Abenomics refers to the economic policies advocated by Shinzō Abe since the December 2012 general election, which elected Abe to his second term as Prime Minister of Japan. Abenomics is based upon "three arrows" of fiscal stimulus, monetary easing and structural reforms. The Economist characterized the program as a "mix 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."
The term "Abenomics" is a portmanteau of Abe and economics, and follows previous political neologisms for economic policies linked to specific leaders, such as Reaganomics, Clintonomics and Rogernomics.
Japan's economy underwent a "Lost Decade" since the burst of the Japanese asset price bubble in the early 1990s. GDP growth was slow and unable to absorb the resulting increase in unemployment. The Japanese government raised consumption tax rates from 3% to 5% in 1997, which worsened the recession and deflated the economy. Concerned about the negative effects of the tax hike, Lawrence Summers had told the Japanese government not to raise the consumption tax. Ignoring the warning, the government then raised the sales tax in 1997 for the purpose of balancing its budget, and then the government revenue decreased by 4.5 trillion yen because consumption stumbled. The country recorded a GDP growth rate of 3 percent in 1996, but after the tax hike the economy sank into recession.
During the global economic recession, Japan suffered a 0.7% loss in real GDP in 2008 followed by a severe 5.2% loss in 2009. In contrast, the data for world real GDP growth was a 3.1% hike in 2008 followed by a 0.7% loss in 2009. Exports from Japan shrunk from 746.5 billion in U.S. dollars to 545.3 billion in U.S. dollars from 2008 to 2009, a 27% reduction. By 2013, nominal GDP in Japan was at the same level as 1991 while the Nikkei 225 stock market index was at a third of its peak.
In 2012, the Diet of Japan under the government of Yoshihiko Noda passed a bill to increase the consumption tax rate to 8% in 2014 and 10% in 2015 in order to balance the national budget; this tax hike was expected to further discourage consumption.
Abe's economic policy is also related to the rise of China as an economic and political power. Abe's supporters drew explicit parallels between Abenomics and the Meiji era program of fukoku kyohei (enrich the country, strengthen the army). In addition to providing a stronger counterweight to China in the Asia-Pacific region, strengthening the Japanese economy is also intended to make Japan less reliant on the United States for defense.
|Economic Outlook in Japan 1994-1999|
(billions of JPY)
|Economically active population
Note: NGDP is valued at 2006 market prices
Abenomics consists of monetary policy, fiscal policy, and economic growth strategies to encourage private investment. Specific policies include inflation targeting at a 2% annual rate, correction of the excessive yen appreciation, setting negative interest rates, radical quantitative easing, expansion of public investment, buying operations of construction bonds by Bank of Japan (BOJ), and revision of the Bank of Japan Act. Fiscal spending will increase by 2% of GDP, likely raising the deficit to 11.5% of GDP for 2013.
Two of the "three arrows" were implemented in the first weeks of Abe's government. Abe quickly announced a ¥10.3 trillion stimulus bill, and appointed Haruhiko Kuroda to head the Bank of Japan with a mandate to generate a 2 percent target inflation rate through quantitative easing. Structural reforms have taken more time to implement, although Abe made some early moves on this front such as pushing for Japanese participation in the Trans-Pacific Partnership.
The mid-2013 House of Councillors election gave Abe complete control over the Diet, but the government showed some internal division over specific structural reforms. Certain cabinet members favored lower corporate taxes, while others were wary of the potential political backlash for cutting taxes on large firms while raising taxes on consumers. Labor laws and rice production controls have also become contentious issues within Abe's government.
Abenomics had immediate effects on various financial markets in Japan. By February 2013, the Abenomics policy led to a dramatic weakening of the Japanese yen and a 22% rise in the TOPIX stock market index. The unemployment rate in Japan fell from 4.0% in the final quarter of 2012 to 3.7% in the first quarter of 2013, continuing a past trend.
The yen became about 25% lower against the U.S. dollar in the second quarter of 2013 compared to the same period in 2012, with a highly loose monetary policy being followed. By May 2013, the stock market had risen by 55 percent, consumer spending had pushed first quarter economic growth up 3.5 percent annually, and Shinzo Abe's approval rating ticked up to 70 percent. A Nihon Keizai Shimbun survey found that 74% of the respondents praised the policy in alleviating Japan from the prolonged recession.
The impact on wages and consumer sentiment was more muted. A Kyodo News poll in January 2014 found that 73% of Japanese respondents had not personally noticed the effects of Abenomics, only 28 percent expected to see a pay raise, and nearly 70% were considering cutting back spending following the increase in the consumption tax.
Abenomics worsened Japan's trade deficit in 2013 as the weaker yen increased the cost of imports, including food, oil and other natural resources upon which Japan is highly reliant. However, the Abe government viewed this as a temporary setback, as the weaker yen would eventually increase export volumes. Japan also managed to maintain an overall current account surplus due to investment income from overseas.
Koichi Hamada, a monetary adiviser for Shinzo Abe, warned that the planned vat hike could hurt Japan's economy which started to recover from long recession and deflation. He says that the Japan government should defer the tax hike so that it could not discourage consumption, adding that economists such as Jeffrey Frankel have suggested the gradual increase of the rate of the tax by one percent annually. Although Hamada is concerned about the effects of the tax hike, he expects that monetary easing by BoJ can offset its negative effects, applying the Mundell-Fleming model to Japan.
Depreciating a domestic currency can boost its export if the Marshall-Lerner condition is met. If it is not, the trade balance initilly becomes worse.
Since the disastrous nuclear incident in Fukushima in 2011, all nuclear power stations in Japan have been shut down. Making up for lost electricity generation, Japan has imported extra fossil fuels, which worsened the country's trade deficit partly because of weaker yen. The increasing cost of electricity may hurt businesses in the country, and hamper the country from boosting its economy. But Shigeru Ishiba said that people were noticed that electrity could be supplied without nuclear power generation. Thus, restarting the reactors is still controversial: a nationwide poll showed that 76 percent either opposed nuclear power or wanted Japan to reduce the reliance on nuclear energy, while in some regions such as communities close to Sendai city, where nuclear power plants create jobs and relating subsidies are granted, restarting the reactors is widely supported. Unless nuclear reactors are restarted, the Marshall-Lerner condition is not be met due to heavier dependence on fossil fuels and increase of reliance on import.
Views on Abenomics
The International Monetary Fund characterized the program as "a unique opportunity to end decades-long deflation and sluggish growth and reverse the rise of public debt," but argued that "all three arrows need to be launched for the policies to succeed. Uncertainty about the ambition of fiscal and structural reforms is adding to underlying risks."
Economist Joseph Stiglitz has explained how Shinzo Abe's programme for Japan's economic recovery has led to a surge in domestic confidence, and questioned how far Abe's "Abenomics" could claim credit. He referenced Momcilo Stanic, saying there is every reason to believe that Japan's strategy to revive and boost its economy will be a success.
Washington Post journalist Neil Irwin cited successful expansion by Toyota, with operating profit rising 88% in the second quarter of 2013, as evidence that the economic program of Japan is working. He has stated that "the fact that one of Japan's biggest and most important companies is again finding ways to make money on the homefront is a good sign that the nation's economic torpor may not last too much longer." He has also argued that Abenomics could "change the economic psychology of Japan domestically" by providing export hikes through currency devaluation.
At a meeting at the House of Representatives, the Democratic Party of Japan President Banri Kaieda questioned several measures of Abe's economic plans and also criticised the administration's plan of inflation targeting, concerned that it may result in a drop in real wages if jobs and salaries only increase marginally. Abe asserted that his administration would achieve higher wages by reinforcing competitiveness and growth potential (such as modifying tax policies and greater investment in R&D), macroeconomic policies and sustainable fiscal structure.
European Central Bank policymaker Jens Weidmann expressed concern that government interference and pressure on the Bank of Japan endangers their independence and may lead to currency wars. Russian Central Banker Alexei Ulyukayev considered the possibility that other countries might follow suit and engage in destabilising devaluations.
In addition, there is a rising skepticism regarding Abenomics, pointing out that the policy is too much focused on the demand side of its economy, not on the supply side. Such as the case of the Japanese government's push for generic medicines within its Universal Healthcare System without actually addressing the root causes. One of the fundamental problems that Japan is facing is its aging population. As the population pyramid becomes inverted, the labor pool shrinks from year to year. This brings about a number of problems for the Japanese economy.
First, the government commitment in spending on pensions, medical expenses and social security will continually act as a substantial burden to the already indebted country with a public debt of 240% its GDP. This will further worsen the financial integrity of the Japanese government leading to an erosion of international confidence in Japanese economy. The lack of confidence can raise the risk premium (CDS).
Secondly, its dwindling workforce cannot sustain the economic output level that is maintained in the future. The Japanese demography will drastically change so that more young people will have to support for the older population, which implies that this change in demography is the main culprit for the last two decades of deflation and stagnant economic growth. This has another implication to why the consumer demand might be falling behind.
One BOJ board member expressed concern over the planned tax-hike set to take effect in 2014 and 2015. Paul Krugman worried about the negative impact of the tax-hike on its economy, pointing out that the real interest rate in Japan is still high due to deflation, and decreasing the rate can contribute to its long-run fiscal condition.
Goldman Sachs chief economist Naohiko Baba has criticized the infrastructure spending component of Abenomics, arguing that the Japanese construction industry is inefficient and short of workers.
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