ABENOMICS - A Brief Analysis,
by Anish Narang
Roll Number- 17090; Class - BMS 3FA
1. A BRIEF HISTORY:
After the war the economy of Japan had developed from the leftovers of an industrial
infrastructure that faced a widespread levelling during the Second World War. In 1946,
industrial production of Japan came down to approximately one-fourth of its pre-war level. The
Japan government’s task was to synchronize economic recovery and supervise the policies
which stimulated extensive mechanisation. In order to offer public funds and long-term loans
to businesses, long-term credit bank system was established. Around 1950’s the production was
concentrated in the hands of priority sectors like steel, coal mining and electricity, consumer
products and automobiles for exports from 1960-70, and subsequently, technology based-items
such as computers and electronics. This was a period of remarkable economic growth, wherein
the GROSS DOMESTIC PRODUCT of Japan grew at an average annual rate of 11 percent
through the 1960s, and it further grew at an average annual rate of 5percent, from 1970-80s.
Japan’s trade surplus had reached ground breaking levels by mid-1980’s. In 1985, dollar
weakened against major international currencies, due to which the yen appreciated by 40% over
the next two years, hence making the foreign investments less costly for Japanese companies.
Poor monetary policy and mis-managed lending standards led to speculation in the domestic
stocks and real estate markets. Concerned with the asset bubble, The BOJ made the monetary
policy more and more rigid for a period of 15 months between 1989-90 which was the major
reason for the crashing of the stock market and the real estate market. Late 2000s was a period
of economic stagnation during which the nominal Gross Domestic Product had declined by
almost 20% and real wages by 5%. In an attempt to revive the economy, private consumption
and investment reduced and government debt levels increased because of large scale spending
on public infrastructure and multiple fiscal stimuli packages.
2. INTRODUCTION:
Japan, one of the largest economies of the world, had witnessed a rapid decline in Gross
Domestic Product over a period of time and this counted upon the Internal and External factors;
Internally Japan’s economy has undergone a structural breakthrough since 1950’s when the
country had witnessed a rapid economic growth followed by 1980’s where the country had
tasted a real estate and stock market bubble burst and the economy suffered from a prolonged
sluggish growth. Externally, in 2008 Japan suffered from global financial crisis and the
catastrophic natural calamities like Earthquake and Tsunami that had hit North-Eastern Japan
in 2011, followed by growing competition from China and South Korea which had a major
impact on Japan’s Economy. Shinzo Abe after being elected as Prime Minister of Japan in
2012 introduced Abenomics which acted as a macroeconomic package hence aiming to
revitalize the Japanese Economy based on the three arrows- Monetary Easing, Fiscal Spur, and
Structural Reforms. The policy aimed to boost its competitiveness and to revive the economy
of Japan using a “three arrow approach” including fiscal consolidation, aggressive monetary
easing by the banks of Japan and structural reforms.
3. UNVEILING ABENOMICS:
Abe Shinzo had served as the Prime Minister of Japan from 2006-07, but after he had begun
his 2nd term by getting re-elected as Prime Minister in 2012 elections he had promised a series
of monetary policy, fiscal policy, and structural reforms to shape the economy of Japan and
further solve the macro-economic problem of the country. Abe Shinzo while introducing these
policies found private sector as a major tool to achieve average real economic growth of 2% of
Gross Domestic Product within the subsequent ten years, the formation of 0.6 million new
workplaces, considerable increase in the flow of FDI and increasing the employment among
the woman by just boosting the private sector. The Prime Minister basically aimed at reviving
the Japanese economy from two decades of deflation just by maintain the fiscal discipline. The
plan was based on following three elements:
a) Monetary Policy Reforms:
Monetary Policy Reforms had helped the Shinzo’s government to reduce the real interest
rates and increase the inflation rate. Japanese exports had become more expensive in
2008 because of deflation and stagflation in Japan and now it was the time for the country's
economy to compete in foreign markets by bringing new monetary reforms like that of
having a target of 2% inflation per year, and purchasing the open ended asset like the U.S.
Fed Reserve. Introduction of this policy by the Abe’s government successfully weakened
the Japanese yen, which led to increase in Nikkei jump as a weaker yen made exports
cheaper for overseas buyers.
b) Fiscal Policy Reforms:
A 10.3 trillion-yen fiscal stimulus package had been introduced by Abe in January 2013.
Along with this he tried to increase the fiscal spending to 2% of Gross Domestic Product
in order to boost inflation by spending on a public and private level simultaneously. In
2014-15 session Abe’s Government doubled the consumption tax to 10% in order to close
the loopholes and generate more revenues for the government. Even after such strong
measures they worried that these measures were still inefficient.
c) Structural Reforms:
Last, but not the least the structural reforms are known to be one of the most difficult
reforms to be implemented. Abe earlier wanted to chuck out all the loopholes that were
limiting the economy's long-term potential and thereby reducing expected tax revenue. But
this deal never was ratified, because USA withdrew its support in 2016. The failure of TPP
to get off the ground was the one of the major reasons that hampered Abe's goals.
4. WHAT DID ABE SHINZO REALLY DO?
Abe Shinzo conducted a series of events which have been mentioned as follows:
a) He ordered the BOJ (Bank of Japan) to come up with a comprehensive monetary
policy through introduction of new money supply by the Central Bank. This helped the
government to lower the value of the yen from USD 0.013 in 2012 to USD 0.0083 by
May 2013 and if we say in terms of the dollar, the value rose from 76.88 yen to 120.18
yen. Later in 2019, the yen became stronger against the dollar where the price of Yen
per Dollar came down to 110.5.
Abe thought that making the yen cheaper would increase the exports, which was a
logical view because their prices would fall in dollar terms, and this would make them
more competitively priced. But the data shows that there wasn’t any increase in the
exports because they did not reduce the foreign prices and earned profits. Others had
already outsourced factories to lower-cost areas, so the devaluation didn't help. Even
now there were many who hadn’t been helped out because they had shifted the
production into their markets. As an example, we can consider Toyota producing 2
million vehicles in the United States in 2017.
The devaluation of the currency did hurt the Japanese businesses that relied on imports
as a result their costs rose which in turn had a major impact on the consumers because
they now had to pay more for imports.
b) Japan’s Prime Minister also launched an expansive fiscal policy where he increased the
infrastructure spending along with which he had promised to offset the increase in
Japan's 235% Debt to Gross Domestic Product ratio with a 10% consumer tax in 2014.
This backfired Abe’s policy when it briefly returned the economy to recession.
c) Abe had spent two hundred seventy-six billion dollars out of which two hundred and
two billion dollars was for government loan programs. The balance amount had been
utilized in the construction of infrastructure which included a magnetic levitation train.
d) The Prime Minister had promised structural reforms which included modernizing
Japan's agricultural industry, reducing the tariffs and further expanding sizes of the plot
which had put him against the powerful rice lobby in the year 2015. During this period
the Central Union of Agricultural Cooperatives also agreed to reduce its power over
farmers which helped the government in promoting effective and efficient production
methods.
5. HOW HAS ABENOMICS IMPACTED THE NUMBERS?
Just after the Prime Minister Abe Shinzo took office on December 26, 2012 came the period
where Japan was moving towards the House of Councillors election on July 21, where the
government’s performance till that date had to be judged by the Japan’s public. The major issue
in the contest full of heated disagreement would be the new economic policies introduced by
the administration, dubbed “Abenomics.” The combination of aggressive monetary easing,
flexibly applied fiscal stimulus, and a growth strategy aimed at spurring private investment
(the Japan Revitalization Strategy) is designed to create a better economic environment in order
to appeal to voters says the Analysts at Nippon in its article The Impact of Abenomics on
Japan’s Economy.
After analysing the movement of the economic indexes over the past year, the change of
government in December 2012 and the dramatic monetary easing during that time have
paralleled with a strong rise in the Nikkei Stock Average and a sharp tweaking of the yen in all
the foreign exchange markets. The total number of people who are unemployed has declined
significantly which has been accompanies by an improvement in the ratio of active job openings
to the applicants, too. The Tankan report that had been published by Bank of Japan on short-
term business sentiment exhibit that the diffusion index, which is calculated by deducting the
“unfavourable” corporate outlooks from the “favourable” opinions, has advanced significantly,
especially among the large sized firms1.
The cheaper yen has benefited exporters, the higher price of imports and raw materials has had
1
https://www.nippon.com/en/features/h00033/the-impact-of-abenomics-on-japan%E2%80%99s-economy.html
a negative impact on households and smaller firms. Hence Abenomics has been successfully
able in breaking Japan free of deflation & realize a full economic recovery.
6. HOW DID THEY FOSTER ECONOMIC GROWTH?
Japan’s technique of financial intermediation i.e. had been criticized a lot for leading to housing
bubble burst in the 1990’s. Collateral Principle is a lending criterion where the amount of
money being lent is based on the amount of collateral, instead of considering the viability of
the project. After all this happened Japanese started following Anglo-American techniques of
finance nationally. After almost twenty years, the world’s economy had been devasted because
of the Lehman crisis, which led to the Anglo-American methods being discarded. Now the
Japan had to face a long and painful recovery process. People united together and they were
willing to work to bring back the economy at the sustainable level; they had a strong desire to
play a part in the recovery process, and help the country by financing the local small and
medium scale enterprises & many start-up companies. These capital providers just had the aim
of supporting the economy and they didn’t expect any monetary return in form of profits from
the economy.
Now the Japanese Government had to overcome this menace, so they came up with a new form
of financing, i.e. the hometown investment trust fund (HIT). As the name suggests HIT was
aimed at integrating the fund providers with their respective hometowns. HIT’s are very
advantageous, some of them have been mentioned below:
1) Hometown Investment Trust Funds aimed at reinforcing financial stability by reducing
information asymmetry and sharing risk. Earlier there existed “originate and distribute”
model where borrower IOUs were hidden deep within complicated financial
instruments. Due to this it became difficult to calculate and track risk, and now the
lenders weren’t in a position to trust the borrowers for, they paying back the money,
they weren’t aware where the risks were due to which the credit markets froze. But on
the other hand, the HIT method encouraged to reduce the information asymmetry
leading to financial stability because if households and firm are willing to invest in
other companies, they are often keen to attain information on the borrowing firms,
mainly SMEs. Either the lenders and borrowers are from the same hometown as the
borrowers or they share a similar interest among themselves. Both the parties usually
are small and dispersed. As a result, this would also help in distributing the risk.
2) Hometown Investment Trust Funds also acted as a source to attract capital. Since
during those days various financial institutions were becoming the source of instability,
the financial regulations became more stringent. Doing this helped to reduce risk, but
was detrimental to the supply of risk capital. Firms with little or no collateral were
particularly affected by this change, so the provision of a new and stable source of risk
capital had been especially beneficial.
3) Hometown Investment Trust Funds was always driven by the projects. Under HIT one
had to predetermine the investments they would like to make from the pool of the
projects unlike the Grameen Bank, where investment destinations are often determined
at the end. Investors were usually willing to invest in a project they were certainly sure
about and not necessarily seeking high returns because either these projects were
carried out in their hometown itself, or they saw significance in the investment’s
potential to reduce poverty, address environmental concerns, or assist in disaster
recovery. In this way, investors felt a level of personal satisfaction in their choice, and
had the added benefit of actually being able to “see” the results. This could not have
been possible with ordinary mutual funds, where investors were not able to track the
destinations of their investments.
While on the other side of the coin these regional trust funds had some drawbacks as well, i.e.
they were not guaranteed by the Deposit Insurance Corporation and risks were borne by the
investors. In order to enable the HIT market to grow steps were taken to increase investor
confidence, by ensuring that the terms of the fund are explained in detail to the investors,
including the associated risks and where the funds will be invested. This certainly helped a lot
in improving the investors’ confidence.
So, let us consider, two examples of regional funds are those covering
(i) wind power generation and
(ii) musicians
Say, there are around 20 wind power generators in Japan, which had been constructed through
PPP. Say for these projects, the local residents had invested USD 1000 - USD 5000, & they
earn annual dividends from the sales of electricity generated in return. Say the musicians’ funds
gather multiple small investors, who hold an average investment unit of USD 150 - USD 500.
Let us now consider a scenario that now if a musician becomes successful and he or she is able
to sell his or her work well, the fund will get benefited with a higher rate of return. This would
lead to the formation of, both successful and unsuccessful funds.
7. RECOMMENDATION
If these projects are instead funded by regional funds, rather than by deposits transformed into
bank loans, then banks would be able to receive money though the sales of regional funds by
their respective branch offices, without worrying about the creation of non-performing loans.
Investors must not only be made fully aware of the risks when making their investments, but
they should also receive a high rate of return, and this is the only thing that might help in
increasing the investments into riskier projects which would otherwise not have been funded.
The success of its regional funds would help a bank to attract more investors. Conversely, if
funds do not perform well, investors may decrease in future. In this way, through competition
on the basis of the performance of the regional funds, the quality of projects and the risk-
adjusted returns for investors can be improved (Yoshino 2012).
8. CONCLUSION
In this term paper, the current status of the Japanese economy was described, which further
included Japan’s government budget deficit-to-GDP ratio, which breached 200% in 2010; the
lack of efficiency and effectiveness of public investment; and the country’s sluggish economic
growth. In order curb these issues going on in Japan’s Economy, Abe Shinzo, who took the
power in 2012, had introduced a reform program called Abenomics, which aimed to revive the
sluggish economy with “three arrows”: fiscal consolidation, more aggressive monetary easing
from the Bank of Japan, and structural reforms to boost Japan’s competitiveness and economic
growth.
As for fiscal consolidation, the government aimed to implement its short-term fiscal policy in
a timely and flexible manner, while also firmly expressing the political will to restore the fiscal
balance over the medium and long term by cutting the primary deficit of the central and local
government in half between FY2010 and FY2015 and achieving a fiscal surplus by FY2020.
In the second arrow of policy reforms, the BOJ had set a price stability target of 2% while in
order to achieve the target at the earliest the government of Japan had expected BOJ to
implement aggressive monetary. Although prices started to rise after monetary easing because
of higher oil prices.
In the third arrow of the policy reforms, the government encouraged higher wages to encourage
the expansion of domestic consumption; raised taxes in order to cover increasing social security
spending; encouraged female participation in the labour force; considered postponing the
retirement age because of the aging population; prepared for a transition to a regional medical
care system for old people and taken measures to reduce their health care costs; provided
sufficient budget for disaster preparedness; considered increasing the share of R&D and
education in government expenditure; improved access to financing for SMEs; and considered
carrying out agricultural reforms in order to overcome inefficiencies in the sector.
The form of financial intermediation called the hometown investment trust, reflected its goal to
connect fund providers and their hometowns and we concluded that the success of regional
funds would help a bank to attract more investors hence leading to a massive boost in the
Economy.
9. BIBLIOGRAPHY
Yoshino, N. 2013. The Background of Hometown Investment Trust Funds. In Hometown
Investment Trust Funds: A Stable Way to Supply Risk Capital, edited by N. Yoshino and S.
Kaji. Tokyo: Springer.
Yoshino, N., and T. Mizoguchi. 2013. Changes in the Flow of Funds and the Fiscal Policy
Rules Needed for Fiscal Stabilization. Public Policy Review 6(1).
Kuttner K.N., Posen A.S. , The Great Recession: The Lesson for Macro Economic Policy from
Japan
Abenomics, 2017, Cabinet Public Relation Office, The Government of Japan,
https://www.japan.go.jp/abenomics/_userdata/abenomics/pdf/170508_abenomics.pdf
The Impact of Abenomics on Japan’s Economy:
https://www.nippon.com/en/features/h00033/the-impact-of-abenomics-on-
japan%E2%80%99s-economy.html
