The Latest Twists and Turns in Japan’s Economic Battle

Shinzo Abe

Since the election of Shinzo Abe as Prime Minister in 2012, Japan has instituted a number of bold economic reforms (dubbed “Abenomics”) to try to jolt the country’s economy back to health after almost a quarter-century of stagnation. These reforms included increased government spending, more purchases of government bonds by the country’s central bank, deregulation, and new international trade agreements. Recently, however, Abenomics has hit a bit of a snag.

In April Japan’s consumption tax rose from 5% to 8%, a change that was agreed to in 2012 before Abe was elected. The tax increase took the air out of the Japanese economy, which contracted in both the second and third quarters of this year. The tax was scheduled to further increase to 10% next year.

In response to the economic fragility, the government has changed tack. The Bank of Japan, the country’s central bank, introduced move aggressive stimulus efforts. Abe stated that he would delay the second phase of the tax hike. And he announced that he would dissolve Parliament and call a new election to try to solidify support for his economic agenda.

Will the new efforts succeed? One of the interesting aspects about Abenomics (and a lot of economic policymaking more generally) is its somewhat circular logic: its success largely depends on how confident people are that it will succeed. If businesses believe that Abenomics will boost the economy and end Japan’s persistent deflation, for example, they’ll be more willing to raise their employees’ wages, which will help boost the economy and end deflation.

Japanese stocks surged after the central bank announced its new stimulus plan, suggesting that many investors still have faith that Abenomics can succeed. But if Japan suffers another hiccup like the recent effects of the consumption tax increase, Abenomics might not be able to recover.

Checking in on Abenomics

Shinzo Abe

When Shinzo Abe was elected as Japan’s Prime Minister in December 2012, he launched a bold plan of economic reforms that became known as “Abenomics”. These reforms included increased government spending, more purchases of government bonds by the country’s central bank, deregulation, and new international trade agreements. The aim was to jolt the country out of two decades of stagnation that had been characterized by deflation and mediocre economic growth.

Almost a year and a half into the implementation of this reform agenda, Abenomics appears to have made some progress. The value of the Yen, the country’s currency, has fallen by more than 20% since November 2012, helping Japanese exporters become more internationally competitive. The stock market has soared by 60% against the US dollar over the same time period (although for US investors some of that gain has been offset by the decline in the value of the Yen). Japanese wages rose in February for the first time in almost 2 years, suggesting that the quest to end deflation may finally be bearing fruit.

That doesn’t mean that Abenomics has been unequivocally successful. Many of Abe’s proposed regulatory reforms, such as breaking up the country’s electricity monopolies and loosening rules about how companies hire and fire workers, have struggled to gain support.  Some critics, such as economist Edward Hugh, argue that Abe’s attempts to stimulate the economy will ultimately fail.

The mixed outlook is reflected in the gyrations of Japan’s stock market: the overall rise since Abe’s election masks a few large drops, including a decline of more than 10% so far this year. Despite some early signs of success, the jury is still out on whether Abenomics will resuscitate Japan’s economy.