Abenomics: A Red Bull stimulus for the Japanese economy

He doesn’t have his –izm yet, but Shinzo Abe does have a –nomics. Re-elected for his second term as the Prime Minister of Japan in December 2012 elections, he advocated an economic framework to revive the sluggish economic growth of Japan. Abenomics is the name given to this framework. The policy broadly focuses on 3 kinds of reforms: expansionary monetary reforms, expansionary fiscal reforms and structural reforms; popularly referred to as the ‘3 arrows’ of Abenomics 1.0.

For more than a decade, Japan has been suffering from deflation (fall in general price level). Economists agree that a certain level of inflation is required for the economy to be healthy. Clearly, Japan is trying to attain that level. Bank of Japan’s (BOJ) governor, Mr. Haruhiko Kuroda, aims to achieve 2% inflation by March 2017. He also states that wages and prices must rise in tandem otherwise the purchasing power of the consumers would fall.

The policy of loosening monetary reigns has resulted in a weakened Yen. Under this comes the much talked about Quantitative and Qualitative Easing (QQE) approach adopted by the BOJ. The aim is to inject money in the economy. It works like this: BOJ engages in expansionary Open Market Operations. This means that BOJ buys government securities from the public thereby giving them more money in hand. Due to excessive supply of funds, the interest rates fall. This makes credit (loans) cheaper. Due to relatively low domestic interest rates (compared to international interest rates), the country witnesses capital outflow. This is primarily due to relatively higher rates of return abroad. The demand for foreign currency receives an impetus and the exchange rates rise thereby devaluing Yen against dollar.

A weakened Yen means that exports are cheaper and imports become expensive. This is what Shinzo Abe had in mind. He wanted to stimulate the economy by boosting the exports. He expected that the benefits from the voluminous exports would outweigh the loss from expensive imports. Unfortunately, that is not how things turned out. Volume of exports did not rise adequately. Rather the imports became costly for an economy heavily reliant on imports for food, oil and other natural resources.

The fiscal policy which was intended to be expansionary took an unexpected turn and became contractionary instead. Due to low tax revenues, a lot of public debt had been accumulated by issuing bonds to the public. Therefore, in order to raise tax revenues a Sales tax hike from 5% to 8% was implemented in 2014.

abenomics 2

Despite an expansionary monetary policy, output growth has been disappointing. Some have attributed this to flat domestic consumption because of the sales tax hike which has adversely effected the purchasing power of consumers.

In 2015, Mr. Abe announced ‘stage 2’ of his programme which has been increasingly referred to as Abenomics 2.0. The ‘3 new arrows’ are: a strong economy, support for family and children, and social security. He aims to increase the GDP from 500 trillion Yen to 600 trillion Yen by 2020. The primary focus on family friendly policies reflects his intention to halt the sliding population growth. Japan has low fertility rates and a rapidly ageing population. His target is to prevent the population from falling below 100 million, which at the present rates might fall to 83 million by 2060.

For a relevant conclusion on the Japanese problem, here is an excerpt from an article of The Economist: An even bolder step, and perhaps the only plausible way to deal with Japan’s demographic problem, would be to back higher levels of permanent immigration. Despite Mr Abe’s promise to stabilise the population, he shows no willingness to go so far. At the United Nations this week, he pledged to triple aid for refugees and displaced people from Syria and Iraq, but ruled out taking any in. After three years and six arrows, Mr Abe’s knack for archery is in growing doubt.

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One thought on “Abenomics: A Red Bull stimulus for the Japanese economy

  1. Pingback: Abenomics: 2 sides to the coin | thespectrum20

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