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. The government 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. But Kikuo Iwata, the deputy governor of Bank of Japan, suggested that BoJ does not strictly aim for the 2 percent price target in two years. Iwata implied that BoJ would not loosen again its monetary policy, aimed at halting economic stagnation, soon after the increase in the sales tax in April in 2014.
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.
Under a weaker Yen, Abenomics 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.
Anatole Kaletsky was an early supporter of Abenomics, but since Japanese government decided to raise the country's consumption tax rate to 10 percent, he expressed his concern that the tax hike could deal a more devastating blow to Japanese economy than expected. In 1997, the Japanese government raised the rate to 5 percent from 3 percent to tackle its debt of 50 percent of its GDP at that time, promising that the tax hike would be offset by income-tax reforms. But the tax hike ended up making the domestic consumption stumble, pushing the economy into recession. The country fell into a deflationary trap. Due to the country's long-running malaise, the government gross debt reached 200 percent of its GDP despite the increase of the sales tax. The IMF forecast that the tax hike in 2014 would cut Japan's economic growth from 2.5 percent in 2013 to 1.4 percent in 2014, but Kaletsky argues that this economic downturn is underestimated.
In March 2014, at a conference in Abu Dhabi, Lawrence Summers expressed his concern about the negative effects of the tax hike, saying that the tax hike could damage the Japanese economy more seriously than early estimates. Although the Japanese government expects the Japanese economy to recover after the economy goes into short recession, Summers suggested that Japan's rebound was overestimated.
Koichi Hamada, a monetary adviser 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 initially 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 noticing that electricity 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.
Japanese wages began to decrease from 1997–98, and Hiroshi Yoshikawa, a professor at university of Tokyo, said that Japan's tenacious deflation was caused by this decline. He argues that the monetary easing by BoJ becomes powerless because the interest rate is already low close to zero. The solution he offers to beating the deflation is to push companies to pay their workers more. Kikuo Iwata, Etsuro Honda and Koichi Hamada disagreed with Yoshikawa. Hamada said if the wages just increased, companies would become incapable of maintaining current level of employment.
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.
Haruhiko Kuroda, the governer of Bank of Japan, said that raising Japan's sales tax is a confidence-buiding measure and the measure could stabilize the social security which would strengthen Japan's economic growth. He stated that the stagnation due to the tax hike would be temporary, while he mentioned the possible scenerio in which BoJ would additionally conduct quantitative easing. He warned that the cut of its corporation tax could worsen its fiscal position.
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.
Japan's real GDP contracted at an annual rate of 6.8 percent in the second quarter of 2014, after the sales tax hike came into effect in April. This fall is the worst since the devastating earthquake and tsunami disaster  hit Japan in the first quarter of 2011 when the GDP shrank by an annualised 6.9 percent.
Economics minister Akira Amari said that the Japanese government would take necessary measures, depending on its economic condition, although he at the moment did not feel that those measures needed to be done. Amari expressed confidence  that the effect of the sales tax hike began to wear off and the economy would recover later in 2014.
Kyohei Morita and Yuichiro Nagai said that they believed that Japan's real GDP would return to growth exceeding potential, mentioning economic indicators such as public works and housing construction orders.
As external demand on Japan's goods declines, Japan's export fell 2.7 percent  in May 2014 from a year ago. But its imports fell by 3.6 percent from a year ago as well, which narrowed Japan's trade deficit by 8.3 percent. The Japan trade deficit with other countries was over JPY 1tn in April 2014, and it went down to JPY 909bn (USD 8.9bn, GBP 5.2bn) in May 2014. But the country is still running a trade deficit for the 23rd straight month.
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