As Japan’s sixth prime minister in six years, Shinzo Abe has a bold plan to ensure that he sticks around. It’s shock therapy for an economy that’s been stagnant for 20 years and was overtaken by China in 2010 as the world’s second-largest. Abenomics departs from the piecemeal measures of previous leaders and antagonizes powerful political constituencies. Abe tells voters that his strong economic medicine is Japan’s last chance to remain a world power, framing his policies as a matter of national security.
Japan’s stocks surged after the 59-year-old Abe was elected in December 2012 on optimism that what he calls a three-arrow strategy of unprecedented monetary easing, government spending and business deregulation will snap Japan out of its malaise. The Nikkei 225 index jumped 57 percent in 2013, its biggest gain since 1972. Growth has returned, helped by a weaker yen that boosted exporters. Now a sales tax increase and cuts in social security aim to claw away at the world’s biggest debt burden. Investors are awaiting details of efforts to promote private-sector competitiveness, such as corporate tax cuts and changes to labor regulations dating from the 1960s that offered lifetime employment at large companies. This is where Abe must take on tough vested interests — including farmers, drugmakers and utilities — or Abenomics will fail. An incomplete package could hobble Japan’s economic growth, shaving two percentage points a year from gross domestic product by the end of the decade, the International Monetary Fund predicts.
Since Japan’s real estate and stock market bubble burst in the early 1990s, companies have focused on cutting debt and shifting manufacturing overseas. Wages stagnated and consumers reined in spending. That led to two lost decades, with no nominal growth in the economy. Prices of goods such as fresh food and sake kept falling, creating deflation that sapped optimism. Japan’s devastating earthquake, tsunami and nuclear meltdown in 2011 didn’t help. The challenge of growing the economy of a nation with a dwindling, aging population has vexed a series of prime ministers. Abe himself had a failed 12-month first term starting in 2006. This time the country’s central bank joined with policy makers and set a target for inflation of 2 percent, a shift so significant that it has been compared with the rate increases that ended high levels of U.S. inflation after Paul Volcker became chairman of the Federal Reserve in 1979. Rising prices encourage companies to invest and consumers to spend.
Proponents of Abenomics see the Bank of Japan’s mammoth purchases of government debt as the only way to shake off deflation and avoid more stagnation. The policy has been popular at home, with Abe’s Liberal Democratic Party-led coalition gaining a majority in upper-house elections July 21, 2013. Elsewhere, there are concerns. The IMF warns that the scale of money printing could roil the world’s markets by causing a spike in government bond yields and rendering the nation’s debt unsustainable. For now though, Japan’s bond yields remain the lowest of any developed nation. The debate has left investors looking for signs that Abe is willing to take more bold steps, such as pressing ahead with a U.S.-led trade agreement to allow greater access for foreign goods and services. Plans to change Japan’s giant Government Pension Investment Fund are also on the table.
The Reference Shelf
- The IMF’s August 2013 country report on Japan gives forecasts for the economy and the impact of Abenomics, and it published an update in May 2014.
- A Bloomberg News profile of the architects of Abenomics, including retired Yale University professor Koichi Hamada. Bloomberg Markets profile of Akira Amari.
- The Japanese government’s statement on regulatory reform to stimulate growth.
- The Bank of Japan’s statement introducing its new easing policy.
- Bloomberg QuickTake on proposed changes to the Government Pension Investment Fund.