What Is Abenomics?

What Is Abenomics?

Let me tell you about Abenomics—it's the term for the economic policies Japan rolled out in 2012 when Shinzo Abe returned as prime minister for his second term. This approach focused on pumping up the money supply, ramping up government spending, and pushing through reforms to sharpen Japan's edge in the global economy. As The Economist put it, it's a blend of reflation, public spending, and growth tactics meant to snap the economy out of the doldrums it's been stuck in for over two decades.

Key Takeaways

Abenomics represents the economic agenda pushed by Japanese Prime Minister Shinzo Abe starting in his second term in 2012. It started as a three-arrow plan: expanding the money supply, launching government spending to kickstart the economy, and introducing reforms to make Japan more competitive worldwide. Over time, as Abe kept leading, Abenomics expanded to include aims like boosting women's roles in the workforce, promoting sustainable development, and advancing Society 5.0 for deeper digital integration in Japan.

Understanding Abenomics

Think of Abenomics like Reaganomics or Clintonomics—it's tied to one politician's economic vision. Abe promoted it to pull Japan from years of sluggish growth and deflation, problems that trace back to the 1990s, known as the Lost Decade. That era followed a huge real estate bubble bursting in the 1980s and an asset price collapse in the early 1990s.

In response, the government ran up big budget deficits for public works. Economist Paul Krugman, in his 1998 paper 'Japan's Trap,' suggested Japan could spark inflation by committing to loose monetary policy, which would lower long-term rates and encourage spending to escape stagnation. Japan tried some of this, expanding money at home and holding rates very low, leading to a recovery in 2005, but deflation lingered.

By July 2006, Japan ditched its zero-rate policy as Abe started his first term, but he stepped down abruptly in 2007 while staying in his party. Even with the world's lowest rates, deflation persisted, and the Nikkei 225 plunged over 50% from late 2007 to early 2009. This ongoing slump helped Abe's Liberal Democratic Party lose power to the Democratic Party of Japan.

Abenomics and the Three Arrows

Abe kicked off his second term in December 2012 and quickly unveiled Abenomics to revive the economy. In a post-election speech, he declared his cabinet would aggressively pursue the 'three prongs' of revival: bold monetary policy, flexible fiscal policy, and a growth strategy to spur private investment.

The first arrow involved printing 60 to 70 trillion yen more currency to make exports cheaper and aim for about 2% inflation. The second was new spending initiatives to boost demand and consumption, targeting short-term growth and long-term budget surplus.

The third arrow was trickier—it meant overhauling regulations to make industries more competitive and attract private investment. This covered reforming corporate governance, relaxing rules on foreign hires in special zones, simplifying firings of underperformers, opening up health care, and supporting entrepreneurs at home and abroad. Laws also targeted restructuring utilities and pharmaceuticals, plus modernizing agriculture. Crucially, the Trans-Pacific Partnership (TPP) was seen by economist Yoshizaki Tatsuhiko as the cornerstone of Abe's plan, enhancing competitiveness via free trade.

Did Abenomics Work?

Like Japan's economic efforts since the bubble burst, Abenomics has had ups and downs. It hit inflation goals, and unemployment dropped over 2% since Abe's return. Nominal GDP rose, along with corporate profits before taxes and tax revenues. But global economic pressures have interrupted progress, and Japan's biggest issue—an aging population—has become even more pressing.