Definition: Abenomics is a set of economic and social policies that begun in earnest during the period of Mr. Abe’s first administration in 2005. It emphasizes increased economic growth, reduced gender employment, increased spending on assistance to women and children, and renewed efforts to strengthen the nation’s sustained economic recovery. Though officially launched on April 16, 2007, Abenomics has intensified in its implementation over the past five years, leading to radical changes in both Japan’s economic policies and political landscape.
Three measures were adopted to achieve the main purpose of Abenomics, namely: Aggressive monetary policy, fiscal consolidation, and growth strategy.
- Aggressive monetary policy is aimed at nurturing market confidence and encouraging consumption and investment in order to achieve the government’s primary goal of full employment.
- Fiscal consolidation pushes through structural reforms aiming to cut excess government spending and boost growth by encouraging private-sector investment.
- Growth strategy focuses on structural reforms promoted by the government in order to sustain economic growth in difficult times.
Japanese economic conditions prior to Abenomics
The consumption tax increase came as a shock to many. The increase effectively ended a decade of very low economic growth – 0.4% in 1993, 0.7% in 1994, and 0.9% in 1995. The tax increase had the intended effect of reducing consumerism, boosting investment, and spurring growth in Japan’s productive sectors (especially agriculture). But it also contributed to a rise in the enormous stock of government bonds, originally issued to finance specific projects and now owned by private and public entities around the globe. Financial deregulation followed, reducing regulatory restrictions on financial institutions.
Japan faced months of uncertainty as lenders and borrowers struggled to cope with the loss of revenue from a single country. With the collapse of the peg, Japan entered a period of hyperinflation that lasted until April 2000. Japan’s financial crisis of 1997 was the deepest and longest in modern history. The period from November 1997 to May 2000 was known as the “Lost Decade”, experiencing GDP contraction of 20.1% in real terms (after taking into account a decrease in inflation) and a decline in living standards for both labor and capital. Within this context, an experiment by then Prime Minister Taro Aso to launch a major overhaul of the country’s economic policies was launched in April 2000 – a period known as Abenomics.
World economic conditions prior to Abenomics
The global economy took a major hit in 2009 when the global recession took hold. Japan experienced a huge drop in exports due to the global financial crisis and the subsequent economic slump. Of all the G7 countries, only the United States saw an increase in exports during this period, outpacing Japan by nearly $100 billion. Japan’s economic performance during this time was not very different from that of the United States or 2008 as a whole. The two countries showed a similar pattern – a sharp decline in household income beginning in 2007 followed by a slower but still substantial increase in exports during 2009.
Implementation of Abenomics
Abenomics was a monetarist program implemented by former Prime Minister Yukio Hatoyama in 2006. It focused on unconventional policies to increase aggregate demand through two policy tools: monetary policy and fiscal policy. Monetary policy and fiscal policy are aimed at influencing aggregate demand through changes in interest rates. Economic growth strategies focus on increasing productivity through increased investment, Innovation, and wages.
Abenomics implemented in Japan is a mixed approach of conservative reforms and expansionary fiscal policy. The policies were designed to reduce labor market rigidities, increase employment, and maintain price stability through continued government spending and monetary policy to stimulate growth through expanded demand while combatting runaway inflation. Abenomics has had some success in addressing these objectives, but it is still unpopular with many Japanese, and many observers believe it will ultimately fail.
Abenomics and the Three Arrows
For Japan, Abenomics has three arrows: aggressive monetary policy, fiscal consolidation, and growth strategy.
The first arrow was monetary policy. Abenomics aimed to reduce Japan’s deflation and get the country out of its loose monetary policy trap, meaning producing more money and expanding the money supply. Monetary policy kept interest rates low across the board and increased the circulation of money.
The second arrow of Abenomics involves fiscal consolidation. The government reduces its fiscal deficit by raising taxes on high-income households and small businesses and introducing new tax credits to encourage investment and employment. Fiscal consolidation is a strategy intended to reduce the government’s dependence on debt — both external and internal — as a percentage of GDP while increasing growth rates. Fiscal consolidation has been key to attaining its goals of full employment and stable prices while strengthening the government’s finances without relying on increases in taxes or spending.
The third arrow Growth strategy emphasizes emphasizing domestic production has been implemented, emphasizing technologies that will make Japanese goods more competitive globally while reducing the government’s exposure to adverse external events such as large-scale trade disruptions or natural disasters.
What Abenomics Strives For?
The key to Abenomics is that it emphasizes rethinking the entire system, including the role of government, business, and people in rebuilding an eco-friendly, inclusive growth. In other words, Abenomics isn’t about what is quick or easy; it isn’t about arbitrarily cutting social programs to make budgets. Rather, Abenomics is about restructuring the entire political economy so that citizens have stronger incentives to invest, save, and master new skills.
Japan’s concerns lie less in demographics than in the changing nature of its economy and society. Abenomics aims to guide a population increasingly disabled by overwork and poverty into consumer goods and services beyond their wildest dreams. It seeks not simply to raise living standards but to provide broadly shared happiness. This can be achieved through a combination of economic reform, tax incentives, generous government programs, and radical changes in the way we do education and culture.
Goal 1: Achieving Sustainable Growth
The key policy action taken by the Abenomics administration is the implementation of comprehensive reform to accelerate a virtuous economic cycle, which will help grow GDP to 600 trillion yen by 2020. Abenomics also lays out ambitious targets for social development, raising the retirement age and creating jobs for the young.
The core of Abenomics is to expand the economy through implementing comprehensive reform. Abenomics is not an economic theory but a set of policies designed to push the economy out of the doldrums and a positive growth path. Japan’s economy grew by an average of 6.5% per year from 1960 to 1990, but its rate of growth slowed to 1.5% per year during the last decade. One factor was the growing national debt which hit a record high of nearly 50% of GDP in 2010.
Goal 2: Realizing Society 5.0
We’re in a period of historic opportunity for rebuilding a prosperous, humane society based on technology, Innovation, and social diversity. Abenomics offers the best policies to realize this vision. Society 5.0 is rooted in five core values. The first is Innovation. Innovation drives productivity, competition, and growth. The second is Fairness. Fairness motivates people and organizations to act in the public interest. The third is Prosperity. Prosperity drives Innovation and growth because it enables individuals to achieve true freedom in working life by exchanging value for work, knowledge, services, and capital. The fourth is Security. Security ensures that hard-won resources are protected and shared fairly throughout society.
What are the risks?
The main risk of Abenomics comes from the government spending plan called spectacular economic reform that is meant to get Japan out of deflation and keep its economy growing at a steady rate of around 2 percent annually. Critics argue that Abenomics ignores the problem of high taxes and runaway government spending, making Japan famous for its backward approach to economic revitalization.
Abenomics was intended to reverse the decades-long trend of declining economic growth and high unemployment. However, it has failed to achieve its initial objectives.
The economic crisis and slump of the early to mid-2000s were severe in Japan and other developed countries. Abenomics was designed to overcome these imbalances by increasing growth and consumption in the context of stagnant wages and debt. The 2005 sales tax increase was one part of this approach. But the tax hike confused consumers, and many skipped necessary and legal purchases as a result. This created an environment in which many businesses cut back on capital investments or simply stopped expanding.
The BOJ’s policy disappointed many economists, many of whom had predicted that Abenomics would lead to higher long-term growth and more balanced consumption budgets. Some fear that the consumption-minded policies will lead to excessively tight money and economic stagnation.
Though Abenomics has been met with some resistance from within the government and among junior bank bond investors, the central bank has committed to continuing with its policy of gradually raising rates over the next two years to fight inflation and tackle a persistently sluggish recovery. While some see new prospects for economic recovery in Japan, others are skeptical about Abenomics’ ability to turn around anemic growth and high unemployment.