refers to the economic policies implemented by the Government of Japan led by the Liberal Democratic Party (LDP) since the 2012 general election. They are named after Shinzo Abe (1954–2022), the longest serving Prime Minister of Japan, governing from 2012 to 2020. After Abe resigned in September 2020, his successor, Yoshihide Suga, stated that his premiership would continue the policies and goals of the Abe administration, including the Abenomics suite of economic policies. Abenomics combines neoliberal elements and keynesian elements.
Abenomics is based upon "three arrows": monetary easing from the Bank of Japan, fiscal stimulus through government spending, and structural reforms. The Economist characterized the program as 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".
During Abe's tenure, the rate of Japan's nominal GDP growth was higher, and the ratio of government debt relative to national income stabilized for the first time in decades. However, the "third arrow" of structural reforms was not as effective as observers had hoped.
Background Japanese economic conditions prior to Abenomics
In 1996, GDP increased by 3%, recovering from a major asset-price bubble burst in the early 1990s. The Japanese government raised the consumption tax from 3% to 5% in April 1997, pledging further increases in 1998.Learning from 1997 tax hike The Wall Street Journal, Sep 9, 2013
A financial crisis in East and South East Asia followed the collapse of the Thai Baht peg on July 2, 1997, with widespread consequences in the region. Government revenues decreased by 4.5 trillion yen as consumption faltered. Nominal GDP contracted for most of the five years following the tax hike.Japan's lost decade AEI Mar 1 2008Tax Hike Will Put Abenomics To The Test International, Forbes, 10/01/2013 Japan's average annual wages grew between 1992 and 1997 but declined after the 1997 tax hike. Since 1997, wages have decreased faster than nominal GDP.
In 2012, the Diet of Japan under previous Prime Minister Yoshihiko Noda increased the consumption tax to 8% in 2014 and 10% in 2015 to balance the national budget; this tax hike was expected to further discourage consumption.
World economic conditions prior to Abenomics During the Great Recession, Japan suffered a 0.7% decline in real GDP in 2008, and a severe 5.2% decline in 2009. In contrast, world real GDP growth was 3.1% in 2008, with a 0.7% decline in 2009. Exports from Japan shrank from 746.5 billion in USD to 545.3 billion from 2008 to 2009, a 27% reduction. By 2013, nominal GDP in Japan was at the same level as 1991, while the Nikkei 225 stock market index was at a third of its peak.
Ideological basis of Abenomics
Abe's economic policy is also related to the rise of China as an economic and political power. Abe's supporters drew explicit parallels between Abenomics and the Meiji era program of fukoku kyōhei (enrich the country, strengthen the military). Strengthening the Japanese economy intended to counterweight to China in the Asia-Pacific region, and reduce Japan's reliance on the United States for defense.
+ Economic Outlook in Japan 1994–1999National accounts of OECD countries detailed table volume 2a 1993-2004, OECD (2006)Year Nominal GDP (billions of yen) 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 is valued at 2006 market prices
Implementation
Abenomics 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 excessive yen appreciation, setting negative interest rates, radical quantitative easing, expansion of public investment, buying operations of construction bonds by the Bank of Japan (BOJ), and revision of the Bank of Japan Act. Fiscal spending increased by 2% of GDP, likely raising the deficit to 11.5% of GDP for 2013.
Two of the "three arrows" were implemented in the first weeks of Abe's government. Abe quickly announced a ¥10.3 trillion stimulus bill and appointed Haruhiko Kuroda to head the Bank of Japan with a mandate to generate a 2% target inflation rate through quantitative easing. But Kikuo Iwata, the deputy governor of the Bank of Japan, suggested that the BoJ does not strictly aim for the 2% price target in two years. Iwata implied that the BoJ would not loosen its monetary policy so soon after the increase in the sales tax in April 2014. Abe also pushed for Japanese participation in the Trans-Pacific Partnership.
The 2013 House of Councillors election gave Abe complete control over the Diet, but the government showed internal division over specific structural reforms. Certain cabinet members favored lower corporate taxes, while others feared political backlash for cutting taxes on large firms while raising taxes on consumers. Labor laws and rice production controls also became contentious issues within Abe's government.
Quantitative easing
On 4 April 2013, the BoJ announced its quantitative easing program, planning to purchase ¥60 to ¥70 trillion of bonds per year. This was raised to ¥80 trillion the following year.
Effects
Abenomics immediately affected financial markets in Japan. By February 2013, the Japanese yen had dramatically weakened and the TOPIX stock market index had risen 22%. The unemployment rate in Japan continued falling from 4.0% in the final quarter of 2012 to 3.7% in the first quarter of 2013.
The yen became 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. By May 2013, the stock market had risen by 55%, consumer spending had pushed first-quarter economic growth up 3.5% annually, and Shinzo Abe's approval rating ticked up to 70%. A Nihon Keizai Shimbun survey found that 74% of the respondents praised the policy for alleviating the prolonged recession.
Changes to wages and consumer sentiment were more muted. A Kyodo News poll in January 2014 found that 73% of Japanese respondents had not personally noticed the effects of Abenomics, only 28% expected to see a pay raise, and nearly 70% were considering cutting back spending following the increase in the consumption tax.
Under a weaker yen, Abenomics increased the cost of essential imports, including food, oil, and other natural resources. The Abe government viewed this as a temporary setback, believing the weaker yen would eventually increase export volumes. Japan also managed to maintain an overall current account surplus, bolstered by foreign investment income. However, the Japanese economy started contracting in the third quarter of 2018, the largest contraction in four years.
Analysis Austerity policies BMI Research predicted the Japanese economy would fall into fiscal crisis before 2020 due to basic structural issues, including high government debt, worsening demographics, and loss of competitiveness in key industries. Anatole Kaletsky was an early supporter of Abenomics, but since the Japanese government raised the consumption tax rate to 10%, he expressed concerns that the tax hike could deal larger blow to the Japanese economy than expected. In 1997, the Japanese government raised the rate from 3% to 5% to tackle its debt (50% of GDP at the time), promising that the tax hike would be offset by income-tax reforms.Review & Outlook: Japan's VAT Ratchet Opinion, The Wall Street Journal, April 1, 2014 However, the tax hike inhibited domestic consumption, pushing the economy into a deflationary trap and a recession. Due to the country's long-running malaise, gross public debt reached 200% of GDP, despite the sales tax increase. The International Monetary Fund (IMF) forecast that the tax hike would cut Japan's economic growth from 2.5% in 2013 to 1.4% in 2014, but Kaletsky argues that this economic downturn is underestimated.
In March 2014, at a conference in Abu Dhabi, Lawrence Summers expressed concern that the tax hike could damage the Japanese economy more seriously than early estimates. Japan's Wages Mask Rise of Hottest Job Market Since 70s: Economy, Bloomberg, March 7, 2014 Although the Japanese government expected their economy to recover after a short recession, Summers suggested the rebound was overestimated.
Koichi Hamada, a monetary adviser for Shinzo Abe, warned that the planned value-added tax hike could hurt Japan's economy, which had started to recover from a long recession and deflation. He suggested the tax hike should be deferred to avoid discouraging consumption, adding that economists such as Jeffrey Frankel suggested a gradual one percent per-annum tax rate increase. Although Hamada was concerned about the effects of the tax hike, he expected monetary easing by the BoJ to offset its negative effects, applying the Mundell–Fleming model to Japan.
Depreciating a domestic currency can boost its exports if the Marshall–Lerner condition is met. If it is not, the trade balance initially becomes worse. All of Japan's nuclear power plants were shut down following the Fukushima nuclear accident in 2011, and Japan imported extra fossil fuels to make up for the lost power generation, worsening the country's trade deficit.Nuclear power in Japan: Start 'em up The Economist, Mar 8, 2014 Restarting the reactors was controversial; a nationwide poll showed that 76 percent either opposed nuclear power or wanted Japan to reduce its reliance on nuclear energy, while in some regions, such as communities close to Sendai, where nuclear power plants create jobs and relating subsidies are granted, restarting the reactors was widely supported. Without nuclear power, the Marshall–Lerner condition would not be met, due to a heavier dependence on fossil fuels and an increased reliance on imports.
Deflation Martin Feldstein argued that consumption would be damaged by monetary ease policy by national bank, when the rise in prices is higher than the rise in wage.
Deflation causes consumers to expect goods and services to be cheaper in the future, discouraging present spending. In turn, this causes the economy to shrink, as consumer spending is vital. Richard Koo explained this phenomenon as the fallacy of composition, a situation, "in which behavior that is correct for individuals or companies has undesirable consequences when everyone engages in it."
Koo opposed the idea that Japan's aging population and decreasing labour force caused the country to suffer from chronic deflation. Population aging leads to a situation where the number of people (including retired people) who spend money becomes larger than that of people who work.Japan's Problem: Demographics or Money? A. Frangos, The Wall Street Journal, 6 Dec 2015 He argued that demand should tend to exceed supply, and therefore population aging should be inflationary. Koo stated that the true driver of deflation was that Japanese companies were unwilling to borrow money and pay interest that the elderly obtain, which may discourage the elderly to spend.