In a surprise move, Prime Minister of Japan Shinzo Abe resigned on August 28, 2020. The reason behind this sudden exit is his deteriorating health. For sure, he is leaving a legacy that won’t be easy for his successor to compete with. Among all his policies, the most interesting one is Abenomics. What is Abenomics, and what were its impacts on Japan’s economy?
In 2013, the then-new PM Shinzo Abe introduced an aggressive economic policy called “Abenomics” to pull Japan out of two decades of deflationary slump. The economic strategy consisted of increasing the nation’s money supply, boosting government spending, and making the Japanese economy more productive. The Economist outlined the program as a mix of reflation, increased government spending, and a growth strategy to jolt the economy out of the suspended animation that had gripped it for two decades.
Abenomics was introduced for a reason. It dates back to the late 90s, known as the Lost Decade. It was a decade in which Japan’s economy staggered following a massive real estate bubble burst in the 1980s, followed by an asset price bubble burst in the early 90s. Due to these events, the government ran massive budget deficits.
The program consisted of three arrows. The first arrow consisted of printing additional currency, ranging from 60 trillion yen to 70 trillion yen. Printing additional notes made Japanese exports more attractive. This also generated inflation, around about 2% (a certain percentage of inflation is actually good for the economy).
The second arrow was increased government spending on programs to stimulate demand and consumption. This was to encourage short-term growth and to achieve a budget surplus.
Finally, the third component of Abenomics is more complex. Different regulations were changed to make Japan’s industries more competitive and encourage investment in the private sector. The reforms included corporate governance and labor market reforms, such as easing restrictions on hiring foreign labor in special economic zones, making it easier to terminate ineffective workers, liberalizing the health sector, and assisting foreign entrepreneurs. A few sectors greatly benefited from these legislations, including the utility and pharmaceutical industries.
Abenomics was effective in supporting firms by boosting equity markets and nurturing currency stability. Regarding womenomics, Abenomics had a mixed record. Womenomics involves involving women in the workplace. Although the plan raised female participation in the workforce, it mostly led to low-paid jobs.
As with every strategy, there are some drawbacks. Abe’s biggest failure was his inability to push through structural reforms, which was the crucial third arrow of Abenomics. Another problem was that labor reforms failed to usher in a productivity revolution. Abenomics also failed to bring down the Debt-to-GDP ratio, which is the highest among industrialized nations. Lower interest rates also failed to encourage domestic investments. According to Shigeto Nagai, head of Japan economics at Oxford Economics, the benefits provided to large corporations led to substantial profits, but the trickle-down effect did not happen. Wages have not risen enough to spur households to spend more.
Abe is stepping down when Japan is facing its worst recession due to Covid-19. The country’s GDP in the second quarter ending in June contracted by a record 27% on an annual basis, another blow to Abe’s ambitious policy to turn the tide on decades of stagnation.
Is Abenomics’ time over now? Experts say that the successor of PM Abe will not give up the strategy. With elections next year, the successor will continue Abe’s fiscal policy. The next leader of the country has to press for structural reforms, which still to date is an important part of Abenomics.
Abenomics’ level of success can be best described by Josh Lipsky: “The track record of Abenomics is mixed at best.”
