Illustration: Lu Ting/GT

One year after Japanese Prime Minister Shinzo Abe launched his eponymous Abenomics campaign (which The Economist has described as "a mix of reflation, government spending and a growth strategy designed to jolt the economy out of suspended animation that has gripped it for more than two decades"), the results to-date have been rather tepid. In my opinion, Abenomics has not produced any fundamental changes for Japan's economy.

Improved corporate earnings and a surging stock market provided ample evidence of the enthusiasm which surrounded Japan's economy in 2013. However, these improvements stemmed not from Abenomics. They were instead largely due to a cheaper yen, which itself was a product of foreign capital realignment. Currency depreciation boosted export revenues and thus stimulated confidence in Japan's equity market.

The yen's depreciation was a natural result of changes in international economic conditions. During the euro crisis of 2010 and 2011, a large amount of global money flowed into Japan, pushing the yen to appreciate. Not until the summer of 2012, when the trend ended amid signs of recovery in the eurozone, did the yen start to devalue against the euro. The yen's depreciation against the dollar played out in a similar manner. At the same time, market speculation further weakened the yen.

In terms of indicators of the country's real economy, Japan did not see major improvement during 2013. For example, real wages dropped and corporate equipment investment did not increase. In theory, a weaker yen can lead to more exports and an enlarged trade surplus. In reality though, what we saw was the opposite - Japan's trade deficit continued to enlarge.

Japan's GDP is currently expanding, however the major forces behind the growth are more government infrastructure spending and increasing residential construction as buyers gobble up real estate prior to April when the country's sales tax rate will rise from 5 percent to 8 percent.

From April 2013, Japan's central bank has introduced several measures to ease market liquidity, however the effects of these have been modest. Falling interest rates failed to stimulate corporate demand for capital as interest in ordering new equipment remained muted. Limited new bank loans left Japan's cash stock almost unchanged after the central bank's moves.

Over the near future, Japan will face pressure from both an enlarging fiscal deficit and labor shortage. Government spending is likely to grow as the country is expected to raise infrastructure investment in 2014. Meanwhile, expenditures on social services will also increase as the population ages.

At the same time, with fewer young people in the overall population, Japan will lack workers. And with Japan generally closing its doors to foreign workers, this will only add insult to the injury in terms of its job market. Only 0.1 percent of Japan's total working population is foreign, an extremely low level compared to the 10 percent average in Europe. To ease shortfalls, the government will have to ease its immigration policies.

In 2014, the yen's exchange rate will remain the most important factor affecting Japan's economy. If the yen continues to depreciate, the situation would be similar to that in 2013 - company earnings will increase, stock prices will go up, but the real economy will remain still in neutral. However, once the yen stops falling, the positive factors will disappear with it.

But the yen's trajectory largely hinges on external economic conditions. In the international market, the US Federal Reserve has started to taper its quantitative easing (QE) program. An expansion of Fed tapering would lead to a stronger dollar and a weaker yen. But if the US decides not to accelerate its taper, the yen will face appreciation pressure. The situation is basically the same with the euro.

Currently, the euro is strengthening, but it is still too early to say whether the upward momentum will last through 2014. With so much riding on foreign developments, 2014 will not be an easy year for Japan's economy.

Compiled by China Business News reporter Huang Lijun based on an interview with Yukio Noguchi, finance professor at Waseda University. bizopinion@globaltimes.com.cn

China Business News