A few days back, Japanese Prime Minister Shinzo Abe announced his resignation citing poor health. So we thought it would be a good time to look at his signature economic strategy— Abenomics and see how Japan has fared since he came to power.
The Story
When Shinzo Abe stepped in as Prime Minister in 2012, Japan’s economy was in crisis. It’s GDP growth rate had tumbled to -4.3%. Demand was lacklustre, exports had taken a hit and there were worrying signs that the country was barrelling down the dark rabbit-hole of recession. Bottom line — Abe had his work cut out for him and he needed to shock the world’s third-largest economy back into action.
And lo and behold, Abenomics was born. The plan was to use a detailed, growth-oriented strategy and change the very nature of how the Japanese economy functioned. Interestingly enough, Abe credits this moment of inspiration to a folk tale.
Once upon a time, there lived a king who had three sons. His kingdom had been threatened, and war was imminent. One day, he gave a singular arrow to one of his sons and asked him to break it. The son snapped the arrow in half without breaking a sweat. Then, the king bound three arrows together, and gave them to another one of his sons, asking him to break them all at once. The son tried with all his might, but couldn’t put so much as a dent in them. Upon which the king said, “Like this singular arrow, one person may easily be defeated. But if you stand united, nothing can overpower you.”
It’s a story you’ve probably heard already. And Abe believed he could make progress if he could get the multiple levers that drove the Japanese economy to work together. Fiscal Policy, Monetary Policy and Structural Reforms, all working in unison, to achieve one common objective — Growth.
While you might contest that virtually every country aspires to do the same things, Japan’s economic problems were rather unique.
For instance, Japanese consumers spend an unusually low fraction of their income. They are just not big spenders. And this means there’s very little incentive for private corporates to invest and expand. After all, if demand is lacklustre, why grow your business at all? And if corporates get moody, employment opportunities suffer in tandem. It’s all a big mess. So somebody had to step in and plug the spending gap.
Under Abenomics, the Japanese government initially planned an outlay of 10.3 trillion Yen in a bid to improve infrastructure and generate more employment opportunities. The hope was that this spending would create new demand for steel, vehicles, heavy machinery, etc. In 2014, the government added another 5.5 trillion Yen to this package. And at the end of it all, massive sums of money were injected into the economy all in a desperate attempt to boost demand.
But Japan’s problems were further aggravated by the restricted flow of credit. In the 1990s Japanese banks suffered massive losses after some reckless lending put them in a lurch. Most economists believe the country’s commercial banks have been tentative about lending ever since. This is deeply problematic because credit, or borrowed money, is what drives most economies. And unless people can get their hands on cheap debt, you’ll probably have difficulties convincing them to invest and spend.
So under Abenomics, one of the principal objectives of the government was to work with the country’s central bank to ensure the free flow of credit. And in a bid to make money more accessible, the Bank of Japan cut interest rates to zero. Technically this happened much before Abe came into power. The only difference — During Abe’s tenure, the Bank of Japan took it a step further. They started paying people* money to borrow when they set interest rates at levels below zero. On top of it, they also initiated a program to print new money. Most people call it quantitative easing. We call it what it is — Printing money.
Now if you are worried if all this money printing business might stoke inflation. Fret not. That is the least of our concerns. After all, you can always count on the Japanese people to not spend. So even if all this extra money made its way into the hands of people, they’ll most likely save a big chunk of these proceeds. Meaning it's unlikely you’ll see prices of goods and services appreciate by a massive amount. In fact, the Japanese government would have been glad to see prices grow a bit each year. It would be a testament to the fact that consumer demand was on the up and Abe made it a personal goal to see inflation at 2%.
Ergo, the biggest challenge plaguing the Japanese economy wasn’t inflation. It was actually something else entirely — a shortage of labour.
Japan’s birth rate had been tumbling for many decades when Abe took over and people expected the country to lose over a third of its population by 2060. So Abe wanted to tackle this crisis head-on using structural policy reforms. The Japanese government spent over 2 trillion yen on childcare and educational reforms to boost birth rates. They also augmented it with social welfare programs so that people could always take care of their children. The hope was that building confidence on the child-rearing front would induce couples to procreate. Meanwhile, the government also tried to induct women into the workforce to solve the more immediate problem of labour shortage. So it’s safe to say that Abe threw the kitchen sink at solving the labour crisis unfolding right before his eyes.
And that leaves us with one final question — How did Abenomics fare, considering, the man leading the charge is finally stepping down?
Well for starters, the unemployment rate dipped to under 3% for the first time in 20 years. And the economy witnessed slow and steady growth — up until the pandemic crippled that equation altogether. On the flip side, consumer demand is still weary. Abe failed to hit the 2% inflation target and many economists believe government spending did not necessarily have the desired effect.
If you ask us, Abenomics, like most economic policies, had a few hits. It had had a few misses. But the most important thing to remember is that Prime Minister Abe was never afraid of conceding to the general public that the country had a massive problem. He acknowledged that there were gaps in the economy and he was willing, to be honest about it. Even if his economic policies did not have the intended effect, he dared to try new things. And hopefully, that will be his lasting legacy.
Until next time…
*People can't borrow money from Central banks directly. However, other commercial banks can borrow money from the Bank of Japan who then lend money to individuals and corporates.
