Japan’s economy contracted 1.4% during the fourth quarter of 2015, raising questions about the efficacy of Prime Minister Shinzo Abe’s Abenomics. Japan has fought hard to break out of a deflationary spiral, a threat which still looms large over its economy. The country's economic growth remains fragile and unstable, domestic consumption is sluggish, exports are highly dependent on the boost provided by the weak yen, the population is aging, and Japan's stock markets remain volatile.
Back in December 2012, Prime Minister Abe said, "With the strength of my entire cabinet, I will implement bold monetary policy, flexible fiscal policy and a growth strategy that encourages private investment, and with these three policy pillars, achieve results,” which were famously – or infamously – dubbed “Abenomics.” The policies were meant to shake Japan’s sluggish economy and put it on a better growth path by boosting domestic demand while aiming for 2% inflation.
Prime Minister Shinzo Abe’s three arrow strategy includes an aggressive monetary policy, flexible fiscal stimulus and structural reforms. Though quantitative easing was first introduced in Japan in the early 2000s, the policy was used again as a part of Abe’s economic program.
In 2013, the Bank of Japan unveiled a massive stimulus package increasing the purchase of government bonds by 50 trillion yen per year in order to reach its target inflation of 2%. The Japanese government spent an extra $114 billion from January to April 2013 in an effort to spur economic growth. The increase in government spending funded infrastructure changes in schools, roads and earthquake defense.
As a result of Shinzo Abe’s expansionary fiscal policy, the Japanese public debt ballooned to $10.5 trillion by August 2013. Among developed nations, Japan has the highest debt-to-GDP ratio with over 240 percent more public debt than GDP. Structural reforms included measures such as easing business regulations, liberalizing labor markets and trimming corporate taxes to enhance Japan’s competitiveness. (Related reading, see: The Fundamentals Of Abenomics.)
Japan’s initial optimism following the introduction of Abenomics resulted in greater consumer confidence and gains in financial markets. However, its success was short-lived, and the “three arrow strategy” obviously did not work given Japan’s economic progress and current report card. Japan’s gross domestic growth continues to seesaw between positive and negative territory, keeping policy makers on their toes.
According to analysts, “for every 1% Japan's economy grows, between 0.5 and 0.7% comes from exports.” This explains the importance of exports and the policies adopted by Tokyo targeted to keep the yen weak.
From 2012 to 2014, Japan was successful in keeping the value of yen down against the dollar, which helped prop up its exports. But the yen has been gaining strength, and at the same time aging corporations in Japan continue to sit on cash but refuse to raise wages or give out dividends, which could boost Japan’s weak domestic demand. To combat these issues, and provide a fresh impetus to lending and investment, the Bank of Japan recently adopted a negative interest rate policy. (Related reading, see: Aging Japan Is an Arrow in the Back of Abenomics.)
The Bottom Line
Abenomics, which has been in force for the last three years, has been challenged each time Japan’s economy hasn’t shown the desired results. The recent adoption of a negative interest rate policy shows that Japan is trying hard to shake its corporations in an attempt to force them to put liquidity back into the system via better wages and investor dividends. Simultaneously, it hopes to keep the yen in check to maintain the competitiveness of Japanese exports. Economists think the central bank may push the interest rate even lower going forward to achieve some success.
While the success of the policy will be measured in the long run, Japan needs to revamp its policies related to immigration to solve the bigger issue facing the country: a fast aging population.