IMF Cheers Abenomics

Shinzo Abe’s troubled economic program seems to have turned a page, according to the IMF. FT:

Japan has finally done enough to stimulate its economy and simply needs to keep policy loose until inflation rises, according to an upbeat verdict by the International Monetary Fund.

In contrast with last year’s urgent call for prime minister Shinzo Abe to “reload” his economic policies, the IMF said it was comfortable with Japan’s policy stance, and declared that Abenomics was a “success”.

The change in the fund’s position comes after Japan enjoyed its longest sustained run of growth in more than a decade, cutting unemployment to just 2.8 per cent.

As we noted last month, Japan’s recent growth streak was a positive omen for Abe, whose three-legged policy of fiscal stimulus, monetary easing, and structural reform had until then struggled to reduce Japan’s perennial stagflation. While it’s too early for Abe to declare his mission accomplished—inflation still remains stubbornly low even as growth is rising—the external vote of confidence from the IMF should strengthen Abe’s mandate to carry on with the policy.

Next on the agenda is ambitious labor market reform to close gaps between regular and non-regular workers. Those reform measures, part of the much-delayed “third arrow” of Abenomics, are now being directly encouraged by the IMF, but they could still face strong headwinds inside the country. According to an April survey, many Japanese businesses (especially in the service sector) anticipate a painful increase in short-term labor costs if the reforms go through. And Abe is pursuing the reforms even as his own amid charges of abuse of authority and strong-arm tactics in Parliament. He is now mulling a cabinet reshuffle to change the narrative as he prepares to push the labor reforms.

Abe’s efforts bear watching; the Prime Minister has staked out an ambitious agenda, with his eye on re-election next year that could have him ruling Japan until 2021. Much of Abe’s legacy rests on whether he can finally turn Japan’s economy around. The IMF verdict is a promising sign, but the battle is far from over.

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