What is Abenomics
Abenomics refers to the economic policies of a particular politician, in the same way Reaganomics or Clintonomics does. It's a nickname for the multi-pronged economic program of Japanese prime minister Shinzō Abe.
BREAKING DOWN Abenomics
Abenomics refers to economic policies enacted by Japanese Prime Minister Shinzō Abe at the outset of his second term.
Abenomics involves increasing the nation’s money supply, boosting government spending and enacting reforms to make the Japanese economy more competitive. The Economist outlined the program as a "mix of reflation, government spending and a growth strategy designed to jolt the economy out of suspended animation that has gripped it for more than two decades."
That "suspended animation" dates back to the 90s, also known as the Lost Decade. It was a period of marked economic stagnation in Japan, following a massive real estate bubble burst in the 1980s, and Japan's asset price bubble burst in the early 90s.
As a result, the Japanese government ran massive budget deficits, funding pubic works projects.
In 1998, economist Paul Krugman argued in a paper titled "Japan's Trap" that Japan could raise inflation expectations, thereby cutting long-term interest rates and promoting spending, to break out of this economic stagnation.
Japan adopted a similar technique known as quantitative easing, expanding the money supply domestically, and keeping interest rates remarkably low. This facilitated an economic recovery, beginning in 2005, but did not stop deflation.
In July 2006, Japan ended its zero-rate policy. Though still having the lowest interest rates in the world, Japan could not stop deflation. The country saw the Nikkei 225 drop more than 50% between the end of 2007 and the beginning of 2009.
Abenomics: The Program
After serving as prime minister briefly from 2006 to 2007, Shinzō Abe began a second term in December 2012. Soon after resuming office, he launched an ambitious plan to bolster Japan’s stagnant economy.
In a speech following his election, Abe announced that he and his cabinet would "implement bold monetary policy, flexible fiscal policy and a growth strategy that encourages private investment, and with these three pillars, achieve results."
Abe’s program consists of three “arrows.” The first consists of printing additional currency – between 60 trillion yen to 70 trillion yen – to make Japanese exports more attractive and generate modest inflation—roughly 2%.
The second arrow entails new government spending programs to stimulate demand and consumption—to stimulate short-term growth, and to achieve a budget surplus over the long term.
The third component of Abenomics is more complex—a reform of various regulations to make Japanese industries more competitive and to encourage investment in and from the private sector. This includes corporate governance reform, easing of restrictions on hiring foreign staff in special economic zones, making it easier for companies to fire ineffective workers, liberalizing the health sector and implementing measures the help domestic and foreign entrepreneurs. Proposed legislation also aimed to restructure the utility and pharmaceutical industries and modernize the agricultural sector. Most important, perhaps, was the Trans-Pacific Partnership (TPP), which was described by economist Yoshizaki Tatsuhiko as potentially the "linchpin of Abe's economic revitalization strategy," by making Japan more competitive through free trade.
Abenomics: The Effect
As of May 2017, though the Bank of Japan's preferred metric for inflation is up on 0.1% from a year ago, growth in Japan has run at an annualized 1.2%, well above Japan's underlying rate; unemployment is at 2.8%, a 22-year low. Japanese companies are trying to find ways to reduce the quality and quantity of their offerings instead of raising prices. According to the Financial Times, though, these cutbacks won't be enough: "Japan is primed for inflation." And this is against a difficult global economic backdrop, which has provided little support for economic recovery or inflation.