The key economic strategy of Japan’s Prime Minister Shinzō Abe upon being elected for a second term in December 2012 was dubbed ‘Abenomics’ for its radical departure from conventional economic thinking. Based around the so-called ‘three arrows’ of fiscal stimulus, monetary easing and structural reform, Abenomics was seen as a necessary strategy in the aftermath of what many observers had seen as two lost decades for Japan’s economy. Japan had been slumped in recession for years, and Abe’s policies of encouraging private investment, targeting inflation of two percent annually (see Fig. 1), setting negative interest rates, huge quantitative easing, and reforming the Bank of Japan were a dramatic economic cocktail designed to drag the country back into growth.
During the first few weeks of Abe’s government, he introduced two of the three arrows of his policy. This included the JPY 10.3trn stimulus bill, alongside the appointment of Haruhiko Kuroda as new head of the Bank of Japan, who was given the task of getting inflation to sit around two percent through a wave of quantitative easing.
The impacts of these policies were immediate, with a sharp weakening of the yen by as much as 25 percent against the dollar, a four percent fall in the rate of unemployment, and an increase in consumer spending. The stock markets also rose considerably, with the TOPIX index jumping 55 percent by May 2013. The quantitative easing implemented by the Bank of Japan has been at an unprecedented level, and far surpasses anything instigated by the likes of the US Federal Reserve and the Bank of England.
Agriculture, labour markets, healthcare and female participation in the markets are all areas that need urgent and ambitious reform
An initial wave of quantitative easing was started in April 2013, with the Bank of Japan buying between JPY 60-70trn each year. In October 2014 it expanded the programme, with a second wave of bond buying of around JPY 80trn each year.
The effect of quantitative easing has been the yen falling sharply against the dollar, but whether it will help to save Japan’s economy in the longer term remains to be seen. While the EU has only just started its own form of quantitative easing, both the US Federal Reserve and Bank of England have ended their own bond purchase efforts.
Too good to be true?
The moves have not been made without resistance, however. Some politicians wanted lower corporate tax rates, while other observers felt the experiment would ultimately fail. BNP Paribas analyst Ryutaro Kono wrote in 2013 that by 2015, Japan’s economy would be engulfed in high inflation and huge public debt.
Others called for a change in tact last year; with the IMF’s Deputy Managing Director, Naoyuki Shinohara, claiming as recently as October last year that Abenomics wasn’t working: “Abenomics is not showing the expected results. There had been considerable fanfare about structural reforms and deregulation, but it ended up with no substance”, Shinohara told Bloomberg Business. According to Ayako Sera, a market strategist at Japanese investment firm Sumitomo Mitsui Trust, the difficult economic climate in the country is likely to mean foreign investors stay away from Japanese stocks.
Sera told Bloomberg Business in December that in order for sentiment to improve, a move away from monetary policies was essential. “We need to see a framework where growth isn’t dependent on monetary easing. If not growth, then at least a way to increase productivity. For now there’s nothing like that, so I imagine it’ll be hard for stocks to keep going higher and for foreigners to take an interest in them.”
Despite the optimism seen from foreign investors in 2013 for Abe’s policies, it’s believed that a sales tax hike implemented in April last year led to the economy sinking back into a recession. The consumption tax rise was the first increase in 17 years and an attempt by Abe to bring Japan’s public debt back under control. However, the impact was devastating to the country’s economy, and meant that foreign investors deserted Japanese stocks. Abe delayed a further planned rise in the consumption tax for an additional 18 months.
However, many others believed that Abe’s policies had in fact got the economy growing once again. Marcel Thieliant, an economist at Capital Economics based in Singapore, told The Financial Times in January that despite the improving economic conditions in the country, Japan’s central bank needs to do more to prevent inflation from slowing even further. “The labour market continues to tighten, as the economic recovery is picking up speed. However, the continued slowdown in inflation suggests that the Bank of Japan still has more work to do.”
In December, Thieliant told The New Economy that Abenomics had in fact brought about a period of modest growth, and so abandoning it would be counterproductive. “All in all, Japan’s economy has done fairly well since the start of ‘Abenomics’, considering the sizeable demographic and fiscal headwinds. To the extent that the policy helps eradicate deeply ingrained deflation with all its economic costs, some short-term pain for consumers is surely no reason to abandon it.”
He added, “Japan’s growth performance in recent years has not been as poor as often believed. Most of the growth shortfall relative to other large advanced economies can be explained by the fall in the working-age population, while productivity growth has been fairly strong. Nonetheless, there is still scope to close the sizeable gap in the level of productivity relative to the US.”
Election gives mandate
With more and more people looking for a change in strategy, Abe called a snap election in November in order to shore up his mandate and get ready to implement the third arrow of his reforms. Securing his victory in December, Abe has maintained that he will push ahead with the structural reforms to Japan’s economy that had taken longer than expected during the previous term.
According to some, the election victory has given Abenomics another chance to properly restructure Japan’s economy. Former German ambassador to Japan and academic Volker Stanzel wrote in December that while his first two years of attempting such reforms had been bogged down in trouble, the monetary easing and huge public spending had been successfully implemented.
Stanzel wrote that if Abe fails to push through serious structural reforms that include a series of free trade agreements, he would have put Japan in a worse position than when he came to power. “His election victory now gives him two additional years to achieve what he promised to achieve. If he does not succeed, Japan will be the worse off for it.”
While his efforts to fire off the third arrow of Abenomics in June were delayed by the aftermath of the consumption tax hike, this year will likely see him start again with attempts to restructure the economy. Part of the plans include hefty reforms to the country’s healthcare market, opening it up to outside investment and cutting lots of red tape. There are also proposals to aid both local and foreign businesses by cutting back on overly burdensome regulations. This third arrow will, however, prove most difficult to implement. It presumes that many of Japan’s ageing and entrenched sectors are willing to be reformed, as well as there being a desire to overhaul many of the regulations that have been in place for so long.
Agriculture, labour markets, healthcare and female participation in the markets are all areas that need urgent and ambitious reform, according to Adam Posen, President of the Peterson Institute for International Economics. He told The Financial Times last year that while Abe’s reforms are to be welcomed, the Prime Minister needs to be much more ambitious. “Mr Abe has prioritised a few key reforms – notably increasing female labour force participation, consolidating farms, breaking down labour market divisions and raising competition in healthcare – which are sensible and feasible. The government has not wasted momentum on administrative initiatives before starting its economic reform efforts.” He added, “In short, the Abe government has understood Japan’s economic problems correctly and concentrated its efforts on areas where it can do most good. But the efforts have been insufficient. Far greater ambition is required. True, half a loaf of reform is better than none. But it is probably not enough to return the Japanese economy to sustained strength.”
Moving into 2015 and Japan’s economic outlook has failed to bounce off the back of Abe’s re-election. Inflation fell even further in January to just 0.5 percent, partly as a result of the falling global price of oil. It represents the lowest rise in prices for around a year and a half, and has led to some analysts to predict that Japan might fall back into deflation during this year. Despite this, economic activity has been increasing in Japan, with industrial production rising by one percent and the rate of unemployment falling to 3.4 percent (see Fig. 2).
In a speech in January, Abe maintained that he would be pressing ahead with the third stage of economic reforms. “We will try to quickly implement the economic stimulus package compiled at the end of last year and make Abenomics bear fruit.”
Still, today there remain difficulties facing Japan. While Abe pursues growth for the economy, the country is one with an ageing population. Instead of growth, the country should instead be trying to consolidate the living standards for its existing population. As a result of targeting two percent inflation, living costs are likely to rise while incomes fall, meaning that Japan’s ageing citizens will find things much tougher in the future.
The year ahead is likely to prove one where there are plenty of opportunities for Prime Minister Abe to restore the optimism in the country seen when he took power in 2013 and give a new lease of life to the flagging Abenomics ideology that he stands for. However, the task of undertaking such heavy structural reforms in a country so set in its ways is likely to prove exceptionally difficult.
