Japan Slows to 2.6% Growth

Abenomics was being hailed as the modern Japan’s answer to worries and woes, but it seems that Prime MinisterShinzo Abe will now most certainly have to put off dealing with Japan’s national debt as the economic outlook in the country looks decidedly compromised by a reduction in the growth of Japan in the second quarter of 2013. The annualized rate of growth has fallen to 2.6%.

Growth in Japan increased in the first quarter of 2013 by 3.8% and the most recent growth figure means that it is below the estimates of analysts for the third largest economy in the world. Is Abenomics over? Has the stimulus drive and monetary policy of Abe truly come to an end?

The reduction in growth of the economy shows that companies in the country are still very wary of long-term growth prospects despite the stimulus plan. They are remaining cautious to increase capital spending while exports are still having trouble improving at a good rate. Exports in Japan rose in June 2013 and reached 6061.43 billion JPY, from5767.60 billion JPY in the previous month. But May’s figure was a drop from April’s level of 5777.41 JPY. Stability is not quite yet the order of the day and corporations are very much aware that the recovery has not yet reached a sustainable level at the present time.

Japan: PM Shinzo Abe

Other problems that are heightening the issue of a slowdown in economic growth of the country are also the fact that Japan’s major trading partner China is experiencing a slowdown in its own economic activity. Geopolitical issues over the islands in the East China Sea that are disputed between the two countries have resulted in a slowdown in economic activity between the two also. China accounts for 17% of all exports by Japan today. However, the Chinese have since the beginning of the year been boycotting Japanese products and moved over notably to suppliers in South Korea, for example. This is not the first time that the dispute over the islands has had an effect on the trade between China and Japan, but this time Japan is increasingly more dependent upon China for trade and it was already predicted that it would have an effect on the growth of the Japanese economy at some time this year. That looks as if it has set in now.

Abenomics was already coming under fire, but it may suffer from greater and wider criticism in the days to come, given the economic results of the country. Abe has pledged to reduce trade barriers in the coming months in a bid to launch economic activity, but this has still yet to be seen.

Government debt reached twice the size of the economy and amounted to $10.3 trillion in the second quarter and the fall in economic growth might mean that the country will be unable to carry through plans to increase taxation and bring that down. There were plans to increase sales taxes in Japan from 5% to 8% in April 2014, and then to take them to 10% by October 2015. But, will that still go through today with the risk of reducing economic growth even further than at the moment?

Analysts agree that if Abe does increase taxation, then economic activity will be compromised and any recovery may not reach a sustainable level.

Abe stated that he was confident that Japan would improve its economic growth. It is not certain that everyone agrees with him, however.

The situation of Japan and the possible failure of Abenomics will most certainly raise questions as to the viability of sustainable growth in the US after the Federal Reserve’s Quantitative Easing program.