tutor2u | Japanese Economy - Abenomics

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Japanese Economy - Abenomics

Level:
A Level
Board:
AQA, Edexcel, OCR, IB

Last updated 3 Jun 2022

In the last few years there has been a dramatic change in economic policy in Japan. The Japanese authorities have embarked on a strategy to raise economic growth and end price deflation. Collectively the policy mix has become known as Abenomics.

Statistic: Japan: Inflation rate from 2008 to 2018 (compared to the previous year)

The main aims of Abenomics

Prime Minister Abe has promised to raise Japan's per capita gross national income by more than $15,592 in 10 years under the upcoming economic growth strategy. It now is about $US 45,000 a year.

He wants to achieve a 3% annual increase in real disposable incomes for Japanese consumers, and lift corporate investment spending by Japan's biggest enterprises.

There are three elements to the policy - known as the "Three Arrows of Abenomics." They are

  1. Monetary easing - quantitative easing to increase the money supply, continued zero policy interest rates - both designed to engineer a depreciation in the external value of the Yen as a strategy to improve export profits and push up share prices.
  2. Fiscal expansion - large rise in infrastructure spending but also a stepped rise in consumption taxes to raise revenues and help control Japan's staggeringly high national debt
  3. Supply-side reforms to improve competitiveness in the medium term - designed to improve business investment, create new jobs and bring Japanese firms back to Japan to produce and export from there. Policies include cutting red tape, making it easier for women to enter the work force (to counter an ageing and declining population). Abe also supports the Trans-Pacific partnership trade pact, he wants to make Japan a more open economy.

The Bank of Japan (BoJ) has run a zero interest rate policy for many years but despite this, growth has remained weak and the economy has suffered persistent price deflation.

As part of Abenomics, the Japanese central bank aims to double the base supply of money – measured by the amount of cash in circulation plus the deposits that commercial banks have at the BoJ – and increase the amount of longer-term bonds and other assets on its balance sheet.

The expansion of the money supply is intended to fast-forward a return to positive inflation in Japan; a new inflation target of 2% for consumer prices has been set.

One consequence of this easing of monetary policy is that the Japanese Yen has depreciated against the US dollar - good news for Japanese exporters but bad for Japanese importers whose raw materials, energy and components will now cost more.

Reforming the heavily indebted Japanese economy to achieve an improvement in trend growth is a long-term aim since the time lags involved in structural changes can take years before showing dividends. There are risks in a policy deliberately designed to increase inflation.

Is Abenomics working?

  1. Japanese yen has weakened but the trade position has worsened
  2. Corporate profits have grow strongly - will this lead to a rise in investment?
  3. The consumption tax has hit household spending and lowered short term growth
  4. Unemployment is down to 3.6% and there are signs that firms are willing and able to raise wages
  5. Nearly one million women have joined the labour force in the last year
  6. Little progress in cutting the budget deficit because of 2014 economic slowdown

Remember that Japan will host the 2020 Olympics - Japan is hoping to double the number of foreign tourists each year in the years before the Olympic flame is ignited in Tokyo for the first time since 1964.

What is Abenomics?

Has Abenomics fixed Japan's economic fortunes

Linda Yueh on Abenomics

Economic Growth Rate for Japan (Source IMF)

Abenomics - a success or not?

BBC World Discussion

Annual trade balance for Japan

Statistic: Japan: Trade balance from 2003 to 2013 (in billion U.S. dollars) |<img src=
Find more statistics at Statista

More articles to read on Abenomics and the Japanese Economy

Linda Yueh (BBC) Japan to be year late in hitting inflation target (Jan 2015)

David Pilling (Financial Times) Abenomics' success hinges on a tricky balance

Can Abenomics succeed? (IMF Review article, April 2015)

Japan's stock market index reached 15 year high (BBC news, April 2015)

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