Decoding Abenomics

Abenomics refers to the Economic policies propagated by the current Japanese Prime Minister, Shinzo Abe; post his selection as the PM in 2012. The term’s origins lie in Ronald Reagan’s economic policies, “Reaganomics”. Thus the various principles of economics used by Prime Minister Shinzo Abe are called “Abenomics”.

Prior to Mr Abe’s appointment as Prime Minister in December 2012, Japan had suffered two decades of economic stagnation and deflation. Problems associated with the Japanese Economy at that time were:

·        Lack of Government Spending

1.      Near zero growth for the past 20 years.

2.     Consumer expenditure falling and stagnating, partly due to deflation.

3.     A large part of the GDP financed by debt, pushing the economy into a vicious debt trap.

·        Monitory Situation

1.      High level of deflation, pushing the prices downwards.

2.     Overly strong yen, reducing the value of exports.

·        Employment

1.      Relatively low employment.

2.     A long-term concern about labour availability as Japan’s population is declining.

3.     Increasingly apparent shortages of labour in some areas (e.g. construction).

4.     Low female labour participation rate.

5.     A large portion of the labour force trapped in non-formal employment with lower incomes and benefits.

To counter this situation, Shinzo Abe introduced a flurry of Economic Reforms popularly known as the 3 arrows of Abenomics.

The major reason why Abenomics has been gaining so much attention is the fact that it’s a great contrast to what was happening in the rest of the world – especially in European countries like Portugal and Greece. But to describe this we need to go into the details. So let’s start on the first arrow.

1^st Arrow- Dramatic Monitory Easing:

Monitory Easing is the situation of pumping in more money into the Economy with the Central Bank purchasing government securities from the Commercial Bank. In this manner the money supply will increase in the economy and hence the Yen will fall. This will cause a rise in the prices of commodities and hence public expenditure will increase.

The government has done this by appointing Haruhiko Kuroda to the helm of Japan’s national bank.

To use an example, let’s say￥1000 is allocated to buy 20 Fuji apples. To boost the economy, the government is making the central bank release more money into the market so that ￥1500 is allocated to buy the same 20 Fuji apples.

In the real world, because the yen becomes weaker compared to other currencies, Japan’s exports therefore become cheaper, thus probably boosting the amount that will be exported.

2^nd Arrow- A “Robust” Fiscal Policy

The point is that the Japanese government is spending more, to boost the Japanese economy. Statistics from the Japanese government show that government spending has been clearly increasing since the implementation of the Abenomic policy which is setting new records in absolute government spending.

Primarily, the expenditure is being incurred on the following-

·        Welfare

·        Servicing the debt

·        Public works

While trying to increase growth through government spending, the Japanese government is at the same time trying to rebuild their finances, or at least reduce their reliance on debt.

3^rd Arrow- Policies of Growth to Spur Private Investment

Following are the ways through which the Japanese Government is trying to increase Government expenditure-

·        Lowering Corporate Tax

·        Increasing participation of women in labour activities.

·        Increased openness to foreigners in the society.

·        Promoting Japanese tourism by exporting traditional Japanese food and simpler visa norms.

·        Lowering of barriers and restrictions on trade and Foreign Direct Investment.

Some of these have already been implemented and some are still in the pipeline. Anyway, if the previous two arrows are meant to prop up the Japanese economy in the short run, this “arrow” of a thousand needles is meant to secure Japan’s long term growth and economic health, and therefore needs time to take effect.

This is because such a measure will lead to a boost in various domestic industries and also, the working population of the country will increase, leading to the strengthening of the Economy.

All these measures collectively form the 3 arrows of Abenomics.

Critical Evaluation

Even though Abenomics is a very radical and effective set of policies which has impacted the Japanese Economy extensively, it cannot be considered a universal concept as the risk level associated with it is very high.

The first two arrows have their detractors from the academic and news worlds, but the third one runs up against vested interest groups such as Japan Agriculture and the doctor’s unions. In addition, it’s not going to be easy to change cultural norms regarding the status of women. The success or failure of the third arrow will largely depend on how much the government bows to these groups’ interests and successfully causes societal change.

-Vidit Jain