ed Abenomics doomed

As the Japanese currency continues to strengthen, Abenomics, Japan’s economic agenda based on a weak yen to fight deflation and boost exports, is faltering.

The yen hovered above 120 yen against the U.S. dollar until January after hitting a low of 125 last June. Last week, however, the 110 yen-to-the-dollar barrier was shattered, and the yen might surge below 100.

The yen’s rise is attributed largely to the greenback’s strength after the U.S. Fed hinted at only slowly raising its key rate. With global economic uncertainties mounting, demand for safer assets like the yen also increased sharply.

Abenomics is based on “three arrows” ― fiscal spending, monetary easing and structural reform. With these, the Japanese government aims to create a virtuous circle of brisk exports, improving corporate health and active investments and wage increases.

Among other things, the weaker yen resulting from monetary easing has been most crucial. So the yen’s strength dooms Abenomics.

Japanese companies are estimated to suffer combined losses of nearly 5 trillion yen this year because of the appreciation of the currency. As a result, they are obliged to shun raising salaries for employees, which in turn weakens the already-depressed domestic demand, and raises the risk of deflation.

Japan introduced a negative interest rate policy for the first time in its history to inject more liquidity into the financial system. But Abenomics appears to be faltering as the stronger yen puts a dent in Japan’s monetary policy.

This awakens us to the fact that it’s all but impossible to revitalize the economy without fundamental structural reform. Japan has been struggling to achieve economic recovery merely with the two arrows of fiscal stimulus and monetary easing, while neglecting the most important, structural reform.

Japan’s doomed economic policies remind us of the stark reality facing Korea.

The government has been carrying out monetary easing and fiscal stimuli in recent years, but to no avail. Most recently, the ruling Saenuri Party raised the need to conduct a Korean version of “quantitative easing.”

Needless to say, the central bank’s supply of liquidity is akin to filling a bottomless vessel unless economic fundamentals are beefed up through reform.

Given the fierce competition against Japanese companies in the global export market, Korean businesses will no doubt benefit from the stronger yen, which makes Japanese goods overseas more expensive. But expecting too much from this must be avoided, considering that Japan might reverse its course at any time.

Hopefully, the ruling and opposition parties will join forces to carry out structural reform in Korea after this week’s general election.