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How Japan's economic survival plan could backfire

Daily Ticker

It's been almost 14 months since Japan's central bank announced its commitment to a 2% inflation rate and monthly asset purchases to stimulate Japan's moribund economy. The policy change, known as "Abenomics," named after Prime Minister Shinzo Abe, is focused on reviving an economy that, though the third largest in the world, has been stagnant for 20 years. In addition to monetary easing, Abenomics includes structural reforms and fiscal stimulus.

"It was probably the right thing to do," says David Pilling, Financial Times Asia Editor and author of the new book, Bending Adversity: Japan and the Art of Survival. Debt was rising as a percentage of a nominal GDP that had "gone nowhere for 20 years," he said.

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But starting April 1, Japan is increasing its sales tax for the first time in 17 years, raising questions about the sustainability of Japan's economic growth, which grew at a 0.7% annual rate in the last quarter of 2013 -- below earlier estimates and economists' expectations.

"The tax increase could be very dangerous," says Pilling in the video above. Japan wants to "prompt consumer confidence, consumer spending, demand. You would have thought if that's your policy the last thing you want to do is take 3% out of people's pockets."

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Japan's tax hike could slow growth, at least temporarily, says Pilling. But he notes the government views it as a way to repair a "fiscal mess" and a "necessary confidence building measure for the markets."

So will Japan succeed in these two goals: growing its economy while repairing its fiscal condition?

Pilling gives Abenomics a 50% chance of success and a 30%-40% chance of petering out. He pegs the odds of inflation turning into hyperinflation at 10%. In the meantime, he'll be watching if Japan achieves a sustainable 2% inflation rate, stronger growth and rising wages. 

"If wages don't rise, then in the long run all Abenomics will have achieved is to make everybody poorer," Pilling argues.

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