Japanese Prime Minister Shinzo Abe's grand plan to revive the economy, which has run into several stumbling blocks in the past year, is reaching a "moment of reckoning", Goldman Sachs has warned.
There are several key turning points before the year-end that will be key in determining whether Abenomics will succeed or stumble, according to the bank, pointing to this week's cabinet reshuffle, a potential expansion of the Bank of Japan's (BOJ) aggressive easing program, and a decision on whether to move forward with a second tax hike in 2015.
"Abenomics is approaching a moment of reckoning, with the decision on whether to further raise taxes next year perhaps the most crucial one," Naohiko Baba, Chief Japan economist at the bank said in a report. The government is due to make a call on a second hike in the consumption tax – to 10 percent from 8 percent - in December.
Inability to raise the tax could be interpreted not only as a failure of Abenomics, but also as an abandonment of fiscal consolidation, Baba said, the biggest tail risk for foreign investors exposed to an economy with by far the highest debt-to-gross domestic product (GDP) ratio in the world.
Wages and exports must rise and Cabinet approval ratings must remain high in the coming months for Abenomics to succeed – all daunting challenge, he added.
Abe carried out a Cabinet reshuffle on Wednesday, an effort to re-energize his economic and security agenda amid declining approval ratings. A Cabinet reshuffle is a means of replacing incompetent - or scandal-ridden - ministers to ensure the government can make progress on different policies.
He kept key ministers including the finance, foreign and economy ministers, while appointing five women, matching the record high in Junichiro Koizumi's first cabinet in 2001, according to AFP.
Abenomics, the name given to the massive economic program launched last year, is made up of monetary easing, fiscal stimulus, and structural reforms. The economy has not responded to the program as many had anticipated, however.
A sales tax hike- to 8 percent from 5 percent – implemented in April drove the economy into its worst contraction since 2011. Meantime, the economy continues to grapple with sluggish wage growth and subdued inflation.
Japan's nationwide core consumer price index rose 3.3 percent in July but remained well below the central bank's 2 percent inflation target when taking into account the effect of the tax hike.