By: Andrea Ferrell
Shinzo Abe’s “Abenomics” was a revolutionary experiment for the Japanese economy, so has expectation become a reality?
Shinzo Abe was elected as the Japanese Prime Minister in 2012. He came to office with a radical plan, called Abenomics, in an attempt to stimulate the stagnant Japanese economy. Abe’s predecessor, Yoshihiko Noda, tried to “fix” the economy by increasing taxes from 5% to 10% in an effort to alleviate some of Japan’s immense debt, which at the time, stood at 10% of the country’s GDP. Abe’s plan was different as it addressed three “arrows” of the Japanese economy: fiscal policy, monetary policy, and structural reforms. In the short run, Abe wanted to raise GDP, and in the long term, Abe wanted to increase consumption, alleviate deflation of the Yen, and reform the labor markets to address the shrinking population in Japan.
The first arrow of Abenomics dealt with fiscal policy, which is the use of government revenue to influence the economy. In 2013, Abe began his policy with a ¥10.3T stimulus package with the intention of increasing GDP by 2% and creating 600,000 new jobs. A third of this stimulus package was dedicated to devastation caused by natural disasters, a third was for social security, and a third was to improve competition within Japanese markets. In addition to this initial package, Abe issued two other packages of ¥5.5T and ¥3.5T, in April and December of 2014 respectively. When this fiscal policy plan began in 2013, GDP was ¥498T, and in 2018 GDP increased to ¥549T. Likewise, in 2013 unemployment was at 4.5% while currently, Japanese unemployment is currently at 2.3%.
These stats seem to show Abe’s policies worked, but at what cost? Well, Japan has the highest debt/GDP ratio in the world, at, 238% in 2013 and 253% by 2017. Debt/GDP is an important statistic as it measures how a country’s “income” (GDP) compares to its debt (for reference, the US’ current debt/GDP is 105%). Such incredible amounts of debt have experts worried because many are unsure if Japan will be able to cover it increasing debt.
The second arrow of Abenomics focused on fiscal policy, in which the central bank controls interest and borrowing rates to ensure a stable currency. Since the beginning of the Lost Decade almost 30 years ago, Japan has been battling the Yen’s deflation, and Abe’s unconventional use of Quantitative Easing was the hallmark of Abenomics. Quantitative Easing is when the central bank, in this case the Bank of Japan, buys assets, like bonds and mortgages, to increase the money supply. Since the early 2000s, Japan has had low interest rates (around one percent), but since the implementation of Abenomics, rates have gone below zero. Negative interest rates force borrowers to pay in order to keep money saved, and are used to stimulate spending as it becomes expensive to save. Abenomics set an inflation goal of 2%, but inflation continues to fall short of this goal. In 2013 inflation was 0.3%, and by April of 2018, deflation was -0.1%. Japan’s culture of saving continues to plague the economy as Japan has been unable to raise interest rates. Many economists worry that negative rates could cause a bubble and harm the economy in the long term.
The last arrow of Abenomics is structural reforms, of which the effects will not be seen in the short run. Reforms spanned the Japanese market with the intention to liberalize the labor market, increase workplace diversity, and slash regulation for businesses. Looking at Japan’s current unemployment rate of approximately 2.3%, one can see that the labor market is certainly tight. But Japan has done little to address its shrinking population and has not budged to increase its workforce through immigration. Haruko Arimura, Abe’s reform minister, has said that “the world has been shaken by immigrants who come into contact with extremist thinking”. In 2015, Abenomics 2.0 in relation to structural reforms was proposed and focused on the wider cultural implication of Abenomics. With these reforms, Abe wanted to diversify the labor market by offering child care to women. He hoped that this simple tool would improve women’s employment from 68% to 73% by 2020.
The second part of structural reform focused on business reform. Japan has one of the highest corporate tax rates, and Abe hoped to bring this tax down to the 20s. However, the tax has only moved from 38.01% in 2013 to 30.86% in 2018. While, these structural reforms seem to have fallen short of Abe’s intentions, it is important to note that these policies will take time before yielding results.
So, looking at the expectations and realities of Abenomics, has this experimental policy been successful since its implementation five years ago? Well, yes and no. Abe’s short-terms goals such as a rising GDP and falling unemployment and corporate tax rate have come to fruition. Women have also begun to enter the workforce, helping to improve the tight labor market. On the other hand, interest rates have remained negative for two years and are forecast to stay around zero until 2020, signaling that the Bank of Japan expects consumer spending to remain constant. Likewise immigration remains a large problem because Japan needs to find a solution to their shrinking population. Tight regulations should be loosened to allow more foreign workers to enter the workforce.
That said, the Tokyo 2020 Olympics may offer Japan the international exposure and investment needed to stimulate their economy, given that these games require workers to build the infrastructure and investment that is necessary to finance the games.
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