Japan’s Prime Minister Shinzo Abe is widely known for his unique economic policy approach, “Abenomics.” Kavan Choksi notes that the term encompasses a set of three arrows – monetary regime shift, fiscal stimulus measures, and structural reforms, all aimed at improving Japan’s economic position. The innovative program was introduced in 2012 and has garnered much attention from economists across the globe. While the monetary regime shift has significantly encouraged investment, the fiscal stimulus measures have helped stimulate consumer demand. Alongside these measures, structural reforms have been introduced to break down regulatory hurdles and promote the growth of new businesses. With Abenomics in place, Japan’s economy is on a path to greater prosperity.
Japan has been fighting deflation for over 20 years and has continuously intervened in hopes of revitalizing its struggling economy. Prime Minister Shinzo Abe announced his “Abenomics” three-pronged approach in 2013, including fiscal expansion, monetary easing, and structural reform. The goal is to increase domestic demand and GDP growth and raise inflation to 2%. Structural policies are being implemented to improve the country’s competitiveness, labor market, and trade partnerships. While the challenges are immense, the government’s commitment to tackling these issues head-on is a positive step towards a more stable economy.
Despite four years of heavy stimulus, Japan struggles with moderate growth, inflation below target, and mounting concerns about debt and structural reform. Even the reelection of Prime Minister Abe in October 2017 has done little to alleviate these issues. However, the country faces an even greater challenge due to the United States’ withdrawal from the Trans-Pacific Partnership under President Donald J. Trump. With this significant blow to Japan’s economic policymaking, it remains to be seen how the country will navigate the difficult road ahead and continue to work towards achieving its economic goals.
To jumpstart Japan’s economy, the Japanese government implemented Abenomics. This set of policies, comprised of three arrows, combines aggressive monetary and fiscal policies with structural reforms. The primary goal of these policies is to pull Japan out of its deflationary slump that it’s been mired in for decades. Although these policies have been met with mixed reactions, many believe that Abenomics has stabilized Japan’s economy and spurred some growth. The long-term success of these policies is still up for debate, but for now, the three arrows of Abenomics continue to aim for a prosperous future for Japan.
1. Fiscal Stimulus
Kavan mentions Japan’s government implemented a fiscal stimulus plan in 2013, totaling a staggering 20.2 trillion yen ($210 billion), with direct government spending accounting for 10.3 trillion yen ($116 billion). Under Prime Minister Shinzo Abe, the focus was on strengthening Japan’s infrastructure with critical projects like constructing bridges, tunnels, and earthquake-resistant roads. This stimulus was the country’s second largest ever, effectively driving economic recovery. Subsequently, there was a 5.5 trillion yen increase in April 2014, followed by another spending package worth 3.5 trillion yen after the December 2014 elections. The subsequent growth of Japan’s economy is a testament to the effectiveness of such measures in the right circumstances.
2. Unorthodox Monetary Policy
The word “experiment” could not be more fitting when describing the Bank of Japan’s unprecedented monetary policy. The policy, coined as Abenomics, centers around the BOJ’s massive asset purchase program and the injection of liquidity into the economy, known as quantitative easing, or QE. However, Kavan emphasizes that the second arrow of this policy has been the most unorthodox – pushing interest rates into negative territory. This aggressive approach to monetary policy has raised eyebrows worldwide and has even been described as a “gigantic experiment” by the Wall Street Journal. The BOJ’s actions are not without risk, but they offer an opportunity to tackle deflation head-on and jumpstart the economy in a way that traditional monetary policies have been unable to do.
3. Structural Reform
Japan has long been a global economic powerhouse, but its competitiveness has taken a hit in recent years. To address this issue, the government has embarked on a bold program of structural reform aimed at stimulating growth and revitalizing the economy. The plan includes various measures, from cutting business regulations to liberalizing the labor market and agricultural sector to increasing workforce diversity. By implementing these changes, Japan hopes to position itself for success in the global marketplace and remain a leader in innovation and technological advancement. While the road to reform may be long and challenging, the result promises a brighter future for Japan.
How Does Abenomics Work?
To combat stagnant inflation, BOJ Governor Haruhiko Kuroda initiated a round of quantitative easing in 2013 which doubled the bank’s balance sheet. However, Kavan explains that with inflation persistently below 1 percent into 2017, the BOJ has entered a second and open-ended phase of QE consisting of $660 billion in yearly asset purchases. Kuroda has stated that asset purchases will continue until the bank achieves its 2 percent inflation target. The sheer magnitude of these purchases is staggering; the value of assets held by the BOJ now surpasses 70 percent of GDP. In comparison, assets held by the U.S. Federal Reserve and the European Central Bank remain below 25 percent of their respective GDPs. The BOJ’s approach to QE is unprecedented and will be closely watched by economists and policymakers worldwide.
Japan’s economy has been in a prolonged state of weakness, leading to the implementation of an unprecedented policy decision in January 2016. BOJ Governor Haruhiko Kuroda shocked the financial world by introducing negative interest rates to spur lending and investment. This decision placed Japan alongside a select group of countries, including Denmark, Sweden, Switzerland, and the European Union, pushing rates below the “zero bound.” While the BOJ’s negative rates may have had some positive impact, there are worries that they can damage the banking system and even contribute to speculative bubbles. Despite these concerns, the bank has continued to persist with the negative interest rate approach, with the decision to prolong the minus 0.1 percent rate into 2018.
Did Abenomics reinvigorate Japan’s economy?
Although Japan’s Prime Minister Shinzo Abe has been in power since 2012, its economy has struggled to reach its robust GDP growth, wage growth, and inflation targets. Despite setting a goal of 2 percent inflation by 2013, the inflation rate was still only 1 percent as of December 2017. However, Japan’s GDP has shown more resilience, having expanded at an annualized rate of 0.5 percent in the fourth quarter of 2017, marking eight consecutive quarters of growth for the first time in almost three decades. The country’s recent growth can be attributed to expanding global demand for high-tech electronics and the implementation of robotics and other labor-saving technology to combat Japan’s acute labor shortage. Increased tourism and a tighter job market have strengthened Japan’s national economy.
Kavan stresses that the Japanese economy has grown tremendously due to Abenomics, but some policymakers feel that consumer spending remains too low. Household spending dropped 0.1 percent in 2017, and real wages decreased by 0.2 percent. Even more disappointing, wages have fallen 9 percent in real terms since 1997. The Abe administration wants to tackle this issue by pushing corporations to raise pay by 3 percent in 2018, but this proposal has challenges. The public remains skeptical of changes that could open the doors to more foreign workers, and corporations worry about losing their competitive edge. Regardless, the reappointment of BOJ Governor Kuroda will ensure that large-scale monetary easing remains a key aspect of Abenomics moving forward. However, many agree that greater structural changes will be needed to spur the growth the Japanese economy needs to thrive.
Kavan Choksi is a successful investor, business management and wealth consultant. Working strategically with companies across fast-moving consumer goods, retail and luxury markets — he leverages his vast experience to help clients turn around and revitalize their businesses. With his expertise in economics and finance, Kavan has developed a passion for investing over the years and enjoys helping others do more with their money. He provides thoughtful commentary to publications such as CNBC, Fox Business, Forbes, Business Insider, CEOWORLD Magazine, International Business Times, Financial Express, and The Epoch Times. Kavan is also a regular contributor for Nasdaq, where he shares his expert insights on what’s moving markets and the global economy.