Japan has been battling their war against deflation for over 20 years now, a term often referred to as ‘The Lost Decade’ in Japan. Several governments have made attempt at reviving Japan from this deflationary slump with different strategies and takes on macroeconomic policies. One such being the three-arrow approach by current Prime Minister Shinzo Abe, aimed at expansionary fiscal policies, monetarily easy and necessary structural reforms. This approach has been referred to commonly as ‘Abenomics’. The following article thus, aims at looking at his approach to using macroeconomic policies, how it has revitalised the Japanese economy from its two-decade long slump and the potential pitfalls this approach may bring.
The principles behind Abenomics
Abenomics, the macroeconomic policies taken up by Shinzo Abe in his second term as Prime Minister in 2013, was aimed at getting Japan’s economy out of their deflationary slump. The period of economic stagnation is primarily attributed to the 1990 real estate bubble burst in Japan, after which the country has not been able to fully recover. Characterised by low GDP growth and 20 years of deflation, the country’s economy was in dire need of a series of economic policies to revive their state. In his 2013 policy speech Shinzo Abe addressed exactly this, where he termed the state of prolonged deflation and economic revival as the greatest issue facing Japan.
Post his parliamentary victory, his policies immediately took off, where he put his ‘Three Arrow Approach’ to work. The first arrow was the monetary policies the Abe cabinet deemed necessary which followed the principle of monetary easing. The second arrow had to do with the fiscal policies following a principle of expanding government spending. The third arrow pointed towards the structural reforms necessary with regard to agricultural liberalisation, creating deregulated economic zones and women empowerment measures to name a few.
The first arrow: Monetary policies
Monetary policies are those that control the magnitude and growth of the money supply in an economy. These are implemented in order to manage inflation, unemployment and prices. Monetary policies are implemented usually by the Central Bank of a country and can be done using tools like adjustment of the interest rate, purchase and sale of government securities and other ways to change the money supply in the economy.
In January 2013, Shinzo Abe declared that the Bank of Japan will follow a monetary policy of quantitative easing. The principle behind this was to achieve a targeted 2 percent inflation rate. The Bank of Japan thus followed the announcement with a set of aggressive expansionary monetary policies with Haruhiko Kuroda serving as the governor of the Bank of Japan. The move didn’t have a major impact on inflation rates but still observed a rise. However, in 2014 the country began experiencing slowing inflation rates falling from 1.5 percent to 1 percent in April 2014. Post this Kuroda announced in October 2014, that the Bank of Japan, in addition to making monetary easing more aggressive, would seek to boost their asset sales.
Having tried and failed to achieve their set targets of 2 percent inflation rate, in January 2016, Haruhiko Kuroda took an extremely aggressive decision of introducing negative interest rates. Economists have been particularly wary of this decision as some suggest it could damage their financial system. Japan however, continued with their decision and maintained an interest rate of minus 0.1 percent as of 2018. Japan’s inflation rate currently stands at 0.98 percent.
The second arrow: Fiscal policies
Fiscal policy measures are changes made in the taxation policies of the economy in order to sustain aggregate demand. They operate through what are known as ‘automatic fiscal stabilisers.’ For example, the size of tax collections and transfer payments are directly linked to the cyclical position of the economy. When the government decides how much to spend on transfer payments and how much tax to collect, they are engaging in fiscal policy measures.
Shinzo Abe’s second arrow strongly favoured fiscal flexibility and increasing government spending. This was seen with the stimulus package, that Abe’s cabinet introduced in 2013, of 10.3 trillion yen. They targeted a 2 percent increase in growth rate, with increased business investments. The package was aimed at infrastructural development. The government followed this up in 2014 with an additional 5. 5 trillion yen increase in spending. To finance this, however, the government increased consumption tax to 10 percent.
The third arrow: Structural reforms
Abe’s third arrow towards growth through structural reforms is perhaps the strongest tool in their kit to revive Japan’s economy. In 2014, Shinzo Abe announced a range of structural reforms including liberalising the agricultural sector, empowering women through an approach termed as ‘womenomics’, which encourages greater workforce participation and more leadership positions to be held women, and labour market reforms to name a few.
In order to liberalise the agricultural sector, the Abe government sought to enter the Trans-Pacific Partnership (TPP) – a free trade agreement with 12 Pacific Rim countries. Many economists deemed this move as crucial to Abe’s vision for Japan. Moreover, their participation in the Trans-Pacific Partnership would also encourage competition in Japan. In 2015, Shinzo Abe managed to come to an agreement to curb the powers of the JA-Zenchu – the agriculture cooperative body to regulate and supervise other cooperatives. This move however could be constricted by Donald Trump’s decision to back out of the TPP.
Japan has been long facing the issue of having an unfavourable demographic dividend. It has a major share of population lying above the working age. In the last decade alone, their working age population fell by 6 percent. In order to address this issue, Shinzo Abe introduced the ‘Abenomics 2.0’ platform to focus solely on correcting this decline. Increasing birth rates and social security has been the prime focus in this regard. However, the move still falls short when compared to a large labour market reform that Japan’s economy demands right now.
On borrowing ideas from Kathy Matsui, a strategist at Goldman Sachs, Shinzo Abe introduced a set of reforms termed ‘womenomics’ aimed at uplifting and empowering women. The Abe cabinet has set a target of achieving a female employment rate of 73 percent by 2020 from a stagnant 68 percent. They additionally plan to achieve a goal of having one-third of leadership positions filled by women by 2020. In order to achieve this, the government urged cooperatives to mandate an increase in the appointment of women specifically in management roles. By raising the status of women’s wages and standard of living, the government hopes to also increase fertility rates that would tackle their long-standing demographic decline issue. However, this claim is yet to be tested.
Although Abenomics promises a revitalisation of the Japanese economy, many economists and critics have argued that these drastic measures could put Japan in a worse position. Economists have suggested that the aggressive policies of monetary easing may in fact spiral into a situation of hyperinflation. That being said, there is also a school of thought which observes that this move may have no impact on inflation rates. The policies are either way being deemed ineffective.
The government’s move to increase the consumption tax has also been criticised for causing a possible dip in consumer spending and potentially leading Japan into a recessionary trend. Moreover, critics argue that Shinzo Abe’s stimulus package may increase Japan’s fiscal deficit to an increasingly large debt situation which may be more problematic in the long run.
Shinzo Abe’s policies have definitely strived to drastically improve Japan’s deflationary slump. However, the trends we observe tend to show a rather low impact on Japan’s inflation rate as well as growth. The structural reforms however, seem the most promising of the lot where measures like entering the Trans Pacific Partnership and improving women participation rates may serve to improve competition, and boost Japan’s development outlook. However, in the area of labour market reforms, Abenomics has still fallen short to correct the weak demographic dividend being faced by Japan.
Picture Courtesy- The National