Anyone with an interest in economics has undoubtedly heard of abenomics, the radically experimental economic policy implemented by Shinzo Abe, Prime Minister of japan, since 2012. The primary aims of Abenomics were to provide a strong counterweight to China in the Asia-Pacific region, and also to make Japan less reliant on the US for defence. Parallels can thus be drawn between Abenomics and the slogan of the Japanese Meiji period, ‘Fukoku kyōhei’ (‘Enrich the state, strengthen the military’). The phrase ‘three arrows’ usually accompanies Abenomics, but what does it actually entail?
The first ‘arrow’: Monetary stimulus
Monetary stimulus refers to policies implemented by a country’s central bank, in this case the Bank of Japan. It involves a lowering of the bank’s interest rates, mainly through quantitative easing. A primary effect of this is devaluation, a fall in the value of the Japanese yen. This should lead to an increase in exports, as foreign consumers are able to buy more yen to buy Japanese goods with the same, or even less, of their own currency. This in turn will increase domestic production, thus encouraging Japanese firms to invest due to the favourable economic conditions. A lowering of interest rates will also make loans cheaper for businesses, further encouraging investment.
The second ‘arrow’: Fiscal stimulus
Fiscal stimulus at a simple level involves the Government increasing public spending, which in the case of Japan involved massively increased spending on public works programmes. It also involves the lowering of taxes, increasing the disposable income of consumers, prompting an increase in spending and thus consumption.
The third ‘arrow’: Structural reform
While the first two ‘arrows’ focus on creating the conditions for economic expansion in the short term, they are not wholly suited to economic growth in the medium and long-term, not least due to the increases in public debt that they cause, particularly fiscal stimulus. Therefore, the long-term policy of Abenomics focused on structural reform, which included deregulation, the implementation of a responsible energy policy and increased labour mobility, the final of which aimed to encourage the greater participation of women and young people in the economy; currently, Japan faces a rapidly ageing population, and thus a decline of those of working age.
The failure of Abenomics
Despite all of the expectations of Abenomics, most, if not all, remain unfulfilled. Up until May 2016, inflation continued to be negative, despite the introduction of negative interest rates at the beginning of 2016. Government debt remains significant, whilst at the same time labour reform has been inadequate. However, one of the main reasons for the relative failure of Abenomics lies with the unwillingness of businesses to invest, perhaps simply because of a lack of confidence. Nevertheless, one should perhaps look more sympathetically on Abenomics, not simply as a failure but as a guide to how central banks and government can control the economy.
