What Abe-nomics crisis alludes to Korea

Japanese Prime Minister Shinzo Abe announced at a press conference on Tuesday that he would prematurely dismiss the House of Representatives, whose term is set to originally expire in December 2016, and would hold general elections next month. He also announced a plan to delay the schedule for an additional hike in consumption tax, originally scheduled in October next year, by 18 months. As the so-called Abe-nomics economic policy showed its limitations through negative economic growth in the third quarter for two consecutive quarters as announced on Tuesday, Abe chose to find a breakthrough through the dismissal of the House and conduct of early general elections.

In a bid to reduce a massive fiscal deficit, with the national debts exceeding 1,000 trillion yen, the Abe administration increased the consumption tax rate from 5 percent to 8 percent in April this year, and planned to hike it further to 10 percent in November next year. However, as consumer sentiment slumped due to a shock from the consumption tax hike, the annualized economic growth rate tanked 7.3 percent in the second quarter of this year, before slumping 1.6 percent in the third quarter. Expansion of liquidity and quantitative easing, which are the hallmarks of the Abe-nomics policy, have generated the positive effects of improving performances at Japan’s major exporters and a spike in its stock market, but the policy led to a contraction in domestic demand due to a surge in import prices of raw materials and daily necessities.

There is controversy over whether Abe-nomics ended in failure or not, but the policy is apparently on seriously shaky ground. The crisis in Abe-nomics that is symbolized by negative economic growth for two consecutive quarters reminds Korea anew how difficult challenge it is to switch an economy saddled in a long-term recession and fiscal deficit into a virtuous cycle. The fact that the economy cannot endure a shock from a tax hike despite ample liquidity into the market during slumping economy sends an important message to Korea as well.

The Abe administration opted for the political gamble of the dismissal of the House and conduct of early general elections by pledging to put off an additional hike in consumption tax, because it judges that holding the elections at this point in time when its approval rating is falling is politically advantageous. It is a reality that the main opposition Democratic Party of Japan, which handed over power after a crushing defeat in the December 2012 general elections, is hardly in a position to become an alternative political party capable of taking power. Unless there is an unexpected variable that will emerge, chances are high that the Liberal Democratic Party led by Abe will secure majority seat in the general elections next month, and thus stay in power for a long-term through December 2018.

Korea is also gradually taking after the structure of "Japanese style recession" entailing falling economic growth rate and mounting fiscal deficit. As we can see in the case of Japan, what Korea urgently needs to do is to revive the economic growth engine, which is losing steam, in order to grow tax income and recover fiscal soundness in a natural fashion. There are still limitations to reverse the economic trend only through monetary policy and fiscal policy. That`s why Korea needs a fundamental reform of its industrial structure by finding a new breakthrough in the service industry, while maintaining its competitiveness in the manufacturing and construction sectors.