Learn about Shinzo Abe’s plans to restore Japan’s growth
Japanese Prime Minister Shinzo Abe was elected on Dec. 26, 2012, and promised a series of monetary policy, fiscal policy, and economic reforms designed to resolve Japan's macroeconomic problems. His reforms have been coined "Abenomics" by economists and the news media.
Abe's approach saw early gains, but they were short-lived. The Nikkei 225—a stock market index for the Tokyo Stock Exchange—rose more than 70% after the program was announced during the first half of 2013, and gross domestic product (GDP) figures in Q1 2013 also appeared promising to many investors.
Long-term growth, however, has been difficult to achieve.
Monetary Policy Reforms
The early success of Abenomics stemmed from monetary policy reforms aimed at reducing real interest rates and increasing the inflation rate. After decades of deflation and stagflation, the country's economy had struggled to compete in foreign markets. Prices of Japanese exports had jumped sharply in 2008, largely due to the safe-haven status of the Japanese yen at the time.
The Bank of Japan set an ambitious target of 2% inflation per year, and Japan employed open-ended asset purchases—like the U.S. Federal Reserve—along with stimulus packages. The central bank made significant progress in weakening the Japanese yen in the first half of 2013, which helped the Nikkei jump sharply as a weaker yen made exports cheaper for overseas buyers.
Fiscal Policy Reforms
Abe implemented a 10.3 trillion yen fiscal stimulus package in January of 2013, which was significantly higher than many analysts initially expected. In addition to the stimulus spending, Abe pushed for fiscal spending to increase to 2% of GDP in a move designed to further boost inflation through spending on a public level in addition to a private level.
Abe planned to pay for these stimulus measures and other spending programs by doubling the consumption tax to 10% in 2014-15 while implementing a number of structural reforms designed to increase taxes, close loopholes, and ultimately generate more revenue for the government. Critics worried, however, that these measures would be insufficient.
The third and most critical piece of Abenomics involves structural reforms, which have proven to be the most difficult to implement. Early on, Abe pushed for Japan's participation in the Trans-Pacific Partnership in an effort to remove regulatory loopholes that could be limiting the economy's long-term potential and thereby reducing potential tax revenue.
The deal never was ratified, largely because the U.S. withdrew its support in 2016. Described as a linchpin of Abenomics by Japanese economist Yoshizaki Tatsuhiko, the failure of TPP to get off the ground has hampered Abe's goals.
Abenomics began on a positive note, with the Nikkei rising sharply and consumers becoming increasingly positive. However, Japan's economy has been cooling off since about 2016 and the threat of deflation has resurfaced.
As of August 2019, inflation was at 0.3%, a six-month low and more than a full percentage point below where it had been in the fall of 2018, according to Trading Economics, which tracks economic data worldwide. Likewise, efforts to strengthen the yen were successfully initially, but it was trending stronger from 2016 to 2019, according to tradingeconomics.com.
The long-term success of Abenomics policies remains to be seen given the slow and weak inflation growth. While the government remains optimistic, international investors should retain a healthy dose of skepticism given the country's long fight against deflation and disinflation.