Abenomics

Prime Minster Abe discussing his economic policies in a speech in London, June 2013.

Abenomics (a portmanteau of Abe and economics) refers to the economic policies advocated by Shinzō Abe, the current Prime Minister of Japan. Abe assumed office on 26 December 2012. The neologism refers back to previous political terms such as Clintonomics (based on American President Bill Clinton) and Rogernomics (based on New Zealand Minister of Finance Roger Douglas). Abe aims to expand the economy of Japan, still facing challenges related to the global economic recession, by a combination of measures such as aggressive quantitative easing from the Bank of Japan, a surge in public infrastructure spending, and the devaluation of the yen.

The policies can be compared and contrasted to other government measures across the world to stimulate economic growth. Keynesian theories of demand side macroeconomic changes are cited as partial inspiration for Abenomics. In terms of results, the yen has become 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. In addition, the unemployment rate of Japan has lowered from 4.0% in the final quarter of 2012 to 3.7% in the first quarter of 2013, continuing a past trend.

Background of Abenomics

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. As well, 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.

Abenomics is a set of policy measures meant to resolve Japan's macroeconomic problems. It 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. In 2012, the National Diet passed the bill to increase the consumption tax rate to 8% in 2014 and 10% in 2015 to balance the national budget, and it is expected that the tax hike will discourage consumption. In 1997 the consumption tax was increased from 3% to 5%, and then deflation started; the nominal GDP growth rate was below zero for most of the 5 years after the tax hike. As of May 2013, it has achieved the depreciation of the yen to 102 yen to a dollar, which was stagnating around 80 in 2012. Also, according to a survey carried out by Nikkei Newspaper in Japan, 74% of the respondents praised the policy in alleviating Japan from the prolonged recession.

In terms of recent economic trends, the unemployment rate of Japan has decreased from 4.0% in the final quarter of 2012 to 3.7% in the first quarter of 2013, continuing a past trend.

Abenomics and foreign policy

Japanese Prime Minister Shinzo Abe's regime of Abenomics includes 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 stock market has subsequently risen by 55 percent, consumer spending has pushed first quarter economic growth up 3.5 percent annually, and Shinzo Abe’s approval rating has ticked up to 70 percent. According to The Economist, Abe’s economic policy can be interpreted as having as much to do with reinvigorating a sclerotic economic situation as does with the rise of China. “Economic decline took on a new reality in Japan when China elbowed Japan aside in 2010 to become the world’s second largest economy... Mr. Abe believes that meeting China’s challenge means shaking off the apathy and passivity that have held Japan in thrall for so long.” Recent spats with China over the disputed Senkaku/Diaoyu islands have precipitated a call to action. Abenomics, therefore, is an economic doctrine inextricably linked to Japanese national security policy.

Lost decade

Main article: Lost Decade (Japan)

Japan's economy has suffered since the asset bubble burst in the early 1990s. GDP growth was slow and unable to absorb the resulting increase in unemployment. In response, the Japanese government raised VAT rates from 3% to 5% in 1997. The consumption-tax-hike in 1997 worsened the recession, deflating the economy. Since the people were discouraged from spending, retail businesses experienced lower prices. The decline in retail sales was followed by a decrease in nominal wages. The nominal GDP growth rate lowered to −1.8% in 1998, and the unemployment rate rose to 4.1%

The Japanese economy 1994-1999 (in a nutshell)
Year	Nominal GDP (billions of JPY)	NGDP Growth (%)	Unemployed persons (thousands)	Economically active population (thousands)	Unemployment (%)
1994	486526.3	1.19	1920	66450	2.88
1995	493271.7	1.38	2100	66660	3.15
1996	502608.9	1.89	2250	67110	3.35
1997	512248.9	1.91	2300	67870	3.38
1998	502972.8	-1.81	2790	67930	4.10
1999	495226.9	-1.54	3170	67790	4.67

Note: NGDP valued at 2006 market prices

Concern over the tax-hike in 2014

The Bank of Japan set a 2 percent target inflation rate. One of its board members expressed concern over the planned tax-hike set to take effect in 2014 and 2015. The Japan government will make a final decision in autumn on whether it will increase the VAT. Paul Krugman is 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. It is absurd to endanger, by raising the VAT, the current economic recovery in Japan. He says that reflation should be done first, and Japan should delay the planned tax-hike until it shows a stable economic growth.

Criticism and support

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. O. 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.

On the other side, economist Joseph Stiglitz wrote an entire guest commentary explaining why Shinzo Abe's programme for Japan’s economic recovery has led to a surge in domestic confidence. He actually 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 has 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.

See also

• Economy of Japan
• Japanese lost decades
• Shinzō Abe

External link

• Abenomics - Financial Times