among its dozen or so members, which range from Chile and tiny Brunei to the U.S. and, if all goes well, Japan.
The trade pact could lend some heft to reform efforts aimed at deregulating and opening the economy. But much wider reforms are needed to cope with Japan's fast-aging and shrinking population, its energy crisis and soaring public debt.
"We need a clear road map. Unlike in the past, we cannot keep things as they are," Norihiko Ishiguro, of the Economic and Industrial Policy Bureau at the Ministry of Economy, Trade and Industry, told a recent forum organized by the Massachusetts Institute of Technology.
Ishiguro said Japan wants to capitalize on its competitive strengths in technology and services and foster more innovation and entrepreneurship. However, apart from talk of speeding approvals for new pharmaceuticals and medical devices and expanding use of robots to help relieve a shortage of care workers, few details have emerged.
The reforms are "full of complicated issues," said Adachi. "Even if you succeed in some areas or all areas, there is no guarantee the economy will get better. Certainly the impact will not come in a short time," he said.
A similar set of reforms in Germany, launched in 2000, took a decade to bear results, said Grimes.
Japan needed these changes years earlier, he said. "We may be moving into the range where the opportunities have passed for having a really big impact."
Source: http://www.kboi2.com/news/business/Japan-PMs-biggest-test-on-economy-still-to-come-201623951.html
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