Abenomics And The Four Arrow Concept

 

Relevancy

  • GS Mains paper III
  • Economics
  • Japan’s economic policy
  • The four arrows, Results and failures

 

Introduction

  • 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.
  • It includes:
    • Deregulation
    • 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.

 

Conclusion

  • 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.

 

 

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