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In a surprise development Japan's Prime Minister Shinzo Abe called for snap polls in mid-December 2014 and suspended a planned sales tax increase. Abe is seeking a renewed mandate for his economic policies that would have helped Japan to come out of two decades of economic stagnation.
Global equity markets have not negatively reacted to the news and in fact have traded higher. However some reaction was visible in the currency market with Yen falling against the Euro and touching a new seven-year low on the development.
Japan observers say that there were indications since the start of the month that Abe would dissolve the parliament. Opposition parties were in talks for possible new alliances even as campaign posters started appearing in Tokyo’s neighbourhood.
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Change in government is not big news in Japan. The country has seen six prime ministers in a matter of five years between 2006 and 2011. Abe’s current term, his second, has been the longest, with none of the previous six prime ministers lasting for more than a year.
From India’s perspective, however, the news is shocking given Prime Minister Narendra Modi’s recent visit to the country and his open admiration for his Japanese counterpart and his economic policy. An immediate question that comes to the mind is has Abenomics (Abe’s economic policies) failed; more importantly has the Indian prime minister imported the same policies in India, making the country vulnerable.
N K Singh points out in this piece in Hindustan Times that Abenomics revolve around what is known as ‘Three Arrows’. These are bold monetary easing; fiscal reforms and growth strategies such as deregulation.
Modinomics on the other hand, Singh says, is about improved human skills, enhanced confidence in the governance matrix, higher quality of infrastructure, inclusive banking, improved connectivity with faster trains, and smarter cities providing gainful employment.
Clem Miller of Wilmington Trust Investment Advisors in Baltimore [LINK 3] says that India and Japan face very different sets of problems, so 'Modinomics' and 'Abenomics' cannot be readily compared.
Abenomics fuelled a 57% rally in the blue-chip Nikkei stock index last year, but over the last few months it has become one of the worst performing equity markets in the developed world as shortcomings were more visible than any positive impact. The final straw was the GDP number announced on Monday when Japan posted a negative growth of 1.6 per cent. Within a day of these numbers being made public Abe decided to call for snap polls.
General consensus among economists is that Abenomics has failed to deliver, just as repeated quantitative easing as failed to deliver in the USA. The ‘Three Arrows’ of Abe failed to hit the mark. Abenomics depends largely on weakening the value of Yen against global currencies. Monetary easing helped Yen to fall against most of the world currencies. A weaker currency would have ideally helped boost exports, resulting in improved corporate earnings and higher wages. As domestic demand was not picking up Abe had to rely on exports to drive growth.
But a stronger yen over the past few years and higher power cost in Japan resulted in Japanese manufacturers shifting their base to other countries. A weaker yen in fact had an adverse impact on the economy as imported fuel prices shot up but wages failed picking up at the same pace, impacting consumption severely.
Small reform measures announced by Abe’s government too failed to kick start the economy. All these issues resulted in Japan crashing to itsfourth recession since 2008.
Apart from the reformist attitude between Modi and Abe, there is little in common between their policies. As this CNBC article points out the danger for Modi (and Indian markets) is that a failure to maintain the reform agenda could lead to the same disappointment that has undermined Abenomics and the Nikkei's stellar rally.
Performance on the ground is all that matters in every democracy across the globe. Modi might not have the luxury of calling for a snap poll if his policies fail to deliver in the same way as Abe’s did.
