Wednesday, September 11, 2013

Abenomics vs Likonomics: Head-to-Head Comparison

No doubt China and Japan are the two biggest economies in Asia region. However, both economies are now suffering from their own specific economic problems which are indeed not easy to be resolved. That is why both Asian countries have recently developed their strategic economic growth plans, namely Likonomics for China and Abenomics for Japan respectively, to try resolving these problems.

For Likonomics that proposed by PRC (People's Republic of China) Premier Li Keqiang, we have already pointed out its main features in our past post and hence we do not repeat them here. If you have not read this post, here is the source: What is Likonomics.

So let us start analyzing Abenomics now and we, Mr China, will then compare both Likonomics vs Abenomics accordingly.

What is Abenomics?

Abenomics is a strategic economic growth plan proposed by Japan Prime Minister Shinzo Abe after he won re-election since December 2012. Similar to Likonomics, there are also three arrows for Abenomics. These three arrows basically focus on ending deflation and reviving the weak Japanese economy after more than two decades of economic stagnation.

Three Arrows For Abenomics

(1) Japanese Government carries out aggressive fiscal stimulus;
(2) Central Bank (BoJ) supports continual monetary easing policy;
(3) Japan Administration runs structural reforms for enhancing competitiveness of the whole country.

In particular, Abenomics aims at expanding governmental expenditure or public investment, increasing money supply via QE (quantitative easing) expansion program, promoting Japanese Yen (JPY) currency depreciation, introducing an annual inflation (CPI) target at +2% YoY, running negative real interest-rate policy, revising Bank of Japan (BoJ) Act, purchasing Japanese Government Bonds (JGB) through Bank of Japan (BoJ) market operations etc.

So which one should really be better, Likonomics vs Abenomics?

If you want to compare Likonomics vs Abenomics, you must realize that either Likonomics or Abenomics is simply designed to deal with different economic conditions of two different countries. China and Japan are two different economies at different development stages currently facing different economic challenges.

Likonomics vs Abenomics: Head-to-Head Comparison

China is facing difficulties in deleveraging and improving overall growth quality for sustaining continuous economic growth. While inflation (CPI) is becoming relatively stable and government debt is under control, Chinese GDP (Gross Domestic Product) growth rate is heading down and unemployment rate is worsening because of the reduced global export demands. Through economic deceleration by Likonomics, China can achieve a better balanced between government (public level) investments and consumer-driven (private market) demands. China can then successfully transform its economy from relying heavily on government fixed-asset investments towards domestic consumptions.

Japan, on the other hand, is facing difficulties in recovering from the deteriorated competitiveness and restarting from the long-lasting economic weakness. With implementation of the first two arrows for Abenomics as proposed by Prime Minister Shinzo Abe, Japanese inflation (CPI) seems to be heading up (i.e.: heading away from deflation), its GDP growth rate and unemployment rate are having some signs of improvement as well. However, Japan government debt-to-GDP ratio has already been reaching a dangerous level and longer-term government bond interest rates also keep raising. In May, Japan benchmark Nikkei 225 Index fell sharply from 15900 level as its domestic 10-year bond yield surpassed 1%, which showed that many investors have still been lacking confidence on Japanese structural reforms.

In short, China needs Likonomics to slow down its rapid economic growth rate to buy more time for Chinese structural reforms, while Japan needs Abenomics to recover from its weak economic growth rate for reversing the long-standing deflation.

Investor Confidence is the Key

Although both Likonomics and Abenomics are applying different strategic approaches to re-adjust their monetary and fiscal policies, it is obvious that only the success or failure of structural reforms will ultimately decide final result of Likonomics or Abenomics.

For comparison of their structural reforms, it appears that Japanese Abenomics still needs a more clear direction for long-term growth, although the third arrow announced in June already mentioned that Japanese government will build some special economic zones and will cut corporate tax or relax some trading regulations there. Since the attractiveness of Japanese special economic zones (SEZ) to new overseas investors is still an unknown, future success of Japan structural reforms can be quite questionable.

On the contrary, structural reforms proposed by Chinese Likonomics seem to have a clearer direction towards securing and stabilizing longer-term growth. Chinese central government top leaders, together with Premier Li Keqiang, emphasize many times that PRC does need more domestic consumptions over government-driven investments. In fact, the continual open-up policy and recent labor wage increase throughout the country can really help facilitating domestic consumptions. These can be a few key reasons why general investors seem to have more confidence on Likonomics over Abenomics in the past few months.

We, Mr China, are by no mean saying that Likonomics must really be better than Abenomics. It can be just due to the fact that PRC is currently imposing planned economy model, which make it easier for central government to implement any structural reform. Good news is that Tokyo, capital of Japan, has recently won to become the hosting city for 2020 Olympic Games. We do hope that this great news can boost foreign investor confidence, can help bringing Japan economy back to a healthy cycle, can even act as the 4th arrow for Abenomics and finally facilitate cross-border trades with its neighbor countries including PRC.


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