Japanese Prime Minister Shinzo Abe, at the start of his second term of office in late 2012, announced a series of policies in an attempt to revitalize the sagging economy after the March 11 earthquake. The measures include the quantitative easing through the yen depreciation to increase the global competitiveness of Japanese companies, and a higher inflation rate set to fight deflation. Following the footsteps of former U.S. president Ronald Reagan, who named his economic policies “Reaganomics”, Abe coined “Abenomics” for the economic policies.
In the early days of implementation of Abenomics, the Japanese government launched “two arrows” — the loose monetary policy and proactive fiscal policy, which did help lift the Japanese stock market and brought about some signs of recovery to the economy. The actual economic growth rates for 2012 and 2013 were 1.46% and 1.52%, respectively. The “two arrows” of Abenomics, however, only produced some short-term and partial effects. Its “first arrow” triggered the yen depreciation and brought benefits to big exporters, while the “second arrow” led to an increase in fiscal expenditure and won appreciation from the construction and heavy industries.
After reaping the benefits from the “two arrows”, big companies hiked the pay levels for their employees. The medium-sized and small enterprises, however, were still unable to give pay raises to their employees. Because the number of employees of large enterprises accounted for less than one-tenth of the country’s total labor force, the national average pay growth was actually lower than the price rises of consumer goods, meaning that the actual pay recorded a negative growth. With the rise of consumption tax from 5% to 8% from April 2014, the price hikes in imported raw materials triggered by the yen depreciation, and the consequential rises in food prices, many people began to feel the pinch of a hard life, and sluggish consumption led to further deterioration of economic prospects.
In 2014, the growth rate of the Japanese economy further slowed to 0.89%. In March 2013, the Bank of Japan pledged to achieve a 2% rise of the consumer price index in two years, so as to unleash consumption on inflationary expectations. However, the much-anticipated CPI in February 2015 still remained at the same level from a year earlier. So the media argued that the Japanese version of the QE program has failed. It is safe to say that, except a slight improvement in employment rate and a rise of inbound visitors, the Japanese economy could not boast of any other bright spots.
In June 2014, the Abe administration launched the Japan Revitalization Strategy, which was widely regarded as the “third arrow” of Abenomics, or the last resort in a three-pronged economic agenda. The strategy was meant to stimulate private investment and promote bold structural reforms in an attempt to fundamentally rein in the “three excessive trends”, namely, excessively low investment, excess capacity and excessive competition.
The strategy was a combination of policy tools to shore up the stalled economy, including to diversify and expand the labor force by increasing opportunities for women; remove inter-ministerial barriers to direct policy resources into the strategic fields; promote development of information technology so as to facilitate technological innovations dominated by the private sector and to elevate Japan’s global ranking in technological prowess from the fifth to the first in five years; open the labor market and attract more foreign talent; improve the investment environment to lure investment from foreign companies, and offer support to medium-sized and small enterprises, which are considered the “backbones of the Japanese economy”. By successively firing the “three arrows,” Abe wanted to prove that these policy measures were not random but well-crafted.
Abenomics, rooted in a belief or vision that the economy could maintain growth, was designed to find the real growth point of the Japanese economy through promoting corporate investment and consumer spending, issuing more banknotes and using government expenditure as the support for the psychological transitional period. The Japanese government pinned high hopes on the “three arrows”, anticipating that it would lift the economy out of deflation, which has haunted the country for about a decade, and would help its economy to achieve an annual 3% nominal growth in the coming 10 years and an annual average of 2% in actual growth. It also hoped that the “three arrows” would help cultivate three cycles of good economic growth, and develop a healthy fiscal system through measures such as an increase of tax revenues. The practice of promoting investment and increasing consumption based on a kind of “conviction” is something “unique” or “innovative” in Abenomics.
However, Abenomics has obvious problems and defects. First, it runs short of effective measures to counter the most fundamental problem with the Japanese economy — the aging population and the declining trend of population, and is short of the courage to boldly open the country to immigrants. Second, fearing any setback would crimp recovery, Abe decided to postpone the plan of hiking consumption tax to 10% by one and a half years, which was originally scheduled for implementation in October 2015. This meant that he failed to find any solution to the dilemma between economic growth and fiscal reconstruction. Third, there was no mention at all about the sources of capital needed for the enforcement of various policy measures in the structural reforms. And fourth, no specific timetable or road map was given for the implementation of some reform measures. The “third arrow” of Abenomics did send a clear signal for reforms and involved a wide range of sectors, but generally speaking, it could still be described as a mediocre plan that is void of any “policy innovation” to tackle the problems in the Japanese economy.
Three criteria — whether Japan could move out of deflation, whether an economic recovery could be achieved and whether fiscal reconstruction could be completed — are the benchmark to judge the success or failure of Abenomics during his tenure of office (fiscal reconstruction is probably the most difficult one). Let’s wait before jumping to any conclusion.