The Abenomics policy program is aimed at both encouraging the economy through short-term stimulus and promoting economic reforms that will support longer-term growth and mitigate the deflationary effects of Japan’s rapidly ageing population.
Abenomics Wider In Scope Than Previous Reform/Stimulus Efforts
Launched in late 2012, the Abenomics program contrasts to earlier policy efforts that failed to stop the transition of the Japanese economy from a wonder of the developed world in the 1980s to a basket case of economic stagnation in the 1990s and early 2000s.
Source: The Observer, April 16, 2012
Abenomics differs because it is an economy-wide stimulus and reform initiative, and a contrast to the sector or issue-specific efforts in the past. Abenomics’ central pillars or ‘three arrows’ break down as higher inflation targets, loose monetary policy and reforms to business regulations.
Targeted at Creating Inflation, Raising Business Investment and Boosting Private Consumption
When deflation weakened aggregate demand in the 1990s, Japanese consumers held on to savings and made fewer purchases, and businesses invested less, particularly amid trade competition from other Asian nations, most notably China.
Trends sketched out by Macromania show a clear decline in corporate investment after 1990, with slight increases in private consumption growth of, on average, 1% per year between 1990 and 2012, compared with 4.7%, on average, per year between 1980 and 1990.
Declining Investment, Slowing Private Consumption in Japan's 20-Year Stagnation
Source: Macromania, May 18, 2014
Abenomics policy mix has a wide range of benefits for the economy: consumer’s confidence will rise as higher future prices make current purchases more attractive, workers will bargain for higher wages as price expectations change, and companies will increase investment as the cost of capital falls and changes to corporate tax rates will cut the cost of doing business.
Creating Aggregate Demand is Necessary to Offset Impact of Population Ageing
Abenomics is also meant to mitigate the impact of Japan’s ageing population which a recent IMF paper argued had a deflationary impact on the economy between 1980 and 2000. During that period, total workers as a percentage of the population dropped from 57% to 41%, resulting in scarce labour, depressed corporate sentiment and weaker consumer spending.
More workers are expected to enter the labor force with changes to government policy such as increased childcare support, higher mandatory retirement ages, cuts to tax benefits for stay-at-home parents and the easing of controls on immigration for skilled workers.
The basis of Japan’s economy is expected to be change through industrial reform. Firstly, by reversing protection to agriculture, the government will push small-scale farmers into the labor force. Secondly, incentives to high-tech, capital (rather than labor)-intensive industries will promote structural change in the industrial sector that will hopefully contribute to GDP but require fewer workers.
Inaction Risks Continued Slump in Demand and Economic Contraction
Looking into the future, the researchers predicted that, without explicit government action, the ageing population would have an upward impact on interest rates as capital became scarce as elderly retirees drew down their savings and international investors expressed concern over the government’s high public financing requirement. This also lead to decreased demand for domestic output as consumers looked for cheaper imported alternatives.