Abe's Legacy: Will his policies and philosophy persist after his resignation?

Authors: Ishaan Poddar & Jinghui Lao Region Head: Kathyrn Chong

Editor: Sakshi Sanganeria

Illustration by Jasmine

Abstract

Former Prime Minister Shinzo Abe’s resignation in August 2020 came as a shock to the Japanese as well as to the rest of the World. However, he has gained recognition for not only being Japan's longest serving Prime Minister, but also his economic policies dubbed “Abenomics”. In this article, the authors analyse the workings of “Abenomics”, its impacts on Japan’s economy, and its role in tackling present challenges such as the Covid-19 pandemic.

1. Background of Japan’s economy

Since 1973, Japan has utilised a flexible, or floating exchange rate system (Deguchi, 2019), A floating exchange rate system is determined by the market demand and supply for the Japanese yen. A decreased demand for the currency of yen will decrease its value relative to other national currencies, increasing cost of important goods and encouraging domestic consumption (Investopedia, 2019)

2. Introducing Abenomics

‘Abenomics’ is a three-pronged approach launched in 2013, which combines fiscal expansion, monetary easing, and structural reform. It’s primary aim is to increase domestic demand for goods and services and the rate of GDP growth while raising the yearly inflation rate to 2 percent (Mcbride, Xu, 2018). These aggressive monetary and fiscal policies, along with structural reforms, aimed to tackle economic stagnation and deflation which was caused primarily by the 1990 real estate bubble burst in Japan (Bangera, 2019)

2.1 Aspect 1: Expansionary Fiscal Policy

In 2013, Abe’s economic recovery measures included a 10.3 trillion yen government injection into the economy, focused on construction of critical infrastructure, including bridges, tunnels and roads. According to Keynesian economic theory, increasing government spending is useful to stimulate aggregate demand. Large scale construction projects increase the amount of capital goods in the economy to boost output (Blinder).

2.2 Aspect 2: Aggressive Monetary easing

The Bank of Japan’s (BOJ) set a 2% yearly inflation target in 2013 in order to tackle its problems with very low inflation since the 1990 Financial crisis. The BOJ aims to achieve growth in inflation rates through quantitative easing (injecting liquidity into the economy), and by easing monetary policy (reducing the interest rates). The BOJ expanded its large-scale asset purchase program by purchasing long-term Japanese government bonds and assets worth $660 billion dollars annually to increase the money supply.

Furthermore, it lowered the interest rate to 0%. However, the inflation rate remained low. In 2016, as the inflation rate continued to drop, the BOJ lowered interest rates to negative values to encourage lending and investment. As of 2018, the short-term interest rate remains at -0.1% (CFI, 2019)

Figure 1: BOJ Inflation rates from 1984 to 2020

2.3 Aspect 3: Structural Reform

Abenomics sought to completely restructure various sectors of the economy to increase Japan’s competitiveness in domestic and global markets. Major social issues like a rapidly ageing population and low birth rates resulted in a labor crunch. To overcome the labor crunch, PM Abe created “Abenomics 2.0”- aimed at increasing birth rates, increasing pensions and providing better social security for seniors. The government spent more than two trillion yen on childcare and education. Furthermore, the Japanese government aimed to increase women’s participation in the workforce. Policy makers also set targets of 30% women leadership in key positions by 2020. These policies helped to lower the unemployment rate to below 3%, the lowest in almost two decades (CFI, 2019)

Another key feature of ‘Abenomics’ is the establishment of several initiatives targeting corporations and capital reforms. Japan’s Stewardship Code and the Corporate Governance code focused on increasing human capital and innovation. This was necessary to ensure that Japanese firms could keep up with the rates of innovation and competitiveness of global capital firms (Bloomberg Intelligence,2017)

Catalyst, an international non-profit organization with a goal to enhance workplace opportunities for Women announced its Catalyst Distinction award for companies that honor women’s career progress, workplace diversity and inclusion initiatives in 2017. Several Japanese companies that won this award includes Deutsche Bank Group Japan, LIXIL Group Corporation, Mcdonald’s Company (Japan) Ltd., and Sumitomo Mitsui Banking Corporation (SMBC) (Catalyst, 2017)

3. ‘Has Abenomics worked?’: Weighing the Pros and Cons

Shinzo Abe’s macroeconomic package comprising the three arrows of monetary easing, fiscal stimulus and structural reforms have proved to be extremely effective and has had a great impact on the Japanese economy.

3.1 How Abenomics benefits markets

The most successful aspect of Abenomics was the large-scale monetary easing by the Bank of Japan through unconventional measures such as asset purchases and yield curve control that managed to be attractive and enter the toolkit of other Central Banks in the world. Such monetary easing boosted stock prices and weakened the Japanese Yen- helping domestic companies to expand their profits by their dependence on exports. In a report by The Economist, Japan’s currency was approximately 30% cheaper in dollar terms when compared to November 2012 and Nikkei 225 stock market index turned out to be up by more than 150%. The impact on the markets has yet provided the intended stimulus to the Japanese economy and has benefitted the large firms by nurturing a sense of stability in terms of the Yen.

Figure 2: Performance of Japan’s stock market

3.2 How Abenomics jump-started the economy

Another important impact of this effective economic reform was on Nominal GDP, which seemed to be downward sloping, prior to Abe’s election. Abe came into office in late 2012 with an aim to lift the Japanese economy out of decades of stagnation. Abenomics has been successful in targeting a strong NGDP, which in turn resulted in solving the problems of excessive debt burdens and high cyclical unemployment. The level of unemployment had fallen to 2.7%, which was the lowest in 23 years and the ratio of public debt to GDP had also levelled off. It also helped the economy to undergo accelerated growth and put Japan in a strong economic position to withstand various economic shocks and downturns.

Figure 3: Japan’s economic growth from 1982 to 2017

3.3 Inflation target still elusive

The Bank of Japan’s target of 2% inflation remained elusive till now, although Abe’s policies did certainly bring an end to decades of deflation. The lack of inflation was similar to other developed countries such as the United States, United Kingdom and others, who found it difficult to raise prices despite solid and stable economic growth. The reasons for the weak inflation performance can be inferred from this two-fold perspective: stagnant wages and focus on productivity. Wages in Japan have not risen as expected due to the permanency of bulk of Japanese workers and because wage settlement follows the cost of living. Secondly, with the increase of labour force in the market, the cost of labour has risen and firms have found ways to improve productivity rather than their prices by investing in labour-saving technologies.

Table 4: Trend of wages across economies

3.4 The use of Abenomics in handling Covid-19

The true test of economic policy lies in its ability to help the country cope with external shocks and large changes in the global economy. Japan’s expected economic decline due to the coronavirus might exceed 5 percent, some even predict an annual decline of 20 percent. The postponement of the Tokyo Olympics would further slow Japan’s economy (Saaler, 2020). Given the looming economic problems, the economic policies enacted during this period will determine the relevance of Abenomics to the present and future economy.

3.4.1 Biggest ever stimulus package- Fiscal expansion?

The Abe government introduced an economic programme, touted as “Japan’s biggest ever stimulus package”. The Abe government deployed combined stimulus spending to firms and households which totalled to US$2.2 trillion. These grants seek to assist families and businesses who have been hit the hardest, to maintain sufficient consumer demand and business operations.

A large portion of the stimulus package went to a cash handout of 100,000 yen (US$952) to every individual registered with the authorities, including foreign residents. These handouts are extremely important to boost consumer spending, especially for the hardest-hit households who have lost their jobs or seen a reduction in working hours as a result of the pandemic.

The government pledged to provide more support for its companies in order to support businesses and employees, through the “Employment Adjustment Subsidies”. The subsidy will be used to provide relief for companies and incentivise them to retain employees- given that the pandemic has reduced the earnings of the businesses. The Japanese government will assist in a partial payment of 60% of the employee’s subsidy, and give the company a subsidy of up to 15000 yen (USD$142) a day for each furloughed employee- provided that the company meets the established criterion. (Bowd,2020).

3.4.2 Aggressive monetary easing

The government aims to mitigate the impacts of an economic recession by actively injecting liquidity in the economy. The Bank of Japan pledged to ‘aggressively’ buy exchange traded funds (ETFs) at a rate of twice that it initially pledged to buy- around ¥12 trillion ($112.55 billion) annually. It will also double the pace of purchase for Japanese real estate trust funds (J-REIT) to ¥180 billion per year (Reuters, 2020). The Bank of Japan also established a new one-year facility offering loans for companies to fund their debt at 0% interest rate. Finally, it raised the upper limit for the purchase of corporate and commercial paper bonds by ¥2tn (KPMG, 2020).

New Prime Minister Suga also plans to continue with former Prime Minister Shinzo Abe’s Abenomics policies, but has plans to establish a new task force dedicated to enhancing digitalization. Efforts to drive digitalization in Japan are also a crucial part of economic reforms that will help boost Japan’s competitiveness and ensure a swift economic recovery from the global pandemic (Kyodo, 2020)

Footnote: Why and in which aspects do Shinzo Abe and Yoshihide Suga differ?

The two men do not differ much in regarding basic policies, both supporting the goal of pulling Japan out of deflation with aggressive monetary policy and large fiscal stimulus, in addition to fiscal stimulus. However, based on their ideologies, and the different contexts that they face when in power, this gives rise to slight differences.

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