Abenomics scorecard: 'A' for early initiative, 'C' for follow-through

Prime Minister of Japan Shinzo Abe
Getty Images

One year into Prime Minister Shinzo Abe's economic revival plan the message from Japan's industrial heartland and economists is clear: he has yet to act on his pledge to stage the nation's comeback as a global economic dynamo.

Abe's recipe of massive money printing, fiscal stimulus twinned with longer-run consolidation and pro-growth policies has already made it into economic vernacular as "Abenomics" and won praise for its initial "print and spend" stage.

But the longer it takes for Abe and his team to follow through with powerful incentives for businesses to take chances, innovate and grow, the bigger the risk that Japan will slide back into stagnation that has dogged it for the past two decades. And with more debt than ever.

(Read more: Verdict on Abenomics, one year on)

The first two arrows of Abe's "three arrow" plan reversed crippling yen strength, buoyed market and business sentiment, got prices moving up after 15 years of deflation and set Japan on course to outpace most of its peers for two years in a row.

Yet Abe swept to power on December 16, 2012 promising much more, namely to defy the gravity pull of Japan's ageing and shrinking population with sweeping reforms to secure sustained, broad-based growth that has eluded Japan for two decades.

Abenomics and the wealth gap in Japan

On that count Abenomics has barely left the starting blocs.

A trip to Japan's western manufacturing hub around Osaka shows there is a long way to go before the benefits of Abenomics start trickling further down from exporters, shareholders or high-end retailers.

"We just frown when we hear about Abenomics on the news over lunch. We're not feeling any effects of it," says Shigeru Yamada, 50, president and owner of Yamada Manufacturing in Daito in Osaka prefecture that is home to industrial groups such as Panasonic and Sharp and an ecosystem of smaller suppliers.

Yamada says his firm has replaced a 24-year-old metal folding machine with a new one, its first big investment in seven years, and will be receiving state assistance for that under a simplified government subsidy scheme. Beyond that, nothing has changed for the small family firm that employs 15 people and has won awards for perfecting its production process.

The company expects a loss this year and it has yet to see big manufacturers' optimism reflected in its order books, meaning no pay increases any time soon.

(Read more: Japan's Abe calls for cut in corporate tax)

Neglected engines of growth

Small and mid-sized firms account for 70 percent of Japan's corporate jobs and 40 percent of the value of manufactured goods and parts, so growth will suffer for as long as many of those businesses struggle.

And Japan needs growth to maintain high living standards, cope with swelling ranks of pensioners and the world's biggest public debt burden worth nearly 2-1/2 years of its economic output that looms large over its financial system.

To that end, Abe's government targets real growth of 2 percent per year, more than double the average over the past two decades and more than double Japan's present potential -- or the speed at which an economy can grow without excess inflation.

Structural reforms still key to Japan: Pro

In economists' terms that potential can rise only as a result of an increase in capital, labour or greater productivity in using them.

The International Monetary Fund reckons 2 percent is possible provided Japan tackles all three with deregulation, tax and labour market reforms, bringing more women and elderly into the workforce and easing curbs on immigration.

"If everything that we are suggesting is introduced as a package then medium term potential growth could increase from around 1 percent to 2 percent," said Giovanni Ganelli, senior economist with the IMF Asia-Pacific office in Tokyo.

That is a big if.

(Read more: Feeling good: Japan business sentiment soars)

Sceptics say demographic headwinds are so strong -- the 18-24 age group is a third smaller than two decades ago -- that nothing short of a miraculous burst of innovation will do, given significant immigration remains a political and social taboo.

But while Abe has been telling audiences from London's City to Wall Street that "Japan is back", at home many plans aimed at lifting the economy's metabolism have been watered down, delayed or shelved.

The hard yards

Asked what the Abe administration has done so far to benefit Japan in the long-run, most economists point to decisions to join talks on the U.S.-led Trans Pacific Partnership (TPP) free trade pact and to raise sales tax next April.

The TPP is expected to open some new markets for Japan but also bring more competition at home while the tax hike marks a first serious step to address the sorry state of public finances, a major source of uncertainty.

The Bank of Japan's monetary stimulus can also help boost long-term growth if it succeeds in defeating deflation, economists say.

(Read more: HSBC strategist: Am I the last person in the world underweight Japan?)

"The inflationary environment makes it easier for companies to invest, hire and produce," said Masahiro Kawai, head of the Asian Development Bank Institute in Tokyo.

Some economists also mention the government's efforts to shorten waiting lists at day-care centres to allow more women to return to the workforce, though many say much more is needed, including further changes in the tax code and corporate culture.

But the list of disappointments is far longer.

Nomura Securities economists estimate the government's growth strategy will add just over 0.3 percent to annual output by 2020 -- not exactly the comeback Team Abe has been promising.

Scant progress in tackling labour market rigidities and a deep divide between well protected regular workers and a growing army of temporary and part-time staff tops the disappointment list.

Japan's labour productivity, at less than two-thirds of U.S. levels, offers ample room for improvement but companies must first feel more comfortable to hire and train staff.

(Read more: BOJ's Kuroda warns against complex forward guidance)

"Corporations are afraid to go into new areas in Japan because once they hire people it is almost impossible to fire them," says Tomo Kinoshita, chief Japan economist at Nomura Securities.

Yet a proposal to test labour liberalisation in special economic zones got struck out from the final plan.

Decisions on two other items high on corporate wish lists have been pushed back: a cut in corporate tax, now one of the highest in the OECD, and social security reform.

"If anything there's re-regulation happening now," says Takuji Okubo, chief economist at Japan Macro Advisors. He says he learned it first-hand this year when he applied for a subsidy for start-ups as founder of his research boutique.

"The growth strategy is just a way to let the bureaucrats tell businesses how to spend the money."