What is Abenomics?
Shortly after taking power in December 2012, Japanese Prime Minister Shinzo Abe outlined a three-pronged economic policy that became known as “Abenomics.” By coordinating monetary, fiscal, regulatory, industrial, social and trade policies, the Abe government is working to end deflation and stimulate demand in the near term and pursue politically difficult fiscal and structural reforms for long-run growth.
Under Abenomics, monetary policy is aimed at reversing the persistent deflation that has weakened domestic demand. To that end, under the leadership of the current Governor of the Bank of Japan (BOJ), Haruhiko Kuroda, the BOJ has adopted a 2% inflation target. To reach this goal, the BOJ has pursued a revolutionary asset-buying program known as quantitative and qualitative easing (QQE). In April 2013, BOJ began expanding the monetary base at ¥60-70 trillion a year and increasing to ¥80 trillion in October 2014, mainly by purchasing Japanese government bonds held by banks, insurers and other investors.
QQE is expected to boost inflation and demand by demonstrating the BOJ’s commitment to achieving 2% inflation by encouraging investors to shift holdings from low-yield government bonds to riskier (and higher-yielding) assets and by lowering real interest rates. As a by-product of QQE, the BOJ ended the post-2008 “strong yen” period, which drove down the value of the yen relative to the dollar, thereby boosting the profits of Japanese exporters and attracting record numbers of tourists.
The BOJ had been making progress towards its inflation target until April 2014 when a 3% consumption tax hike – intended to boost fiscal sustainability – triggered a brief recession and reversed gains in inflation. Then, the global decline in oil prices in the second half of 2014 compounded the setback. Accordingly, fiscal policy has played an ambiguous role in Abenomics. Although the Abe government made headlines by introducing a ¥10 trillion fiscal stimulus package soon after taking office, the government’s fiscal policy emphasis shifted from stimulus to restraint when it decided in 2013 to implement a 2014 tax hike and reduced the size of subsequent stimulus packages.
The prime minister announced in November 2014 that he would postpone a second consumption tax hike, scheduled for October 2015 – a decision that prompted a snap election – but the Abe administration is still under pressure from the BOJ, the finance ministry, investors and international economic institutions to shrink the government’s debt, which was 227% of gross domestic product (GDP) in 2014. By 2015, the government had successfully achieved its target of halving the deficit, relative to 2010, thanks to the highest tax revenues in two decades, but additional gains in shrinking the deficit will require either tax increases or welfare spending cuts, both of which could be unpopular.
The Multifaceted “Third Arrow”
At the same time that the Abe government has used monetary and fiscal policy to spur short-run growth, it has outlined the “third arrow” of Abenomics, a mix of regulatory reform, industrial policy, social policy and trade policy intended both to encourage growth in the near term and change how the Japanese economy functions over the long term. Major initiatives include:
• Corporate governance reform to strengthen the power of shareholders;
• “Womenomics” to encourage women to join and stay in the workforce;
• Agricultural reform to boost the global competitiveness of the agricultural sector;
• A Japanese version of the United States’ National Institutes of Health (NIH) to encourage cutting-edge medical research;
• Special economic zones to serve as laboratories of deregulation;
• Participation in the Trans-Pacific Partnership (TPP) to expand international opportunities for Japanese businesses.
These initiatives have faced considerable opposition from entrenched interests, and implementation has, in many cases, been slow. However, successful conclusion of TPP has come to play an increasingly important role in the Abe government’s long-term growth strategy. Even before the agreement takes effect, it might enable the government to advance other reforms in the interest of boosting Japan’s competitiveness and prompt businesses to undertake growth-enhancing changes on their own.
• Haruhiko Kuroda, “Two years under QQE,” Speech at a Meeting of the Yomiuri International Economic Society, Tokyo, 15 May 2015.
• Shinzo Abe, “Economic Policy Speech at Guildhall, City of London,” 19 June 2013.
• Richard Katz, “Zombie Abenomics,” Foreign Affairs, 20 November 2014.
• Changyong Rhee, “Can Abenomics Succeed? Overcoming the Legacy of the Lost Decades,” IMFdirect, 1 April 2015.
• Adam Posen, “What can we learn from Abenomics?” East Asia Forum, 12 October 2014.
• Hugh Patrick, “What’s the score on Japan’s Abenomics,” East Asia Forum, 9 November 2014.
• Aurelia George Mulgan, “Japan’s agricultural reforms watered down but still significant,” East Asia Forum, 7 May 2015.