Last week, Prime Minster
of Japan, Shinzo Abe announced his exits from the incumbent post citing health
reasons. This decision has sparked off questions in the Japanese political
landscape as to who will be his successor. Nevertheless, the successor will be
subjected to an economy which is burdened by an aftermath of the COVID-19
pandemic. The GDP has declined by 27.8% at an annualized rate and the economy
is on the verge of facing a recession. The Prime Minister had introduced his
package of economic reforms called the ‘Abenomics’ in 2013 in order to usher in
a new era of economic growth. With the current state of the economy, this post
tries to look at the main highlights of Abenomics and the effect it has made on
the economy.
In early 1990’s, Japanese
economy suffered a real estate and stock market bubble burst. Undoubtedly, there
were mistakes made by the Bank of Japan (BOJ) as it reduced the money supply in
late 1980s bringing the equity rally to a halt. The equity market collapsed by
60% from 1989-1992 and as the BOJ raised its interest rates, the real estate
prices plunged by 70% until 2001. The government started to slash debts and
decide to relocate the manufacturing activity overseas. This led to a huge drop
in the wage growth along with price of goods leading to a deflationary mode.
Natural calamities (Tsunami, earthquakes) along with its aging population added
to the increasing stress in economic machinery. Between 1991 and 2003, GDP of
Japan grew by just 1.14%. Against this backdrop, Prime Minister Shinzo Abe
introduced ‘Abenomics’ which was expected to serve as a caffeine boost to wake
the economy from its decades-old sleep. Along with the growth, Abenomics was
aimed to be a therapy to shift its dependency from China, which was growing its
domination in Asia.
As drafted by Prime
Minister Shinzo Abe, Abenomics had a three-arrowed strategy. Firstly, fiscal
stimulus package was introduced in 2013 with measures amounting to 20.2
trillion yen. The package was concentrated towards critical infrastructure
spending (earthquake-resilient roads, bridges). These measures were beefed up
later in 2014 with Abe injecting more 5.5 trillion yen. Post 2014 elections,
economic measures observed an increase of 3.5 trillion-yen worth of funds. The
second arrow points towards a flexible monetary policy. The BOJ adopted
string of quantitative easing programs to inject liquidity in the economy. The
value of assets held by the BOJ as against GDP of Japan increased more than 70%
during that period. This figure is mammoth as compared to assets held by
European Central Bank and the Federal Reserve which stood below 25% of the GDP.
The third arrow of Abenomics is for structural reforms including enabling a
conducive regulatory environment for business, slashing corporate tax rates and
increasing participation of the women workforce. Along with this, Abe had huge
expectations from the Trans-Pacific Partnership (TPP) which was formulated by
the U.S President Barack Obama to advance US strategic interests in Asia. Its
agenda was to expand U.S trade and investment in the Asian region. Japan had
tremendous hopes from this partnership to drive its structural reforms. Prime Minister
Abe wanted to open up the trade corridors for Japanese exports in the US and
reduce reliance on Chinese markets. Without the Trans-Pacific Partnership,
Japan would have been sucked in the overpowering Chinese hegemony in Asian
region. After Donald Trump’s unexpected withdrawal from the agreement, Japan’s
best interests were are at stake. Trump’s exit put stress on Abe to resort to
reductions in tariffs and exercise policy support in agriculture segment
After its implementation,
Abenomics showed its wonders as the headline inflation hit 3% above BOJ’s
target of 2%. Japanese yen collapsed dramatically as the BOJ kept injecting
fresh yen in the economy, paving way for exporters to attract higher returns. However,
eventually in 2017, the growth became tepid as the household spending decreased
by 0.1% and real wages declined by 0.2%. Abe was known to push corporations to
increase their pay by 3% but to no avail amidst rising competitiveness. Abenomics
hasn’t been effective when it comes to achieving its inflation figure at 2%. As
of 2019, the World Bank reports the inflation to be at 0.5%, way below the
target. The political leadership led Abe also wanted to impose its deregulation
framework to expand the markets. This deregulation model led to an increase in
profits. However, the share of income for labour and capital investment went
downhill. One of the aspects which Abenomics succeeded is on its unprecedented
efforts in curtailing the gender inequality. Female representations across the
leadership, middle-level and low-tier management roles showed significant improvements.
Evidently, the female workforce following marriage or after delivery of their
first child increased from 30% to 48% in 2019.
As every economic objective,
Abenomics had its share of ups and downs. However, the new successor to Prime
Minister Shinzo Abe will face a rapidly shrinking economy at a pace last
observed during the World War II. Even though, he has the economic tools left
by Abenomics which are required to put the economy back on the track, only time
will tell how efficiently the successor can use the fundamentals of Abenomics
to reap the economic benefits.
* The opinions expressed in the article are personal and do not represent the opinions of the organization I work for *
