Abenomics is the economic policy implemented by Shinzo Abe, Prime Minister of Japan, since 2012.
It is a combination of monetary policy, fiscal policy and economic growth strategies to encourage private investment.
Abenomics is parallel to the the slogan of the Japanese Meiji period, ‘Fukoku kyōhei’ which literally means to ‘Enrich the state, strengthen the military’.
Aim and Significance of Abenomics
Abenomics is aimed at ending the deflation which has continued for more than 15 years.
It does so by focusing on massive monetary stimulus to build up self-sustaining expectations of moderate inflation.
Abenomics was launched to provide a strong counterweight to China in the Asia-Pacific region
It also aims to make Japan less reliant on the United States for defence.
It strategizes to encourage private investment.
Abenomics aims at bringing about significant changes to the economic stagnation caused by zero inflation reflecting unattractive aggregate demand.
Various aspects of ‘Abenomics’
Abenomics is accompanied by a phrase ‘three arrows’ and recently added ‘fourth arrow’.
These arrows are the essence of Abe’s policy.
While the first two ‘arrows’ focus on creating the conditions for economic expansion in the short term they are not suitable for economic growth in the long-term.
It is due to the increases in public debt that they cause, particularly the fiscal stimulus.
The first ‘arrow’: Monetary stimulus
Monetary stimulus refers to policies implemented by a country’s central bank, and in case of Japan is ‘The Bank of Japan’.
It suggests lowering of the bank’s interest rates through quantitative easing.
The primary effects of this is devaluation are:
fall in the value of the Japanese yen
increase in exports:
Foreign consumers are able to buy more yen to buy Japanese goods with the same, or even less, of their own currency.
Increase in domestic production
Therefore encouraging Japanese firms to invest due to the favourable economic conditions.
lowering of interest rates:
It will also make loans cheaper for businesses, further encouraging investment.
The second ‘arrow’: Fiscal stimulus
Fiscal stimulus involves the Governmentincreasing public spending which in the case of Japan involved massively increased spending on public works programmes.
It also involves:
the lowering of taxes
increasing the disposable income of consumers
prompting an increase in spending and thus consumption
The third ‘arrow’: Structural reform
As a long-term policy, Abenomics focused on structural reform.
the implementation of a responsible energy policy
increased labour mobility
To encourage the greater participation of women and young people in the economy.
The fourth ‘arrow’: Specific policies
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)
revision of the Bank of Japan Act
Results yielded by Abenomics
Accordingly, the Bank of Japan’s (BoJ) policy of negative interest rates and quantitative easing has yielded spectacular results.
The country recorded an unbroken six consecutive quarters of growth until June in gross domestic product (GDP) after 10 years.
There has been 4% annualised growth in the April to June quarter resulting to a boost in domestic demand and private consumption.
Japan’s current labour market conditions are said to be the strongest since 1974, with unemployment hovering below 3%.
The failure of Abenomics
Prices have not kept pace with these improvements as inflation has remained close to zero.
Government debt remains significant, whilst at the same time labour reform has been inadequate.
It shows the limits to how much ultra-loose monetary policy by itself can do to trigger demand.
Most importantly, BoJ has repeatedly deferred its decision to achieve the 2% target rate.
There is the lack of rise in wages commensurate with the growth in employment, impacting prices and consumption.
There is growing perception that the objectives of Abenomics could not be achieved unless reforms are given a rigorous push.
Abe has agreed to an annual 3% pay rise as his fourth arrow.
Yet, more radical reforms in the labour market are needed.
Japan also needs a transformation of cultural attitudes to maintain its industrial might as there has been a decline in Japan’s population in the working age, and the country stands 111th in the World Economic Forum’s ranking of gender equality.
Nevertheless, countries should look Abenomics not simply as a failure but as a guide to how central banks and government can control the economy.