TOKYO -- All eyes are on the Japanese economy -- singled out by experts and execs alike as the only bright spot on this side of the Pacific -- whether it can make a full-bodied recovery this year.

The good news is that the world’s third-largest economy posted some solid gross domestic product figures in 2015 -- the 1.6 percent average growth rate seen in the first three quarters was about twice the pace over the past two decades. Corporate earnings were robust, wages climbed and the stock market boomed.

So the first arrow in Shinzo Abe’s quiver definitely seems to have hit its mark.

But Japanese policymakers know they cannot afford to be complacent at this time. They realize the economy is still haunted by the demons of deflation, which could ultimately undo all the current achievements.

“It seems unlikely that deflation woes will go away too soon, especially not this year,” said Sohn Sung-won, professor of economics at California State University, in a recent interview with the Korean media.

“The first arrow, which was quantitative easing, may have worked, but the second and third arrows, which are fiscal stability and economic restructuring still have a long way to go.”

The issue now is whether the Japanese central bank can manage to achieve its 2 percent inflation target for the fiscal year April 2016-March 2017.

Over the past three years, the Bank of Japan has injected up to $1.6 trillion (200 trillion yen) into the economy up until last year.

The bank has indicated additional measures may come, and some experts believe they will be implemented as early as the first half of this year.

The easing, however, may be detrimental for Korean exporters, as it could trigger a depreciation of the already cheap Japanese yen making Korean goods less price-attractive overseas.

Under the Abe administration, the yen lost more than 40 percent against the dollar.

Some analysts say that the depreciation trend may continue this year after the recent rate hike by the U.S. Federal Reserve, which is strengthening the dollar. Another round of monetary easing by the BOJ could also undermine the yen’s value.

Others argue that the dollar’s ascent won’t be too steep as the Fed’s rate action had long been factored into the markets. They add that traders may flock to the safer Japanese currency in the face of the ongoing slump in the Chinese and emerging economies.

But experts caution that unless Japan achieves a 1.4 percent GDP growth rate this year, its chances of hitting the 2 percent consumer price target by the end of this year will grow dimmer.

Given this, Korea also needs a contingency plan as Japan is one of its top trade partners. 

By Kim Ji-hyun (jemmie@heraldcorp.com)
Korea Herald correspondent