What Is Abenomics?
Abenomics refers to a range of economic and social policies devised and implemented by former Japanese Prime Minister Shinzo Abe to revive the nation’s economy. Thus, the term combines the phrases ‘Abe’ and ‘Economics.’ He proposed these reforms soon after holding office for the second time in 2012.
Abe’s Keynesian economic policies aimed to get the country out of a two-decade deflationary spiral. The three-arrow principle encompassed monetary, fiscal, and growth measures. Other objectives included expanding the money supply, increasing government spending, raising inflation, and implementing regulatory reforms.
Table of contents
- Abenomics meaning describes a set of economic and social policies created and implemented by former Japanese Prime Minister Shinzo Abe in 2012 to revitalize the country’s economy.
- The three arrow principle considered monetary, fiscal, and growth factors to increase the money supply, government expenditure, and inflation and execute regulatory reforms.
- Abenomics goal was more than economic growth, as it also included societal reforms, such as digitization, women employment, and Society 5.0.
- Many experts lauded Abe’s efforts and attributed the improved Japanese economy to him. However, global economic conditions, Japan’s financial woes, and the country’s aging population hampered the expected growth.
How Does Abenomics Work?
Abenomics in Japan was an effective economic strategy introduced by former Japanese Prime Minister Shinzo Abe in 2012. However, Japan was still recuperating from the global financial crisis of 2008 at that time. As a result, the nation’s GDP was negative, at -4.3%, and Japan’s exports were also dropping, negatively impacting the country’s economyEconomyAn economy comprises individuals, commercial entities, and the government involved in the production, distribution, exchange, and consumption of products and services in a society.. Therefore, he aimed to raise inflation to 2% and minimize deflationDeflationDeflation is defined as an economic condition whereby the prices of goods and services go down constantly with the inflation rate turning negative. The situation generally emerges from the contraction of the money supply in the economy. to recover the national economy from a long period of low growth.
Given the limited spending habits of the Japanese people, Abe needed to find a way to balance the loopholes with efficient economic initiatives. When a populace does not spend responsibly, businesses and sectors slow down, impacting the overall financial health of the economy.
Abenomics meaning is about more than just economic development. It also encompasses digitization and social reforms that must be instilled in society. To revive the nation’s economy, Abe formed a three-arrow economic strategy, which included:
- Adaptive fiscal policyFiscal PolicyFiscal policy refers to government measures utilizing tax revenue and expenditure as a tool to attain economic objectives. (increased government expenditure)
- Consistent Monetary policy (quantitative easing from the Bank of Japan)
- Economic growth strategy (structural reforms)
These reforms were proven to be beneficial to the country’s economic growthEconomic GrowthEconomic growth refers to an increase in the aggregated production and market value of economic commodities and services in an economy over a specific period., which resulted in:
- Increased exports
- More job opportunities
- Higher pay
- Enhanced competitiveness in the global market
Goals Of Abenomics
The motives of Abe behind framing Abenomics were:
- Achieving sustainable growth rateSustainable Growth RateSustainable Growth Rate (SGR) signifies how much a company can grow without relying on external capital infusion and is calculated using the return on equity and multiplying it by the business retention rate. Formula = retention rate * return on equity
- Accelerating an economic cycle
- Boosting the GDPGDPGDP or Gross Domestic Product refers to the monetary measurement of the overall market value of the final output produced within a country over a period.
- Bringing the inflation to up to 2%
- Increasing the demand
- Making the nation globally more competitive
- Expanding country exports
- Raising the national employment rate
- Promoting women employment
- Correcting yen’s overvaluation
- Keeping interest rates below zero
- Revising the Bank of Japan Act
- Establishing Society 5.0 – a data-driven, human-centric social arrangement for future generations
Three Arrows Of Abenomics
#1 – Fiscal Policy
The Japanese government spent trillions of yen on infrastructuresInfrastructuresInfrastructure refers to fundamental physical and technological frameworks that a region or industry establishes for its economy to function properly., such as flyovers, buildings, and highways, due to this Abenomics policy. Consequently, spending on infrastructure development doubled the consumption taxConsumption TaxConsumption Tax is a type of indirect tax you pay for using or “consuming” goods and services. Also called Expenditure Tax, it includes sales, excise, tariffs, or some property taxes. and created a slew of new jobs. Furthermore, an increase in the employment rate let people earn more money and spend more on products and services. As a result, trade and commerce improved, helping enterprises and industries, propelling the economy ahead.
Other highlights of the policy include:
- Encourage public investment and spending
- Stimulate demand for and consumption of goods and services
- Accelerate short-term economic growth
- Achieve long term budget surplus Budget SurplusA budget surplus occurs when the government's earnings through tax revenues is more than its spending in the current quarter or year. A government surplus is a positive sign in an economy because it demonstrates the government's earning power.
- Increase the GDP
- Reduce corporate taxCorporate TaxCorporate tax is a tax levied by the government on the profits earned by a company at a fixed rate each year and is calculated in accordance with specific tax regulations. rates
- Liberalize agriculture and healthcare industries
#2 – Monetary Policy
It included a series of quantitative easingQuantitative EasingQuantitative easing (QE) is an advanced monetary policy of central banks to stimulate growth in a stagnant economy by large scale buying of government bonds and other assets. initiatives to boost liquidityLiquidityLiquidity is the ease of converting assets or securities into cash. in the Japanese economy. However, due to real estate and asset price bubblePrice BubbleA price bubble occurs when the price of an asset, such as a stock or a commodity, is overbought, or when demand for such asset is constantly increasing, resulting in a price rise that exceeds the asset's explainable fair value. bursts, Japan experienced economic stagnation in the 1990s. Furthermore, national banks lent money without confirming the borrowers’ credentials. As a result of their inability to repay, the majority of the borrowers became defaulters, causing banking problems.
Given their past experiences, banks and financial institutionsFinancial InstitutionsFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. began to apply stricter standards. As a result, it made it more difficult for Japanese people to borrow money. Furthermore, because the interest rates were excessively high, no one was willing to take out loans. Also, Japan’s inhabitants rarely contemplated borrowing money due to their limited spending habits.
Abe proposed decreasing interest rates to a negative figure to maintain societal balance in terms of monetary resources. Despite fears of the financial systemFinancial SystemA financial system is an economic arrangement wherein financial institutions facilitate the transfer of funds and assets between borrowers, lenders, and investors. collapsing, the Bank of Japan kept rates negative at minus 0.1% in January 2018 to attract lending and investment.
As a result, the government began printing additional money to keep the loan and spending cycle going. In addition, it increased spending on goods and services, resulting in price increases for those items. All this brought the inflation rate closer to Abe’s target. It also boosted exports and inflation in Japan.
#3 – Structural Reforms
Aside from reduced spending and borrowing difficulties, another factor influencing the economy was a labor shortage. Moreover, Japan’s birth rate has dropped dramatically over the last few years. As a result, Japan is expected to undergo a protracted era of population decrease, according to the National Institute of Population and Social Security Research’s medium-fertility estimate, with a population of 116.62 million in 2030, 99.13 million in 2048, and 86.74 million in 2060.
Abe implemented social reforms to address the labor shortage issue based on projected population projections in Japan. He also introduced Abenomics 2.0 to boost the birth rate while improving pensions and social security for the elderly. In addition, Abe recommended incentive and reward systems to entice people to start families. He invested in child care services and educational reforms to meet the goal. Under his womenomics plan, he pushed more women to enter the workforce and eliminated the spousal tax exemptionTax ExemptionTax-exempt refers to excluding an individual's or corporation's income, property or transaction from the tax liability imposed by the federal, local or state government. These exemptions either allow total relief from the taxes or provide reduced rates or charge tax on some items only..
Some other efforts included:
- Encouraging private investment
- Introducing business reforms
- Supporting domestic and international businesses
- Modernizing and liberalizing healthcare and agricultural industries
- Participating in the Trans-Pacific Partnership (TPP)
- Increasing competition in regional and global markets
Did Abenomics Fail?
Abenomics resulted in a significant increase in job opportunities, lowering the unemployment rate to below 3%. The policies worked and strengthened Japan’s economy. In addition, the GDP, tax revenues, and inflationInflationThe rise in prices of goods and services is referred to as inflation. One of the measures of inflation is the consumer price index (CPI). Rate of inflation = (CPIx+1–CPIx )/CPIx. Where CPIx is the consumer price index of the initial year, CPIx+1 is the consumer price index of the following year. all increased. Though the rate of acceleration was not as fast as Abe had hoped, it was enough to get the economy back on track.
The measures successfully eased the Bank of Japan’s stricter large-scale monetary criteria. The monetary policyMonetary PolicyMonetary policy refers to the steps taken by a country’s central bank to control the money supply for economic stability. For example, policymakers manipulate money circulation for increasing employment, GDP, price stability by using tools such as interest rates, reserves, bonds, etc. resulted in large asset purchases and yield curveYield CurveA yield curve is a plot of bond yields of a particular issuer on the vertical axis (Y-axis) against various tenors/maturities on the horizontal axis (X-axis). The slope of the yield curve provides an estimate of expected interest rate fluctuations in the future and the level of economic activity. control, setting precedents for other central banks. The equity marketEquity MarketAn equity market is a platform that enables the companies to issue their securities to the investors; it also facilitates the further exchange of these stocks between the buyers and sellers. It comprises various stock exchanges like New York Stock Exchange (NYSE). benefited from the convenience of monetary transactions. Furthermore, Japanese enterprises were more reliant on exports for profit, improving economic growth.
Abe retired as Prime Minister in September 2020, and his replacement, Yoshihide Suga, carried on the legacy and continued Abenomics. Many analysts praised Abe’s efforts and credited him with the improved Japanese economy. In addition, they claimed that his policies helped the country cope with the economic instability brought on by the coronavirus outbreak.
On the other hand, global economic factorsEconomic FactorsEconomic factors are external, environmental factors that influence business performance, such as interest rates, inflation, unemployment, and economic growth, among others., Japan’s economic troubles, and the aging population have hindered the predicted growth.
Frequently Asked Questions (FAQs)
Former Japanese Prime Minister Shinzo Abe announced Abenomics in 2012 as a successful economic approach to help the country’s economy recover. He devised a three-arrow economic strategy, combining fiscal policy, monetary policy, and structural changes, to help the country recover from the global financial crisis of 2008.
His goal was to elevate inflation to 2% to help the country’s economy recover from a protracted period of poor growth and avoid deflation. In addition, these policies attempted to strengthen the country’s economic growth by increasing exports, creating better jobs, raising salaries, and increasing global competitiveness.
When Shinzo Abe became Prime Minister of Japan for the second time in 2012, he established a series of economic and social reforms. Hence, the term is a combination of ‘Abe’ and ‘Economics.’
Abenomics was successful in boosting Japan’s economy. The strategies resulted in a considerable rise in job openings, bringing the unemployment rate below 3%. Furthermore, the GDP, tax revenues, and inflation all rose. Even though the rate of acceleration was not as quick as Abe had planned, it was sufficient to get the economy back on track.
This has been a guide to What is Abenomics & its meaning. Here we explain how Abenomics work along with the goals, three arrow principle and if it failed. You can learn more about from the following articles –