A
recovery in Japan’s economy will boost Indonesia
Rachmat
Gobel ; Deputy
Chairman of the Indonesian Chamber of Commerce and Industry (Kadin) and
chairman ofthe Indonesian-Japan Friendship Association (PPIJ)
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JAKARTA
POST, 26 Februari 2014
After
many years of Japan seeming to matter less and less to the rest of the world,
the country is making a comeback. There is much media focus on Prime Minister
Shinzo Abe’s groundbreaking policies called “Abenomics”, the outlook for the
yen and the prospects for Japan to make a decisive break with two decades of
deflation and decline.
While
the jury is still out on how successful Abenomics will be, the initial signs
are encouraging. Japan is making a spirited return and this will be positive
for Indonesia.
A
more positive mind-set is beginning to take hold among corporate leaders and
ordinary citizens since Abe took over as prime minister in December 2012. He
has swiftly delivered on two parts of his “three arrow” strategy. Monetary
policy has been boldly transformed, with the Bank of Japan aggressively
pumping
money
into the economy and moving away from its past hesitancy to tackle deflation.
He has also introduced several large fiscal stimulus packages, the second
arrow of his strategy.
Now
Abe is beginning to push through structural reforms despite the political
risks of doing so. This third arrow of his strategy has been criticized for
being too timid but such a judgment is premature. A more reasonable
interpretation is that Abe is introducing reforms steadily and at a pace that
Japan’s conservative
society
can absorb. He has outlined a detailed plan for reforms and has already gone
ahead with some of them.
The
most important has been in agriculture, where 40-year old subsidies for
producing table rice according to state-determined quotas will be abolished
by 2019. Few had expected Abe to tackle such a sensitive issue as rice
farming. Several other reforms have also been brought up in recent months on
other touchy issues such as immigration (where highly skilled foreigners can
now apply for permanent residence more easily), education (changes in
entrance examinations) and policies to aid working women. The Abe government
has also encouraged firms to invest abroad, especially in Southeast Asia.
Reforms
may be slow and cautious but the cumulative impact will become powerful over
time.
Abenomics
has delivered some important results. The yen has depreciated by about a
quarter against the US dollar since late 2012, providing relief to Japanese
exporters and boosting the profitability of Japanese companies. Exports grew
9.5 percent in January as a result. A critical improvement has been the
turnaround in deflation — core consumer prices are now rising by more than 1
percent annualized after years of decline. Land values in more than
two-thirds of major urban areas have started to rise as of the summer of
2013. The business sector is also much healthier — business failures fell
10.5 percent in 2013 to the lowest level in 22 years as credit conditions eased
as the central bank’s aggressive monetary policies boosted bank lending.
One
area of concern has been the still-downbeat confidence levels of households.
A recent survey showed that 73 percent of respondents felt that they were not
benefiting from Abenomics. That is why the decisive turnaround in the labor
market is so important. With the ratio of job offers to applicants above one
since November 2013, the excess labor that caused wages to fall 8 percent
from the 1998 peak is less of a drag. Indeed, large companies have been
indicating that they are prepared to give wage increases this year — a vital
step toward boosting consumer spending and the economy. If wages rise as we
expect, the rise in the sales in April will not be as damaging to consumer
spending as many fear.
Another
reason to expect the improvement in Japan’s recovery to be sustained is that
Japanese companies are likely to step up their capital spending. Service
sector companies (about two-thirds of companies in Japan), in particular, are
reporting a shortage of capacity requiring stepped-up investment. Once
investment accelerates, the boost to employment and the multiplier effects on
spending will allow economic growth to accelerate.
Japan’s
return to economic vibrancy will offer tremendous benefits for Indonesia.
Japan remains the third-largest economy in the world, accounting for about 8
percent of world output. It is the sixth-largest source of foreign investment
and the fifth-largest importing country in the world. A turnaround will
impact the
world
economy and Indonesia significantly.
Indonesia
stands to be a major winner. First, a more confident Japanese corporate
sector is indeed stepping up investment abroad in countries such as
Indonesia, which offers a large domestic market that is growing rapidly.
Indonesia is doubly attractive because China is less and less attractive to
Japanese companies as the latter’s costs rise and political tensions erupt
every now and then.
Second,
stronger import demand from Japan will help Indonesia in two ways. Prices of
commodities that Indonesia exports will be better supported if Japan
recovers. The volume of demand for Indonesia’s commodity and manufactured
exports will also rise.
Third,
as the Bank of Japan steps up its monetary easing, Japanese portfolio capital
will flow out in ever larger magnitudes. This is important at a time when the
US Federal Reserve has started to reduce its monetary expansion, causing
portfolio capital to flow out of countries such as Indonesia. Japan’s
policies could thus offer Indonesia important protection against the sort of
financial market volatility and pressures on the rupiah Indonesia had to
endure last year.
Fourth,
as an improving economy and easy monetary policies strengthen Japanese banks,
they will be in a better position to help fund Indonesia’s massive
infrastructure needs — in the way they did in the 1990s before Japan’s
banking crisis and Indonesia’s financial crisis erupted.
Yes,
there remain many risks for Japan given its aging society, high public debt
and the many obstacles to structural reforms. Still, it would be wrong to
dismiss Abenomics as doomed to failure as some observers have done. The
evidence of the past year shows that Abe and his allies are determined to
press ahead with a revitalization of Japan.
Perhaps
some of the measures needed will be too slow to materialize because of
political or other hindrances. But the strong political will that is evident
will over time overcome these challenges and eventually turn Japan around.
Such
a turnaround in one of Indonesia’s most important economic partners can only
be positive for Indonesia. ●
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