On July 8, news of the assassination of Shinzo Abe, Japan’s longest serving prime minister, shocked the world. Along with the life of its architect, the decade-long economic strategy, Abenomics, and its influence came to an end.
Abenomics was borne out of Shinzo Abe’s resolve to revive Japan’s economy in light of more than two decades of economic stagnation following the collapse of an asset bubble in the early 1990s. This economic stagnation was a result of low economic growth, disinflation (low inflation rates), and even deflation (falling price levels). Exacerbating its poor economic performance was Japan’s demographic constraints as she faced a labour shortage due in part to its aging and falling population. Thus, Abe’s multipronged approach consisted of three “arrows”: fiscal expansion, monetary easing and structural reforms, aimed at stimulating spending and investment to promote economic growth and to push up prices.
The hallmarks of Abenomics’s policies remain evident today: economic growth picked up from the slack of the 1990s and 2000s as companies reported record profits and wages increased, export quantity rose and unemployment levels fell to its lowest level in decades with more women and seniors entering the labour force. However, critics of Abenomics argue that his macroeconomic policies did not live up to expectations. For one, over the course of Abe’s nearly eight-year stint as prime minister for the second time, real GDP growth, a measure of economic growth, averaged just 0.9 percent according to an analysis by economist Kaya Keiichi. Abe’s conviction to boost nominal GDP to 600 trillion yen by the end of his term was never realised and remains so to this day.
Though Japan recorded eight consecutive quarters of growth from 2015 to 2017, the longest streak in nearly three decades, inflation and wage growth did not grow in tandem, holding back the economic gains that were achieved. Prices have indeed been on the rise over the last five years, though it is significantly better than the deflation that preceded Abenomics, it is nevertheless still short of the 2% inflation target set for developed economies like Japan.
Furthermore, Abe was said not to have followed through with his commitments to structural reforms. Jeffrey Halley, senior market analyst for the Asia Pacific at OANDA, had this to say: “The lack of will to implement the third arrow of economic and trade reform, as Japan fell back into entrenched ways, meant the other arrows only really managed to keep the lights on through the 2010s.” Japan's longer-term problem of weak demand, especially in terms of private consumption, remains unresolved as well as the expanding income disparity despite improvement of the economy.
Abenomics also left in its wake new challenges to tackle, such as “the weakest yen in decades and a mountain of national debt” as consequences of its aggressive fiscal stimulus packages and monetary policies. Structural reforms in Japan that include helping small- and medium-sized enterprises stay competitive, have also inadvertently lowered the competitiveness of Japanese companies and helped keep some zombie corporations up and running.
What does this mean for Japan post-assassination? With a new era of macroeconomic leadership, Fumio Kishida’s New Capitalism has to now grapple with problems that existed pre-Abenomics: low inflation rates and slow economic growth. Yet, despite the similar nature of the problems that both New Capitalism and Abenomics tried to address, New Capitalism (the face of Japan’s post-Abenomics economy) is presented to take a considerably different stance.
The New Capitalism Kishida touted is said to address inequality and other social issues that got little attention in Abenomics. In its rework, the Kishida administration pivoted New Capitalism around investing in growth fields, like start-ups, the green economy, and digitalisation. Off the bat, New Capitalism appears to be filling in the gaps of its predecessor, thus necessarily placing emphasis elsewhere in Japan’s macroeconomic goals. In taking over Abe, Kishida is expected to gradually resolve Japan’s public deficit and in line with this responsibility is Kishida’s skepticism of monetary easing, a prominent arrow in Abenomics. In the 2020 Labour Democratic Party leadership election, Kishida noted the adverse effects of negative interest rates such as the unfavourable depreciation of the yen and the rising cost of living.
Yet, as with political matters, it is never really that simple. Kishida nevertheless had to uphold the policies of Abenomics to win the support of the Abe faction in the elections. However, from here on out, the scale of upcoming aid measures will reveal how committed Kishida really is to the principles behind Abenomics. For example, a smaller fiscal stimulus package will indicate that Kishida is more prudent with expenditure than Abe while another big package will suggest that he is likely to tread the path paved by Abenomics. Without Abe now though, the likelihood of a candidate for the new governor of the Bank of Japan who supports monetary easing has fallen, and monetary policy is expected to gradually be “normalized”, that is to say short-term interest rates may be increased.
With regard to Japan’s sentiments towards a post-Abenomics economy, though Kishida’s monetary and fiscal stance can be considered “correct” in the long-run, it will nevertheless be unpopular with markets in the short-term as productivity among Japanese companies and confidence are already low and normalizing fiscal and monetary policy could further dampen the broader economy.
This is a particularly pertinent problem for Kishida because with growing public dissatisfaction over inflation and politically controversial issues such as the Unification Church, the approval rating for the Kishida Cabinet has dropped to 35%, its lowest level, according to a Kyodo News survey. As a result, Kishida will have to “focus on delivering results in the short term”, said Yasuhide Yajima, chief economist at NLI Research Institute, such as by tackling the rising cost of living.
In the wake of Abe’s assassination, while it is hard to predict what Japan’s future economy will look like, what is sure to follow will be a period of uncertainty and change as Japan navigates a new normal. When Shinzo Abe was asked what he thought his legacies were, he said, “We were able to end 20 years of deflation with the three arrows of Abenomics,” but perhaps it is also time now “we should look to the future, rather than worry about the present,” as Abe said in a 2016 speech when he was outlining his economic vision.