Abenomics and the Three Arrows

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 overshadow. Among his most well-known policies bare his name – Abenomics. This article endeavors to understand what is it, and its impact on the Japanese Economy.

In 2013, the then new PM Shinzo Abe introduced an aggressive economic policy “Abenomics” to pull Japan out of the two decades of deflationary slump. The economic strategy consisted of increasing the nation’s money supply, boosting government spending and making the Japanese economy to be more productive. The Economist outlined the program as a mix of reflation: mandating an increase government spending and implementing growth strategy to jolt the economy out of the suspended animation that had gripped it for two decades.

The lost decade, a period in the 90s where 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. Abenomics came as a response to the era of missed opportunity and lost growth.

The programme consisted of 3 ‘arrows’.

The first arrow involves the printing additional currency between 60 trillion yen to 70 trillion yen and injecting it into the Japanese economy. It is hoped that the move would make exports more attractive due to depreciation and generate a healthy inflation of 2%.

The second arrow involves the increased government spending on programs to stimulate demand and consumption. This was to encourage short term growth and to achieve a budget surplus in the long run.

The third arrow of Abenomics is on deregulation and reform. Deregulation would be ushered to make Japanese industries more competitive and encourage investment in private sector. The reforms touched upon corporate governance and, controversially for Japan, the labour market. It meant the easing of restrictions in hiring foreign labour in special economic zones, making it easier to fire ineffective workers, liberalizing the health sector and helping foreign entrepreneurs.

Abenomics was effective in supporting firms by boosting equity markets and nurturing the stability of the currency. The Abe administration also faced setbacks in labour reform. In regard to womenomics Abenomics had a mixed record. Womenomics is basically a push to involve more women in the work space. Although the plan raised the female participation in the workforce, the new entry often found themselves with low-paying job instead. As with every strategy there are some fallbacks. Abe’s biggest failure was that he was unable to push structural reforms. This was the crucial third arrow of Abenomics. Thus, he failed to usher productivity revolution.

Abenomics also failed to bring down the Debt to GDP ratio, which is the highest in any industrialised country. The Japanese government also found that lower interest rates had failed to encourage domestic investments. According to Shigeto Nagai, head of Japan economics at Oxford Economics believe that the benefits provided to large corporations made large profits, but the trickle-down effect did not happen. The wages have not risen enough to spur households to spend more.

Abe is standing down when Japan is facing due its worst recession due to Covid-19. The country's GDP in the second quarter ending 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 carry on 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.

“The track record of Abenomics is mixed at best.” -Josh Lipsky

---

About the Author

Suhaib Shaukat

Suhaib is currently doing Foundations at the University of Nottingham, Malaysia. He loves to read about politics and business. He hopes to serve the public in future and wants to become a civil servant in the future. Suhaib also serves at IGNITE (UNM Student Magazine) as a News Editor.