Abenomics: Has it really worked for Japan?

By Keerthana Raghavan

Abenomics refers to a set of policies adopted by the Japan Prime Minister Shinzo Abe when he was selected as Prime Minister for the second time in 2012. The policies were implemented in the background of near zero growth rate for past 20 years and huge government debt. The policies were aimed to fight deflation by encouraging private investments and consumer spending.

The Three “Arrows” of Abenomics:

1. Monetary Stimulus: Monetary stimulus like quantitative easing (when the Central Bank buys bonds from people to lower rates and increase money supply in the economy which would trigger spending) was undertaken. In 2013, the Bank of Japan purchased bonds to reach its inflation target of 2%. The rates are currently negative (-0.1%) in Japan which means the banks need to pay interest to the Central Bank for keeping excess reserves. The whole point is to increase lending and prevent people from saving and also to break the chain of deflation and low spending.

2. Fiscal Stimulus: Relates to government spending in three main areas ranging from welfare of the people to the infrastructure. The government is trying to create a good environment for business with big building projects. The focus on infrastructure relates to building schools, roads etc. and buildings for the upcoming Tokyo Olympics in 2020. Other measures include fulfilling of its debt obligation which is very high.

3. Structural Reforms- Policies targeted towards long-term growth focusing on the productivity of its labour force, improving the ease of doing business, deregulation of various industries, increasing inbound tourism etc. productivity of labour force is vital since the demographics of Japan are skewed more towards the older population.

In spite of all these reforms in 4 years nothing much has changed. The GDP growth is still flat this quarter and capex has declined 0.4%. The prime minister has also delayed the hike in consumption tax to 10% to 2019 for the worry of consumer spending taking a hit.

 Why has Abenomics failed?

The major problem in Japan has been a chronic lack of demand for goods. The problem is rooted in the demography. The growth is possible only if there is a major technological growth driver that can revive the economy or if there is huge immigration to balance out the ageing population and shrinking workforce. The fiscal stimulus cannot keep continuing since the budget of Japan is already constrained. The need of the hour is to accept the fact that Abenomics has failed and look for reforms that may boost the economy.