Abenomics How Japan Revived Its Economy -Abu Foysal
In the world there existed many famous leaders but no one had achieved such a fame in case of leading specially in economic side like Shinzo Abe, former president of Japan.
In last month Abe had resigned from his presidency due to illness and his renowned economic policy had come to light named ABENOMICS. This kind of presidential economic policy is not a new policy in the world, we have observed Obamanimics, Trumponomics, Rangnanomics ect, previously.
If we simply define the Abenomics we can say an economic policy advocated by Shinzo Abe since the December 2012 general election, when Abe was elected to his second term as Prime Minister of Japan.
Advocates of Abe explained Abenomics ideologically that in that time China was becoming a super power in the Asia pacific region in both economic and defense sector. To compete with China Japan had to enhance its power in the mentioned sector specially Japan was trying to lessen its dependency on USA for defense sector.
Before 2012 not only Japan but also the entire world had faced the great depression when Japan suffered a 0.7% loss in real GDP in 2008 followed by a severe 5.2% loss in 2009, Net Exports faced 27% reduction from 746.5 billion in U.S. dollars to 545.3 billion in U.S. dollars from 2008 to 2009.
By 2013, nominal GDP in Japan was at the same level as 1991 while the Nikkei 225 stock market index was at a third of its peak. Japan had also faced economic failure which was taken by its former government including tax hike from 3% to 5% in 1997 which created a burden and consumption decreased. GDP increased by 3 percent in1996, but sank into recession after the tax hike and average annual wages grew between 1992 and 1997, but began declining after the 1997 tax hike. Since 1997, wages have decreased faster than nominal GDP.
In 2012, the Diet of Japan under previous Prime Minister Yoshihiko Noda passed a bill to increase the consumption tax to 8% in 2014 and 10% in 2015 in order to balance the national budget; this tax hike was expected to further discourage consumption. That’s why Japan was facing unstable economic situation before 2012.
Shinzo Abe had mentioned three arrows to implement his policy. Firstly, Monetary easing from the Bank of Japan where the central bank of Japan buys government bonds or other financial assets in order to inject money into the economy to expand economic activity.
Secondly, Fiscal stimulus which refers to attempts to use monetary or fiscal policy to stimulate the economy by lowering interest rates and quantitative easing. Last one is Structural reforms with the help of loans provided by the IMF and the WB to countries that experienced economic crises.
To implement Abe’s policy Japan took Specific policies including inflation targeting at a 2% annual rate, correction of the excessive yen appreciation, setting negative interest rates, radical quantitative easing, expansion of public investment, buying operations of construction bonds by Bank of Japan, and revision of the Bank of Japan Act. Fiscal spending will increase by 2% of GDP, likely raising the deficit to 11.5% of GDP for 2013.
Two of the three arrows were implemented in the first weeks of Abe’s government. Abe quickly announced a ¥10.3 trillion stimulus bill, and appointed Haruhiko Kuroda to head the Bank of Japan with a mandate to generate a 2 percent target inflation rate through quantitative easing. But the last arrow structural reforms are a long-term process, so Japan had to wait some years to enjoy the benefits of this policy. In 2013 Abe had given the complete control over Diet (Japan’s parliament) to function structural reforms quickly.
Abenomics had immediate effects on various financial markets in Japan. By February 2013, the Abenomics policy led to a dramatic weakening of the Japanese yen and a 22% rise in the TOPIX stock market index. The unemployment rate in Japan fell from 4.0% in the final quarter of 2012 to 3.7% in the first quarter of 2013, continuing a past trend.
IMF affirmed that nominal GDP of Japan contracted by $1.8 trillion during 2012–2015 while real GDP contracted at an annual rate of 6.8 percent in the second Quarter of 2014, after the Consumption Tax hike came into effect in April. Economists forecast said that the Japanese economy would grow by annualized 2 percent in the third quarter of 2014, but in reality, GDP contracted at an annual rate of 1.6 percent in the quarter. Japan’s second consecutive contraction meant that technically the third largest economy slipped into recession.
In this time Japan had faced an incident named disastrous nuclear incident in Fukushima in 2011, all nuclear power stations in Japan have been shut down. Making up for lost electricity generation, Japan has imported extra fossil fuels, which worsened the countries trade deficit partly because of weaker yen. The increasing cost of electricity may hurt businesses in the country, and hamper the country from boosting its economy. But Shigeru Ishiba, the then chief of Bank of Japan said that people are noticing that electricity could be supplied without nuclear power generation.
Unless nuclear reactors are restarted, the Marshall Lerner condition will not be met due to a heavier dependence on fossil fuels and an increased reliance on imports. But Japan had gradually come out form this power lacking situation. Some research forecasted that Japan’s economy will fall in recession including IMF affirmed that Japan’s nominal GDP contracted by $1.8 trillion during 2012–2015 while real GDP contracted at an annual rate of 6.8 percent in the second quarter of 2014, after the Consumption Tax hike came into effect in April.
Economists forecasted that the Japanese economy would grow by annualized 2 percent in the third quarter of 2014, but in reality, the country’s GDP contracted at an annual rate of 1.6 percent in the quarter. In the third quarter of 2015 the Japanese economy contracted 0.8 percent in annual terms and went into a technical recession as the real GDP shrank for two quarters consecutively. The GDP figure was worse than economists forecasted that it would contract by around 0.2 per cent in the third quarter. This recession was its fifth recession since the Lehman shock occurred in 2008.
But Amari seemed to be optimistic about the future of Abenomics, indicating that this technical recession would be temporary and the economy was showing signs of continuous and gentle recovery.
The results of Abenomics were positive on GDP, Trade, Inflation and Wage. As external demand on goods declines, export fell 2.7 percent in May 2014 from a year ago. But its imports fell by 3.6 percent from a year ago as well, which narrowed the trade deficit by 8.3 percent. Japan’s trade deficit with other countries was over 1 trillion yen in April 2014, and it went down to 909 bn yen ($8.9bn, £5.2bn) in May 2014. But the country is still running a trade deficit for the 23rd straight month.
In late January 2015, BoJ governor Haruhiko Kuroda admitted that the central bank would not achieve the 2 percent inflation target by April 2015, adding that he expected the price level to get to the target level in another 12 months. In February 2015, he said that the escape velocity to lift the economy out of tenacious deflation needed to be tremendous.
The Impact of Abenomics on the world economy was widespread. In the early October 2014, the IMF revised its 2014 global growth forecast downwards from 3.4 percent to 3.3 percent, although many central banks continued to provide liquidity to the world financial market. Weaker expansions in Japan, Latin America and Europe worsened the outlook for the world economy.
In October 2014 the World Bank’s chief economist Kaushik Basu said that the world economy was taking the risk of stagnation. He added that The Eurozone and Japan were the main slowdown areas. Japan, the world’s third largest economy, can be likely to sink into recession due to the consumption tax hike. So we can say due to fluctuations of Japan’s economiy, world was facing a risk of recession after the great depression.
Taking everything into account, Abenomics is a sound Keynesian arrangement that could spare the Japanese economy from emptying. The Mundell-Fleming Model was utilized to represent the financial hypothesis behind Abenomics. Abenomics first and second bolts have put the Japanese economy solidly on the way to recuperation. The nation is currently anticipating the arrival of the third shaft.
The 2020 Tokyo Olympics supplement the Abenomics technique by displaying a brilliant chance to take care of Japan’s obligation to maintain a quality issue. Marking the event, Japanese government is shrewd to build utilization charges before the 2020 Olympics. then the obligation issue might cease this year that began after the 1964 the Olympic Games.
The writer is undergraduate student of Economics at University of Dhaka