Economy Recovery in Japan - Initiatives: Abenomics provides a look at Japan's economic resurgence, detailing the various government programs.
Abusive economic policies: Breaking down Abenomics
Let's dig into Abenomics, the rowdy economic strategies introduced by Japanese Prime Minister Shinzo Abe in 2012, inspired by Obamanomics, Clintonomics, and Reaganomics. Comparable in name but unique in its own special way, Abenomics is an unapologetic attempt to stimulate Japan's economy and combat deflation.
After taking office, Prime Minister Abe confronted a recession-scarred economy, still reeling from the 2008-2009 crash, and a stagnant growth spree in the 2000s. Abenomics aimed to ignite economic growth, wipe out deflation, and bring inflation to a targeted 2%, all by loosening fiscal and monetary policies, boosting competition, expanding global trade, and addressing deep-rooted economic woes.
Abenomics Unleashed
During his second term, Abe announced a series of economic policy programs emphasizing:
- Monetary easing
- Fiscal stimulus
- Structural transformation
Labeling this economic policy cocktail as Abenomics, Abe hoped Japan would recover and become more competitive. Japan's predicament since the 1990s, marked by deflation and anemic growth, had begun after the bursting real estate bubble in the 1980s.
Drowning in easy money
Japan began to adopt quantitative easing, meaning expanding the money supply and keeping interest rates rock-bottom, as early as 2005. Although this policy facilitated economic recovery, it could not stop deflation.
As Prime Minister, Abe launched an aggressive economic policy covering money loosening, fiscal flexibility, and structural reform initiatives to provoke private investment. We christened it Abenomics.
Printing money like nobody's business
The Bank of Japan (BoJ) aspired to bring inflation up to 2%. To achieve this, the BoJ increased the monetary base by 60 trillion yen and 70 trillion yen each year through bond purchases, starting in October 2013. The policy aimed to:
- Boost economic growth
- Correct the excessive Yen appreciation
- Make Japanese exports more competitive
In October 2014, the BoJ raised the bond purchase program to 80 trillion yen annually. In 2016, BoJ cut interest rates below zero, aiming to raise lending and investment. By July 2019, BoJ maintained its short-term interest rate target at -0.1% and the 10-year government bond yield at around 0%.
The BoJ also introduced additional options for easing monetary policies, including:
- Increasing the ETF holding up to 6 trillion yen per year
- Increasing J-REITs by 90 billion yen per year
- Raising the loan program denominated in US dollars to 24 billion USD
Fiscal ease your way out
From a fiscal standpoint, Abenomics prioritized fiscal easing to stimulate consumer demand. The Japanese government spent 10.3 trillion Yen on infrastructure in 2013 and further increased spending by 5.5 trillion yen the following year.
This increased government spending widened the fiscal deficit. To offset increased spending, the Japanese government raised the consumption tax rate from 5% to 8% in April 2014 and subsequently raised it to 10% in October 2015.
Abe also approved an emergency stimulus package worth 3.5 trillion Yen in December 2014 to boost the ailing economy. In addition, Japan lowered its corporate tax rates below 30% in 2016.
Structural reform, the hard way
Abenomics involved a range of reforms to encourage private sector investment, targeting:
- Improving corporate governance
- Easing restrictions on foreign staff in special economic zones
Labor supply posed a challenge for Japan, as the birth rate plummeted by 6%, resulting in a substantial population decline. To address the workforce shortage, Abe offered Abenomics 2.0, focusing on increasing the birth rate and boosting pension and social security benefits for the elderly.
Japan implemented several structural reforms, including:
- Narrowing the wage gap between regular and non-regular workers
- Promoting labor market flexibility
- Offering free educational programs for low-income households and increasing scholarships
- Implementing retraining programs
- Developing sandbox regulations and digital marketplaces
- Designating special national strategic zones to support ongoing structural reforms
- Advancing international trade agreements, such as the Trans-Pacific Partnership in 2018 and the Japan-EU Economic Partnership Agreement in 2019
- Exporting infrastructure services through project financing and public-private partnerships
- Boosting tourism, targeting 60 million tourists by 2030 from the initial 8 million in 2012
- Supporting small and medium enterprises and startups
- Reducing administrative costs and providing a single-stop service for foreign investments
Although Abenomics yielded moderate economic growth and decent productivity, it fell short of its inflation and wage growth targets. Japan's persistent low inflation, subdued wage gains, and cautious corporate response underscored ongoing structural rigidities and demographic challenges. The policy mix continued to rely heavily on monetary easing, with structural reforms moving sluggishly, and the success in attracting foreign investment was overstated due to currency valuation effects.
Sources
- VoxEU.org, “Abenomics: Assessing six years of Japan's economic policies”, 2018
- East Asia Forum, “The politics of Abenomics”, 2015
- The Japan Times, “Foreign direct investment in Japan slows”, 2019
- In an effort to bolster Japan's economy and compete effectively in the global market, Abenomics was designed to focus on monetary easing, fiscal stimulus, and structural transformation.
- To stimulate private investment, Japanese Prime Minister Abe's economic policy, Abenomics, included initiatives such as money loosening, fiscal flexibility, and structural reforms, aimed at modernizing Japan's business sector.
