Prime Minister Shinzo Abe recently announced that he is stepping down due to his deteriorating health condition. The longest-serving prime minister in Japanese history will stay on as head of state until a successor is chosen. With the Abe era coming to an end, it would be apropos to assess his chief policy: Abenomics. What is it? Did it work? Will Tokyo maintain the status quo in a political world without Abe at the helm? It should be a fascinating time in Japanese politics.
Abenomics: A Primer
Reaganomics, Clintonomics, Obamanomics, and Trumponomics. Abenomics is an economic philosophy named after Prime Minister Abe. It is a multi-pronged strategy that involves increasing Japan’s money supply, enhancing government spending, and reforming the world’s third-largest economy to make it more competitive. He launched Abenomics once he started his second term in December 2012, announcing that his government would “implement bold monetary policy, flexible fiscal policy and a growth strategy that encourages private investment, and with these three pillars, achieve results.” In other words, Abe promised to reverse the country’s stagnation and supercharge Japan. But what did he achieve after eight years as head of state?
The Fruits of Abenomics
In the aftermath of the Lost Decade, Tokyo never fully recovered from this abysmal period. Abe enjoyed electoral success because he championed economic policies that would lead to prosperity and growth. However, Abe’s government fell short of the $5.6 trillion growth target laid out by the prime minister.
The Nikkei 225 Stock Market Index has done incredibly well under Abe as it has more than doubled since 2012. This was achieved because a critical component of Abenomics was the Bank of Japan’s (BoJ) large-scale monetary easing putsch that involved subzero interest rates, enormous asset purchases, and yield curve control. This triggered massive asset inflation and a weakened yen, which boosted its exports and allowed Japanese firms to expand their footprints in foreign markets.
But what about common folk? Wage growth has stagnated for the last 30 years. Unlike its Organisation for Economic Co-operation and Development (OECD) partners, average real wages have flatlined since 1991, and it continued under Abe, despite his cabinet mandating higher salaries. Although deflation is often associated with the Japanese economy, consumer and producer prices have gone up since 2014. When you factor in an unwelcomed sales tax hike and a depreciated yen, the cost of living became a tad too high.
The most significant burden for the Japanese population will inevitably be government debt. Tokyo generated international headlines when it reported a one quadrillion yen public debt. There is no argument that the national debt and the budget deficit will explode following the COVID-19 pandemic. Before the virus outbreak, the prime minister did introduce a plan to organize its financial mess. But once the Coronavirus gripped the Japanese economy, the government abandoned fiscal responsibility and instead implemented a series of exorbitant stimulus and relief packages. Right now, spending is about survival. In the future, the astronomical debt levels will hinder expansionary fiscal efforts, which would impact the state-dependent economy.
In the end, somebody is going to have to pay the bill. Seniors over 65 account for a third of the population, young people are not having children, and the current system is bloated. These are indicators that a lot of change is needed, but it is unclear if the Diet has an appetite to modify public policy.
Abenomics is Here to Stay
Abe said that he would officially resign when the Liberal Democrat Party chooses his successor. No matter who is selected to lead Abe until the next election, Abenomics is here to stay, even if the opposition forms a government. Tokyo would have no other choice but to embark upon a perpetual campaign of printing and spending money in the post-Coronavirus economy, particularly if a second wave strikes. The next leader might tinker around with altered approaches, but it will be more of the same.
Japan is in a recession, debt to gross domestic product is more than 200%, and the many purchasing managers’ index (PMI) readings suggest business activity is still contracting. Japan would need Abenomics right now, even if this neo-Keynesian approach to central planning failed during the boom phase of the business cycle. Japan will never kick its easy money addiction, but that is par for the course of the rest of the planet that has adopted ultra-loose fiscal and monetary policy.
Read more from Andrew Moran.
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