High Risk, High Reward: Abenomics and the future of Japan

Posted on the 23rd November 2014 by Max, Summit Coordinator

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"What is important, I believe, is that I really act on promises that I make and leave results. Leave a track record and show that to the Japanese public, who will, at the end of the day, I hope, appreciate it." - Shinzo Abe

It has been two years since Shinzo Abe & the Liberal Democratic Party were returned to power in a landslide election victory, ending a three year exile from government that had interrupted their long history of being Japan's governing party. After such a landslide defeat in 2009, the fact that the LDP were able to return in another landslide just three years later was nothing short of a political miracle. In particular, Shinzo Abe's triumphant return to the Prime Minister's office, five years after resigning from the post following a troublesome year long term, could be seen as evidence of how spectacular a comeback the LDP had made.

In the quote above, Abe talks of how he is prepared to radically reform Japan and his hope of leaving results to benefit the Japanese people. Here, he speaks of the one factor seen as the primary cause for his political comeback, the high risk, high reward economic policy that has come to be defined as Abenomics.

Abenomics defined

'Abenomics' refers to the three core parts of Shinzo Abe's economic policies since his return to power, namely fiscal stimulus, aggressive monetary easing and structural reforms, in an attempt to revive a Japanese economy that has been plagued by numerous problems over the last two decades. These problems include stagflation, which has been a consistent problem since the nineties; frequent recession & declining GDP growth; a rapidly ageing population and a falling birth rate, which has led to a state struggling to support an expanding retired population with a declining workforce.

In response to these problems, Abe proposed three "arrows" to fix the crisis. Firstly, the printing of additional currency, to the number of 60-70 trillion yen to boost exports and generate inflation to combat stagflation; secondly, the introduction of new government spending & infrastructure programs to stimulate demand, and finally, complex regulation reform, designed to make business & industry more competitive.

Ascension

At the time of the 2012 election, the three part plan of Abenomics proved itself to be immensely popular among the electorate. Despite the economic woes, many Japanese lawmakers had previously failed to come up with comprehensive solutions to the issue at hand and those that did found their policies either fail to pass through parliament or become immensely unpopular when implemented. A notable example of this was when Abe's predecessor, Yoshihiko Noda, introduced an unpopular rise in consumption tax in a move to repay public debt in the run up to the 2012 election, widely seen as one of the leading factors as to his defeat and Abe's ascension. Therefore, Abenomics, with it's bold ideas and promises of solving the crisis in a large, radical manoeuvre, initially had strong popularity.

Having won a landslide victory, the new government then began a radical implementation of Abenomics. In his first weeks, Abe announced a 10.3 trillion yen stimulus package, appointed a key ally in Haruhiko Kuroda as the Governor of the Bank of Japan on a platform of generating 2% inflation via quantitative easing. The effects were almost immediate, with the yen weakening substantially, the stock market rising, unemployment falling and consumer spending increasing, leading many in Japan to support the new program.

Challenges

However, two years on, Japan is back in recession and Abe is back fighting another election to gain a new mandate for Abenomics. He is likely to win, given an opposition in disarray and support for his policies still, albeit having declined significantly since 2012. Another consumption tax rise, widely seen as the reason for Japan's dip back into another recession, combined with weak demand and lowering commodity prices are seen to be hampering the radical comeback being attempted by Abe.

While Abenomics is deemed by most economic analysts to be successfully on track to combat deflation, the new recession has presented two options to the government. Either proceed with the original plan for another consumption tax rise and risk a deeper recession, or postpone the hike until the economy has enough strength to escape deflation, risking a fiscal crisis due to high debt levels. With such a choice, it is easy to see why Abe has called an election two years ahead of schedule, to give himself a four year mandate to cope with the impending path ahead.

Despite the early optimism and positive effects of Abenomics, the recession has given a reality check to Japan, displaying how it is not easy to escape a deflationary trap, especially with a faltering global economy. While Shinzo Abe looks set to be returned for another term, whether Abenomics will succeed in lifting Japan out of chronic deflation while avoiding a debt crisis remains to be seen. Only time can tell.

By Max Rodgers, WES 2015 Communications Coordinator

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