Abenomics is a term that refers to economic policies introduced by the Prime Minister of Japan Shinzo Abe, from 2012 to 2020, in an attempt to revive the Japanese economy from deep rooted stagnation and deflation.
Broadly, this suit of policies comprises of a synergy between the ‘Three Arrows’ of monetary easing, provision of fiscal stimulus, and implementation of structural reforms. This concept of the Three Arrows stems from the Japanese legend which dictates that it is easier to break a solitary arrow than three arrows held together.
Before Abe
In the run up to Abe’s election as Prime Minister, the Japanese economy was characterised by sustained deflation stemming from economic deterioration during the ‘Lost Decade’. In contrast to the high growth witnessed in Japan’s post World War transformation into a developed nation, the nation’s economic health started on a downward trajectory after the 1970s showcasing low growth, inability of banks to extend loans, high levels of government debt, appreciation of yen, and falling output and productivity.
The economy took three major hits in the form of the 2008 Financial Crisis, the Tsunami of 2011, and the subsequent collapse of the Nuclear Power Plant at Fukushima. Abe took office in an economy which harboured a debt-to-GDP ratio of 220% and a deflation rate of 0.05%. The sharp decrease in manufacturing output in the period of 2008 to 2012 further intensified the need of introducing adequate economic reforms to save the crumbling Japanese economy.
The First Arrow
The First Arrow of Abenomics focused on reflation, that is, to increase consumption of goods by households, through an aggressive monetary policy. Under the purview of this, the government in conjunction with the Bank of Japan (BoJ), pursued a targeted inflation policy to achieve 2% inflation in the economy. In an attempt to increase the money supply BoJ announced that it would undertake monthly purchase of long-term government bonds worth ¥7.5 trillion. In 2016 the BoJ set negative interest rates to encourage borrowings by businesses, essentially implying that borrowers now had to repay an amount which was even lesser than the principal amount borrowed. This arrow also targeted the depreciation of yen as a consequence of lower real interest rates, which would arise due to future expectations of inflation in the economy.
The Second Arrow
The Second Arrow targeted fiscal consolidation and stimulus. The Abe government pursued an aggressive fiscal policy which included increased investments in building and maintaining critical infrastructure like public roads and bridges, ensuring public schools are adequately reinforced against earthquakes and restarting the nuclear power plant at Fukushima. These concerted efforts were undertaken to further push demand in the economy and build towards reflation. However, with a high debt-to-GDP ratio and expanding public expenditure, the government had to implement a tax hike on consumption from 5% to 8% in 2014.
The Third Arrow
Abe’s third arrow aims at making the economy more competitive and conducive to private investments. This strategy aimed to spur growth in the economy by initiating structural reforms in spheres of wages, female employment, tourism and corporate taxes. The Japanese work force faced an imminent threat of rapid contraction due to the ageing population, and stagnant wages which stemmed from a system of rewarding an employee’s seniority over productivity. To this end, the government undertook improvements in child care facilities to ensure increased female participation in the workforce and encouraged firms to increase employee wages. The Abe government further endeavoured to introduce policies to favour international tourism and acceptance of immigrants in the workforce.
The Legacy of Abenomics
Abenomics has had divergent impacts on varying fronts and has thus left a mixed legacy in its wake.
Immediate reverberations were felt across the economy upon the initial implementation of the policies. The stock market indices like Nikkei 225 soared, yen depreciated against the USD causing exports to rise, and the Foreign Direct Investment in Japan surged. In 2017, the Abe government also managed to achieve the lowest rate of unemployment that the country had ever encountered, at 2.9%. Additionally, the growth strategies were largely successful in integrating an increasing proportion of women in employment.
However, Abenomics fell short on several grounds and its impact remains lopsided. Even though deflation rates have dropped, the target inflation rate of 2% wasn’t achieved. Further, the tax hike of 2014 has reversed the progress and caused the economy to witness its largest contraction since 1993. Moreover, increasing government expenditure and a rapidly ageing population has sustained the debt-to-GDP ratio at about 250%, bringing Japan dangerously close to the brink of a sovereign debt crisis.
Against this backdrop, the new Prime Minister will have to gear up to ensure that the world’s third largest economy continues on its path towards recovery and comes out of a stagnation that is persistent and structural inadequacies that have been become the new norm.
