Abenomics
Japan's economic policies, which were implemented under late Prime Minister Shinzo Abe's government to help the country recover from deflation
What is Abenomics?
Abenomics refers to Japan's economic policies, implemented under late Prime Minister Shinzo Abe's government, to help the country recover from deflation.
It is the label given to Prime Minister Shinzo Abe's economic initiatives when he took office for the second time in 2012.
Abenomics is frequently viewed as comprising aggressive measures affecting Japan's monetary and fiscal status.
It is a set of economic policies aimed at generating fiscal and monetary stimulus through government expenditure and unorthodox central bank policy. In the 2000s, Japan had prolonged periods of poor economic growth figures.
Abenomics's principal goal was to boost demand while maintaining a 2% inflation target. His programs aimed to improve competition, develop trade, and boost the economy's employment rate.
Abenomics entailed increased government expenditure, expanding the money supply, and implementing reforms to make the Japanese economy more competitive. According to The Economist, the program is a "mixture 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".
Key Takeaways
- Abenomics refers to Japan's economic policies introduced under Prime Minister Shinzo Abe's government.
- Abenomics is often symbolized by three arrows, representing aggressive measures in monetary policy, fiscal policy, and structural reforms.
- Abenomics aimed to improve competition, develop trade, and boost employment rates in Japan.
- Abe's government enacted significant fiscal stimulus, focusing on infrastructure projects to spur short-term growth while aiming for long-term fiscal balance.
Who was Shinzo Abe?
Shinzo Abe was born on September 21, 1954, in Tokyo, Japan, and was assassinated on July 8, 2022.
He served as the Prime Minister of Japan twice (2006–2007 and 2012–2020). Abe began his political career in Japan's Lower House of Parliament, where his grandfather and great-uncle both served as prime ministers.
A few of Abe’s achievements are:
- Secured a fourth four-year term as Japan's prime minister in the October 2017 legislative election.
- Won six consecutive elections despite twice hiking the consumption tax rate.
- became the longest-serving Prime Minister in Japanese history.
- Upon becoming Prime Minister in 2012, implemented the "Abenomics" economic measures, which have pumped billions of dollars into Japan's economy.
- Restored trust in the Japanese government and energized the economy with daring initiatives.
- Attained a highly respected reputation at international gatherings which few Japanese prime ministers have ever attained.
Three Arrows of Abenomics
Three arrows sum up the essential components. The "three arrows" on his agenda were:
- Flexible fiscal policy
- Monetary expansion
- Structural economic transformation
But before going into more detail with the “arrows,” let’s first discuss why it was implemented.
Abenomics was introduced in December 2012, and Japan’s economic prospects were dim. Many different factors were affecting Japan’s economy, including that:
- The Japanese economy unexpectedly contracted for the second quarter in a row, bringing the world's third-largest economy into recession.
- Poor consumer outlook resulted from the 2011 earthquake and its aftermath.
- Low level of unemployment.
- Low female participation in the workforce.
- An unduly strong yen was harming exports.
Abenomics was marketed as a solution to jolt Japan's economy out of stagnation and deflation. However, the economic problems in Japan began in the 1990s, sometimes known as the "Lost Decade."
Following a large real estate bubble burst in the 1980s and Japan's asset price bubble burst in the early 1990s, Japan experienced a period of severe economic stagnation.
Between 1991 and 2003, the Japanese economy expanded at a pace of only 1.14% per year on average, while the average real growth rate between 2000 and 2010 was under 1%, far below that of other developed nations.
Due to the Great Recession in 2008, the Tsunami and Earthquake in Tohoku, and the Fukushima Nuclear Disaster in 2011, Japan’s debt levels continued to grow.
Monetary Policy
The implementation of quantitative easing by the Bank of Japan would be the first arrow in the quiver of an aggressive monetary policy.
In Japan, deflation and low-interest rates had continued for a long time, and there was not much opportunity to cut the nominal interest rate. Because of this, quantitative easing was viewed as a strategy to raise prices while lowering the real interest rate.
The BOJ continued to carry out its quantitative easing strategy, which involves ruthless purchases of Japanese government bonds to infuse enormous quantities of money into the economy.
The intention was to establish a sense of expectation among market participants that prices would rise.
The Bank of Japan (BOJ) began a massive asset acquisition program in which it made yearly purchases of assets totaling $660 billion.
The objective was to keep buying assets until the country's inflation rate reached the target level of 2%. To boost lending and investment, the BOJ cut interest rates below zero in 2016. The short-term interest goal was at -0.1% as of 2018.
The BOJ followed this policy program due to its fear of the Japanese economy falling into a deflationary spiral. That would mean there is no spending and hence no money being made, prices would then decrease, and there would be only small profits and growth, if any.
The purpose of negative interest rates in this case was to encourage lending and spending rather than saving and hoarding.
Fiscal Policy
While strongly declaring the political resolve to restore Japan's fiscal balance over the medium and long term, the Abe government controlled short-term fiscal policy in a timely and flexible manner.
Economic recovery measures totaling 20.2 trillion yen ($210 billion)—of which 10.3 trillion ($116 billion) was direct government spending—started the fiscal stimulus in 2013.
Abe's massive spending plan was the second-largest stimulus package in Japan's history, which was centered on constructing vital infrastructure projects, including bridges, tunnels, and earthquake-resistant highways.
Following an additional 5.5 trillion yen hike in April 2014, Abe pushed through a second 3.5 trillion yen spending package in December 2014, following the elections.
The government's goal was to boost short-term growth while maintaining a long-term budget surplus.
Structural Reform
Over the medium and long term, the Japanese government took steps to improve the economy's competitiveness, overcome energy constraints, and strengthen its innovation platforms.
The rest of the focus lies on accelerating the removal of domestic institutional barriers, such as regulations, based on a well-defined growth strategy.
The different ways by which Japan tackled the growth issue were:
- Promoted higher salaries to boost domestic consumption.
- Increased taxes to pay for rising social security costs.
- Encouraged female engagement in the labor force.
- Because of the aging population, the government considered changing the retirement age.
- Preparing for the transition to a regional medical care system for the elderly and taking steps to lower their healthcare expenses.
- Budgeting adequately for emergency response.
- Enhanced access to finance for SMEs by boosting the amount of R&D and education financed by government spending.
Was Abenomics Successful?
Prime Minister Shinzo Abe and his cabinet worked to help the Japanese economy recover from two decades of deflation while preserving budgetary discipline since taking office in late 2012.
A comparison of Japan's economic data from 2012 to 2020 may help us analyze the policy's progress:
| 2012 | 2020 | |
|---|---|---|
| Real GDP (billions of chained 2015 Yen) | 517,928 | 572,765 |
| Employed Women (% of the total labor force) | 41.9% | 44.2% |
| Corporate Pre-Tax Profit (billions of USD) | 363 | 117 |
| Unemployment Rate (%) | 4.3% | 2.97% |
| General Govt Revenues (billions of USD) | 152,250 | 198,513 |
At times, Abenomics has performed effectively, but at other times it has stagnated. Nevertheless, the inflation target was sometimes achieved, and Japan's unemployment rate dropped by more than 2% since Abe took office for the second time.
Global economic forces have sometimes disrupted Japan's periods of prosperity. The country's most serious economic concern, its aging population, has increasingly taken center stage.
What was Abenomics Trying to Achieve?
The largest structural concern affecting the Japanese economy is the society's aging population and demographic decline.
Japan, however, sees this as an opportunity to address these issues early. Demographic transition is a societal problem that most industrialized countries will face.
Japan is dedicated to attaining long-term prosperity and being a leader in developing a new social model. Japan's concept for the next phase in human progress is dubbed Society 5.0.
Its goals were:
Goal 1: Achieving Sustainable Growth
Implement sweeping reforms to kick-start a virtuous economic cycle that would propel GDP to 600 trillion yen by 2020.
Goal 2: Realizing Society 5.0
Society 5.0 is a national goal for future generations to create a data-driven, human-centric society. It's a picture in which economic growth, digitization, and social-issue solutions are all in sync.
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