Abenomics is only a risk if it is allowed to fail

Japan suffers from an ageing population, persistent deflation and knotty structural problems in its labour market and energy supply. Its fiscal position is awe-inspiringly bad. Any country in this state would normally be advised to plan for the worst, and merely hope for the best.

Yet Japan's Cabinet Office builds its fiscal prognosis upon an assumption of 3-4 per cent nominal growth in the years ahead. This is despite a failure to reach such a level for over 20 years. In cash terms Japan has trodden water since a financial bubble burst in the early 1990s.

Rosy fiscal forecasts are often fatal to governmental good intentions. These ones allow Shinzo Abe, the prime minister, to prepare little in the way of tax rises or spending cuts to bring a chronic fiscal deficit to heel. Elsewhere such optimism would inspire calls for forecasting to be handed over to an impartial third party.

But Japan is not like most developed economies. Some see in its decades of moribund growth a harbinger of what awaits similarly becalmed countries in Europe. Another view is that Japan is an outlier, an object lesson in bad macroeconomic policy that could still be corrected. "Abenomics", Mr Abe's programme of monetary, fiscal and structural reforms, is still the medicine needed for jolting the economy out of its torpor.

Abenomics has not proceeded without mishap. A rise in consumption tax derailed consumer confidence. Sharply lower oil prices led to lower headline inflation which muddled the signal that consumers should expect annual price rises of 2 per cent. Worse, Mr Abe and his inflationist central bank governor Haruhiko Kuroda have appeared to differ on the relative importance of fiscal and monetary policy in ending the economy's deflationary blight. These are reasons to improve the current approach but not to abandon it.

The job of Messrs Abe and Kuroda is to change expectations in the economy, which they best achieve by reaffirming their joint intention to make the Cabinet Office's bullish forecasts come true. In the meantime each should keep to their own sphere of action. The BoJ governor, formerly of the Ministry of Finance, has no business interfering with fiscal policy. Mr Abe's monetary role should be limited to giving Mr Kuroda his highly expansionary marching orders. The prime minister's political capital is better spent on structural reforms to raise potential growth to 2 per cent. This remains the trickiest challenge, and the most doubtful element of the fiscal forecast, particularly given Japan's ageing population.

A priority should be dealing with corporate Japan's mushrooming cash surplus, the counterpart to the fiscal deficit. Thus far, the government has tried hectoring companies to be more generous to their workforce. If this fails - and there is no economic theory to suggest it will work - the next steps should include fiscal measures that make hoarding more expensive. But signs of tightness in the labour market - unemployment is near to a 15-year low - may push cash into the economy through the traditional route of market-led wage rises.

Japan's decades of exporting prowess have bequeathed it foreign reserves larger than those of Germany, the US and UK combined. These help insure it against the sudden loss of confidence in the currency warned of by Abenomics' detractors. As yet the problem is still too much rather than too little confidence in the yen, which leaves it locked away in savings accounts rather than invested or spent. Abenomics is only a risk if it fails. Planning for its success is still the right approach.

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