Abenomics 101

August 7, 2018
Editor(s): William Chen
Writer(s): Divya Marwaha, Nathan Peters, Maggie Tan

Japan – the economy in the context 

Prior to the introduction of Abenomics—a set of monetary and fiscal policies, as well as structural reforms devised by Prime Minister Shinzo Abe aimed at pulling Japan from its deflationary slump—the Japanese economy had been in a deflationary spiral since the early 1990s. A deflationary spiral occurs when deflation creates expectations of further price falls, resulting in prompting consumers to reduce their spending which creates further deflationary pressure in the economy.

Japan boasted a history of strong economic growth leading up to the late 1980s, with the largest Gross National Product (GNP) per capita worldwide. Record-low interest rates fuelled real estate and stock market speculation, and at the same time Japanese banks dished out more and more loans with less quality-control on the borrowers, causing an asset price bubble to form. Eventually, realising the unsustainable nature of the bubble, the Bank of Japan sharply hiked inter-bank lending rates in an attempt to curb speculation and inflation in 1989. However, this move led to a stock market crash and tremendous falls in asset prices ensued, leaving Japanese banks who had over-lent with debts of epic proportions, sending Japan into its decades-long slump of deflation and low growth. The long-awaited solution? PM Shinzo Abe, ladies and gentlemen.

Shinzo Abe and his fourth cabinet, 2017

What is Abenomics?

Since his inauguration on the 14th of July 2016, prime minister Shinzo Abe quickly revitalised the Japanese economy through his economic policy which many have termed Abenomics. Put simply, Abenomics revolves around the idea of the Government printing and spending major amounts of money to climb out of deflation and create higher levels of economic growth. Prime minister Abe likens his strategy to that of three arrows.

  1. Monetary Easing and Negative Interest Rates
    Monetary easing is a risky policy involving the printing of money to flood the market and lower the value of cash. This process is likely to lead to higher amounts of spending as individuals gain access to greater levels of disposable income, thus stimulating consumer demand and economic activity. Many countries have tried such policies and failed to cause hyperinflation and effectively making their currency useless. Interest rates in Japan have been historically low even before this period, however during this time Abe and the Bank of Japan pushed interest rates for the first time into negative territory. Interest rates are a common method used to disincentivise saving and encourage spending, however, have generally remained above zero in all countries. With negative interest rates, consumers are almost forced to spend and increase their consumption levels.
  2. Fiscal Stimulus
    Government spending over the 2013 financial year totalled 20.2 trillion dollars. Being Japan’s second largest stimulus package in history, Abe has funnelled this spending into critical infrastructure projects to combat issues such as the high frequency of earthquakes within Japan. High levels of direct Government spending have a far greater effect than just the face value as it creates employment, drives consumer confidence and improves efficiency and equality throughout the economy.
  3. Structural Reform
    Prime minister Abe has supported his first two arrows through restructuring many aspects currently in place. Some of these activities include slashing business regulations, liberalising the labour market, cutting taxes and increasing workplace diversity. A liberalised economy is widely seen as a positive influence on the economy and by slowly reducing the Government’s grasp over the economy, Abe has revitalised businesses into being able to operate more productively and generate higher levels of competition and economic activity.

How are households and individuals responding to Abenomics, and the current climate?

Japan’s current economic woes begun in the 1990s, which means that this generation’s young professionals and academics have lived their entire lives in this era of deflation, low, and slow growth. For the purpose of this piece we asked some recently graduated Japanese students about the economic climate and what this means for spending, Japan’s future, and what they’ve heard from their parents about what living in Japan was like in more prosperous times.

“Compared to 20 years ago, things are more expensive, despite the fact that we get higher salaries.” said one student, who touched on how individual and household budgets are being tightened, said budgets being particularly sensitive to food prices. In fact, it has been found that increases in spending have been due to price changes as opposed to increased wages or output.

Abenomics aims to revitalise Japan’s economy into a period of stable growth and inflation. When asked about the job market, he said that “Young people, especially new graduates, can find a job much more easily now when compared to 2009”. But when asked of his optimism regarding Japan’s future, he said that “[While] the job opportunities are as high as when the Japanese economy was growing rapidly,” regardless of the new and promising economic policies, “The population of Japan is quickly decreasing, so the economy won’t develop as the population shrinks.” He went on to touch on how the rising power of China’s economy will overshadow Japan’s potential.

It seems that there was a shrouding pessimism around Japan’s future, and current economic situation, regardless of the plethora of economic policy currently being undertaken.

Barriers to Abenomics

It was intriguing to hear from our grassroots sources some raw sentiments from Japanese nationals. It has been said that an issue surrounding Abenomics is the response of households to the policies – mindsets are not adjusting to become optimistic and growth-centric given the expansionary fiscal and monetary policy as well as structural reforms. The responses we received only verified this, with respondents acknowledging that economic conditions are better, but the prevailing pessimism about Japan’s economic future, and mindsets deep-rooted into a deflation-ridden environment, and population issues, are barriers to the effectiveness of Abe’s promising policies.

The set of policies introduced by Shinzo Abe are crucial for the growth of Japan’s economy. The target inflation of 2 percent can be realistically achieved through the three-arrow policy approach, provided the response of the people is affirmative. The sentiment and beliefs of the people of Japan are crucial for the success of the policies introduced – reversing the spiral. The lack of trust and the institutionalisation of a cautionary mindset challenges the 2 percent inflation target, materialised in strong resistances against rising prices, a hesitance to increase spending, and a pessimistic view regarding Japan’s future. Sustainably high corporate profits along with labour shortages may help improve households’ actual income this would make the people more tolerant to price hikes, thereby helping to correct households’ upward bias. If Japan shows a way out of this, it shall be very encouraging for policymakers worldwide. If this were to eventuate, next, a focal shift to phase two of Japan’s economic troubles – debt.

A special thanks to Keita Yamaguchi for assisting to synthesise and compile sentiments.

The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.

Meet our authors:

William Chen

Divya Marwaha

Nathan Peters

Maggie Tan