Japanese Economy During Shinzo Abe’s Term as First Prime Minister

December 17, 2012

Abe’s first stint as Japan’s prime minister lasted exactly one year and ended on September 27th.  His reputation back then was much as it remains now.  He’s a foreign policy hawk.  In 2006-7, he practiced toughness in dealings with North Korea and other Asian neighbors and denied atrocities committed by Japan during and before the Second World War.  He favors modification of the pacifistic stipulations in Japan’s constitution.  He held imperial views on the rightful line of succession of Japanese emperors.  On fiscal policy, Abe sought to consolidate the ballooning fiscal debt but preferred spending cuts over higher taxes.  A half year before Abe became prime minister, the Bank of Japan began to back out of its first episode of quantitative easing, which had been imposed in 2001, and zero interest rates were ended in July of 2006 when the overnight rate target was raised to 0.25% from zero.  A second rate hike to 0.5% occurred in February 2007 when Abe was still prime ministers.  In retrospect, these tightenings were a mistake.  Part of the error was bad timing, happening shortly before the onset of the global financial market crisis.  But it’s also true that monetary officials acted before a sustainable end to deflation was clearly in sight.  That experience may in part explain Abe’s current determination to secure more control over the parameters within which the Bank of Japan is to operate.

The yen was considerably weaker the first time Abe was Japan’s prime minister.  He inherited a 117.1 per dollar yen, left office a year later with the yen at 115.2/USD, and the currency posted an average value of 118.95 over the whole period, some 30% weaker than its present value.

Japanese interest rates were higher then than now.  Ten-year JGB bond yields went from 1.61% when he was sworn in to 1.68% when he left, and such averaged 1.71%, 97 basis points above the current level.  Three-month euroyen deposit rates averaged 0.67%, a half-percentage point more than now.

Abe followed the popular Prime Minister Koizumi and benefited from the better economic growth that evolved under his predecessor.  Real GDP expanded 2.0% in the year of Abe’s stewardship, led by an 8.5% advance in exports and a 3.0% gain in nonresidential investment.  Personal consumption only grew 1.5%, government spending contracted somewhat, and residential spending was quite depressed with a double-digit drop of 11.5%.  The GDP price deflator slipped 0.8%, and consumer prices eased by 0.2%. 

Abe’s views on the yen, monetary policy, and relations with other governments are consistent with a Japan at the expense of others viewpoint, to be enforced through a powerful centralized government.  His challenges are more serious this time than when he was prime minister the first time.  In that initial experience, Abe’s aspirations were undermined by a scandal-plagued cabinet that eroded his voter popularity to less than 30%.  Ultimately, Abe cited deteriorating health when he surprisingly stepped down after just a year in office.  He had harder shoes to fill, following Koizumi then and Noda now, and Japan’s economy and the global economy looked much better in September 2006 than it does now.  Any hope of pleasing voters over the long run this time runs through a much weaker yen.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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