REPORT: Abenomics: The true solution to reviving the Japanese economy?

The bursting of Japan’s stock market and real-estate bubble in the early 1990s ushered in a new era of economic stagnation for the third largest economy in the world. Reductions in wages and consumer spending decreased nominal growth and initiated a deflationary cascade that resulted in two lost decades of economic progression. The devastating earthquake in 1995 and the Fukushima nuclear disaster in 2011 further crippled the already fragile economy. Drastic overhaul was needed to resuscitate the Japanese economy and Japan’s Prime Minister, Shinzo Abe, believed he had found the answer. Abenomics is the broad term given to the economic policies proposed by Abe after his re-election into office in December 2012. It centres around three main tenets: aggressive fiscal stimulus, unprecedented monetary easing and fundamental structural reform aimed at consolidating Japan’s role as the economic powerhouse of the Asia-Pacific region.  

Market responses to Abenomics first became apparent by end of February 2013, when the implemented measures weakened the Yen by as much as 28% against the Dollar over a two year period. This also happened to coincide with the tapering of the Federal Reserve’s asset purchase programme. Whilst this monetary easing supported Abe’s objective of boosting exports (evidenced by the fourfold increase in the operating profit of companies like Toyota Motors), it adversely affects import-oriented companies which engage in the bulk purchase of commodities. Steelmakers Nippon Steel & Sumitomo Metal Corporation suffered profit reductions to the tune of 62% as the weak Yen increased the cost of iron ore and coal imports.

The contagion effects of this ‘Currency War’ has also been felt throughout other Asian economies and Western markets. The Peoples Bank of China (PBoC) was forced to respond by devaluing its Yuan in order to safeguard its supremacy as the dominant exporter in the region. G7 nations and the US in particular, also voiced concern about the aggressive devaluation of the Yen, emphasising its negative global impact on foreign direct investment.

The recent introduction of Abenomics 2.0, with its new three arrows consisting of: raising GDP by 20% to 600 trillion yen (£3.2tn), keeping the population above 100 million and enhancements to social security, claims to be the second phase of Abe’s robust economic plan. However, critics remain sceptical since they argue that there has been virtually no inflation after more than two years since the programme’s inception. This impact was further exacerbated by the general propensity of the Japanese to save rather than spend; maintaining a degree of frugality as per the norm in their culture. Out of the previous three arrows, only monetary easing appeared to have a noticeable effect, leading policymakers to question the efficacy of the other measures. Furthermore, the outcome of the fiscal policy stimulus was outweighed by the sales tax increases in 2014.

Proponents of Abenomics reason that increases in corporate earnings, wage hikes and consumer spending growth are the principal outcomes of this initiative, as indicated by the rapid increase in wage growth earlier in the year. Nevertheless, due caution must be exercised as the recent decreases in consumer spending levels suggest that the Japanese economy may not be out of the fog yet.

The Bank of Japan (BoJ) has fought-off pressures to unleash additional stimulus to achieve its mandated 2 percent inflation target, stating that upward price pressures have been weakened by cheaper oil imports. Whilst the central bank’s record quantitative easing previously helped to weaken the Yen, boosting the profits of exporters and driving Tokyo stocks higher, the Japanese currency is now strengthening due to its “risk-haven” status at a time of international market turmoil.

After falling to a low of 125 per U.S. dollar in June, the Yen is now projected to appreciate to 115 per USD by the year-end, as investors unwind carry trades, according to Bloomberg. This could intensify pressure on BoJ Governor Haruhiko Kuroda and his board to take additional easing measures at its upcoming October 30 policy meeting.


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Reuters: Business News

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