Abenomics

Abenomics refers to the economic policies implemented by the Government of Japan led by the Liberal Democratic Party since the 2012 general election. They are named after Shinzo Abe, who served as Prime Minister of Japan from 2012 to 2020. Abe was the longest-serving prime minister in Japanese history. After Abe resigned in September 2020, his successor, Yoshihide Suga, stated that his premiership would focus on continuing the policies and goals of the Abe administration, including the Abenomics suite of economic policies.
Abenomics is based upon "three arrows": monetary easing from the Bank of Japan, fiscal stimulus through government spending, and structural reforms. The Economist characterized the program as a "mix of reflation, government spending, and a growth strategy designed to jolt the economy out of suspended animation that has gripped it for more than two decades".
During Abe's tenure, the rate of Japan's nominal GDP growth was higher, and the ratio of government debt relative to national income stabilized for the first time in decades. However, the "third arrow" of structural reforms was not as effective as observers had hoped.

Background

Japanese economic conditions prior to Abenomics

In 1996, GDP increased by 3%, promising recovery from the bursting of a major asset-price bubble in the early 1990s. The Japanese government raised the consumption tax from 3% to 5% in April 1997, with the view to further increases in 1998.
There was a financial crisis in East and South East Asia, following the collapse of the Thai Baht peg on July 2, 1997, which had widespread consequences in the entire region. Government revenues subsequently decreased by 4.5 trillion yen as consumption faltered. Nominal GDP growth remained below zero for most of the five years following the tax hike. Japan's 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.

World economic conditions prior to Abenomics

During the Great Recession, Japan suffered a 0.7% decline in real GDP in 2008, followed by a severe 5.2% decline in 2009. In contrast, the data for world real GDP growth was a 3.1% increase in 2008, followed by a 0.7% decline in 2009. Exports from Japan shrank from 746.5 billion in U.S. dollars to 545.3 billion from 2008 to 2009, a 27% reduction. 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.

Ideological basis of Abenomics

Abe's economic policy is also related to the rise of China as an economic and political power. Abe's supporters drew explicit parallels between Abenomics and the Meiji era program of fukoku kyōhei. In addition to providing a stronger counterweight to China in the Asia-Pacific region, strengthening the Japanese economy is also intended to make Japan less reliant on the United States for defense.

Year	Nominal GDP	NGDP Growth	Unemployed persons	Economically active population	Unemployment
1994	486526.3	1.19	1920	66450	2.88
1995	493271.7	1.38	2100	66660	3.15
1996	502608.9	1.89	2250	67110	3.35
1997	512248.9	1.91	2300	67870	3.38
1998	502972.8	-1.81	2790	67930	4.10
1999	495226.9	-1.54	3170	67790	4.67

Note: NGDP is valued at 2006 market prices

Implementation

Abenomics consists of monetary policy, fiscal policy, and economic growth strategies to encourage private investment. Specific policies include 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 the 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% target inflation rate through quantitative easing. But Kikuo Iwata, the deputy governor of the Bank of Japan, suggested that the BoJ does not strictly aim for the 2% price target in two years. Iwata implied that the BoJ would not loosen again its monetary policy, aimed at halting economic stagnation, soon after the increase in the sales tax in April 2014.
Structural reforms have taken more time to implement, although Abe made some early moves on this front, such as pushing for Japanese participation in the Trans-Pacific Partnership.
The 2013 House of Councillors election gave Abe complete control over the Diet, but the government showed some internal division over specific structural reforms. Certain cabinet members favored lower corporate taxes, while others were wary of the potential political backlash for cutting taxes on large firms while raising taxes on consumers. Labor laws and rice production controls have also become contentious issues within Abe's government.

Quantitative Easing

On 4 April 2013, the BoJ announced its quantitative easing program, whereby it would purchase ¥60 to ¥70 trillion of bonds per year.
On 31 October 2014, the BoJ announced the expansion of its bond buying program to ¥80 trillion of bonds per year.

Effects

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.
The yen became about 25% lower against the U.S. dollar in the second quarter of 2013 compared to the same period in 2012, with a highly loose monetary policy being followed. By May 2013, the stock market had risen by 55%, consumer spending had pushed first-quarter economic growth up 3.5% annually, and Shinzo Abe's approval rating ticked up to 70%. A Nihon Keizai Shimbun survey found that 74% of the respondents praised the policy for alleviating Japan from the prolonged recession.
The impact on wages and consumer sentiment was more muted. A Kyodo News poll in January 2014 found that 73% of Japanese respondents had not personally noticed the effects of Abenomics, only 28% expected to see a pay raise, and nearly 70% were considering cutting back spending following the increase in the consumption tax.
Under a weaker yen, Abenomics increased the cost of imports, including food, oil, and other natural resources upon which Japan is highly reliant. However, the Abe government viewed this as a temporary setback, as the weaker yen would eventually increase export volumes. Japan also managed to maintain an overall current account surplus due to investment income from overseas. In December 2018, however, it was confirmed that the Japanese economy started contracting in the third quarter of 2018 and had declined the most in four years during this quarter as well.

Analysis

Austerity policies

expressed the view that the Japanese economy would fall into fiscal crisis before 2020 due to basic structural issues, including high government debt, worsening demographics, and loss of competitiveness in key industries. Anatole Kaletsky was an early supporter of Abenomics, but since the Japanese government decided to raise the country's consumption tax rate to 10%, he expressed his concern that the tax hike could deal a more devastating blow to the Japanese economy than expected. In 1997, the Japanese government raised the rate to 5% from 3% to tackle its debt of 50% of its GDP at that time, promising that the tax hike would be offset by income-tax reforms. However, the tax hike ended up making domestic consumption stumble, pushing the economy into recession. The country fell into a deflationary trap. Due to the country's long-running malaise, the government's gross debt reached 200% of its GDP, despite the increase of the sales tax. The International Monetary Fund forecast that the tax hike would cut Japan's economic growth from 2.5% in 2013 to 1.4% in 2014, but Kaletsky argues that this economic downturn is underestimated.
In March 2014, at a conference in Abu Dhabi, Lawrence Summers expressed his concern about the negative effects of the tax hike, saying that it could damage the Japanese economy more seriously than early estimates. Although the Japanese government expects their economy to recover after the it goes into a short recession, Summers suggested that Japan's rebound was overestimated.
Koichi Hamada, a monetary adviser for Shinzo Abe, warned that the planned value-added tax hike could hurt Japan's economy, which had started to recover from a long recession and deflation. He says that the Japanese government should defer the tax hike so that it could not discourage consumption, adding that economists such as Jeffrey Frankel have suggested the gradual increase of the rate of the tax by one percent annually. Although Hamada is concerned about the effects of the tax hike, he expects that monetary easing by the BoJ can offset its negative effects, applying the Mundell–Fleming model to Japan.
Depreciating a domestic currency can boost its exports if the Marshall–Lerner condition is met. If it is not, the trade balance initially becomes worse.
Since the disastrous nuclear incident in Fukushima in 2011, many nuclear power stations in Japan have been shut down. Making up for lost electricity generation, Japan has imported extra fossil fuels, which worsened the country's trade deficit, partly because of a weaker yen. The increasing cost of electricity may hurt businesses in the country and hamper the country from boosting its economy. But Shigeru Ishiba said that people were noticing that electricity could be supplied without nuclear power generation. Thus, restarting the reactors is still controversial; a nationwide poll showed that 76 percent either opposed nuclear power or wanted Japan to reduce its reliance on nuclear energy, while in some regions, such as communities close to Sendai, where nuclear power plants create jobs and relating subsidies are granted, restarting the reactors is widely supported. 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.