What is Abenomics?
Abenomics is the moniker given to Prime Minister Shinzo Abe’s economic policies after he took office for the second time in 2012. Increases in the nation’s money supply, increased government expenditure, and changes to make the Japanese economy more competitive were all part of Abenomics. The policy is described as a “combination of reflation, government spending, and a growth strategy aimed to shake the economy out of the suspended animation it has been in for more than two decades,” according to The Economist.
Abenomics: An Introduction
Abenomics is a term that refers to a politician’s economic policy in the same way as Reaganomics and Clintonomics do. Abenomics was marketed as a solution to jolt Japan’s economy out of a state of stagnation and deflation. The economic problems in Japan began in the 1990s, sometimes known as the “Lost Decade.” Following a large real estate bubble burst in the 1980s and Japan’s asset price bubble burst in the early 1990s, Japan experienced a period of severe economic stagnation.
To deal with the economic repercussions, the Japanese government ran enormous budget deficits to fund public works projects. In a paper titled “Japan’s Trap,” economist Paul Krugman suggested in 1998 that Japan could enhance inflation expectations by committing to an irresponsible monetary policy for a period of time, lowering long-term interest rates and encouraging the spending needed to break out of economic stagnation.
Some of Krugman’s recommendations were followed by Japan, which increased its domestic money supply while keeping interest rates low. Beginning in 2005, this helped the economy recover, although it did not prevent deflation.
As Abe began his first term as Prime Minister in July 2006, Japan discontinued its zero-rate policy. Abe abruptly resigned as Prime Minister in 2007, but remained a member of the ruling party. Japan could not avoid deflation despite having the world’s lowest interest rates. Between the end of 2007 and the beginning of 2009, the Nikkei 225 index fell by more than half. Abe’s party, the Liberal Democratic Party of Japan (LDP), lost power to the Democratic Party of Japan (DPJ) in part due to Japan’s economic woes.
Abenomics and the Three Arrows.
In December 2012, Abe began his second term. He launched his Abenomics plan to boost Japan’s lagging economy soon after resuming office. Abe promised that he and his cabinet will “implement strong monetary policy, flexible fiscal policy, and a growth strategy that fosters private investment, and with these three pillars, accomplish results” in a speech following his election.
Three “arrows” made up Abe’s programme. The first was to print more money – between 60 trillion and 70 trillion yen – to boost Japanese exports while also generating slight inflation of around 2%. The second arrow pointed to new government spending programmes to boost demand and consumption in the short term while also achieving a long-term budget surplus.
The third component of Abenomics was more complicated: a regulatory change to make Japanese companies more competitive and to stimulate private sector investment. Corporate governance reform, easing restrictions on hiring foreign staff in special economic zones, making it easier for companies to fire ineffective employees, liberalising the health sector, and putting in place measures to assist domestic and foreign entrepreneurs were among the items on the agenda. The proposed legislation also planned to improve the agricultural sector and reform the utilities and pharmaceutical businesses. The Trans-Pacific Partnership (TPP), which economist Yoshizaki Tatsuhiko termed as the “linchpin of Abe’s economic rejuvenation policy” by making Japan more competitive through free trade, was possibly the most essential.
Did Abenomics Work?
Like all Japanese economic policy since the bubble burst, Abenomics has worked well at times and stalled at others. inflation targets have been met and Japan’s unemployment rate is more than 2% lower than when Abe came to power for the second time. Similarly, nominal GDP has increased and corporate pre-tax profit and tax revenues have both seen significant rises. However, Japan’s periods of success have been halted at times by global economic forces and the country’s most significant economic problem – a rapidly aging population – has increasingly taken the forefront.
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