Abenomics

Abenomics (= Abe + Economics) is the term used to describe the economic policy proposed and executed by the administration of the current Japanese Prime Minister Shinzo Abe who was re-elected in December 2012.  Japan’s economy has suffered prolong recessions since mid-1990s and deflations for at least a decade. So, the new economic policy includes the three parts, also called the Three Arrows of Abenomics: a massive fiscal stimulus, more aggressive monetary easing from the Bank of Japan, and structural reforms to boost Japan’s competitiveness. 

The First Arrow of fiscal stimulus is to increase government spending by 2% of GDP, which is worth 10.3 trillion JPY or 116 billion USD.  However, this level of spending is likely to raise the deficit to 11.5% of GDP for 2013 (For comparison, the current US deficit to GDP ratio is 5.7%).  The current public debt to GDP ratios are 105% for the US and 240% for Japan.  To offset this huge spending, the consumption tax will be raised from the current 5% to 8% in 2014 and to 10% in 2015.  However, the tax hike will definitely encourage consumption and slow down the economic growth. 

The Second Arrow of monetary easing is to target the inflation rate at an annual rate of 2%, and to correct the excess yen appreciation, to set negative real interest rates, and to commit to radical quantitative easing of buying construction bonds.  At one time, yen has depreciated to 102 JPY/USD from 80 JPY/USD. The Third Arrow of structural reforms, which should be the most important arrow among the three, was announced on June 3, 2013, which disappointed the market due to its small scale.

In general, the market reactions to the Three Arrows were positive:  The NIKKEI index showed the sign of great improvement after December 2013.  However, it is still very small in term of its 30-year trend; maybe it is still too early to tell.  The recent GDP growth showed a good sign, too, but it was still insignificant judging from the trend of recent 10-year data.  The unemployment was trending down, but it has happened since 2010.

There are many criticisms of Abenomics.  It may result in a drop in real wages if jobs and salaries do not increase significantly. Government interference and pressure on the Bank of Japan endangers its independence and may lead to currency wars.  Some also criticize the policy focusing too much on the demand side of its economy, not on the supply side.  The real problem on the supply side is Japan’s aging population; its shrinking workforce cannot sustain the current economic output in the future.  Also, the government commitment in spending on pensions, medical expenses and social security will continually act a substantial burden to the already indebted country.

Sources:

1. 1.      en.wikipedia.org/wiki/Abenomics
2. 2.      The Economist, May 18^th-24^th 2013
3. 3.      Yahoo Finances for NIKKEI indexes and Yen historical exchange rate.
4. 4.      www.tradingeconomics.com for other Japan’s macroeconomic data.