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Can Japanese economy come back?

There is some way to go, says one writer, while the other declares Japan is back.

Published on Apr 23, 2014 5:46 PM

ON APRIL 1, Japan raised the consumption tax from 5 to 8 per cent in the hope of boosting government revenue by 5 trillion yen (S$61.05 billion). It was an important step towards fiscal consolidation for the country with a massive general government gross debt of over 1,000 trillion yen, or 243.2 per cent of gross domestic product.

Fortunately, the Japanese economy is not likely to plunge into recession as it did in 1997, when the consumption tax went up from 3 to 5 per cent. This year, the world economic outlook is good and Japan's banking system is healthy. After a short drop, growth will turn positive in the third quarter, the Japan Centre for Economic Research predicts.

Under Prime Minister Shinzo Abe, the government has pledged to halve the primary fiscal deficit (which excludes interest payments on debt) by next year, and achieve a primary surplus by 2020. But it will not be easy.

According to the International Monetary Fund's Fiscal Monitor 2014, the cyclically adjusted primary deficit will decline from 7.9 per cent of GDP in 2013 to 5.3 per cent in 2015 and to 3.4 per cent in 2019. But the primary deficit will not be eliminated with the higher consumption tax alone. It is imperative that the Japanese government start reducing social welfare spending by cutting down on medical costs and pension payments.

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Background story

The economic recovery is largely a product of a highly expansionary monetary and fiscal policy - the first two pillars of Abenomics.