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Abenomics and the future of Japan

13 May 2013 9:58 AM | Anonymous

For those that watch Japanese politics and news, they might have heard the term "Abenomics" recently. Abenomics refers to the fiscal and monetary policy of the new prime minister of Japan, Shinzo Abe. This section will briefly look at what Abenomics is and what effects it might have on business and relations with Japan.

As many of you are aware, over the past two decades Japan has faced deflation and a stagnant economy. While no one denies that the problem exists, past Prime Ministers and Bank of Japan heads have realistically done little to battle this trend. This is not to mention the frequent change in Prime Ministers (7 in the past 6 years) that has made it hard to have coherent monetary and fiscal policies.

However, Japan recently elected a new prime minister, Shinzo Abe, into office. Abe, known for his somewhat conservative social and political views, ran on reviving the stagnant Japanese economy. After being elected, his policies have become known as “Abenomics”. It is important, especially for those who work and do business with Japan, to understand what exactly “Abenomics” is and what it means for the future of Japan.

Abenomics is the idea that with loose fiscal and monetary policy, Japan can quickly restart their economy. Abenomics proposes doing three things:

1.     A large stimulus (known as QE or Quantitative Easing).

I.               The Japanese government announced it will spend an unprecedented 1.4 trillion to kick-start the economy.

2.     Using Bank of Japan (BOJ) to raise inflation rate to 2%.

I.               Haruhiko Kuroda, an Abenomics believer, was recently appointed head of the BOJ. He has said that he will work to raise the inflation rate to 2%, thereby battling the deflationary trend of the past 2 decades. 

3.     Enthusiasm for weak yen       

I.               This general strategy looks to revive Japanese manufacturing at home by weakening the yen, thereby making it easier for Japanese construction to sell overseas.

With these three policies – a strong Stimulus, new BOJ Monetary Policy, and active structural change around the yen, Abenomics hopes to bring the Japanese economy out of grips of deflation and stagnation. However, Abe is also looking to encourage some cultural changes as well, hoping to make Japan more competitive in the international marketplace. A few of the more recent include plans to double the amount of JET English teachers in the next three years, require all students to take the TOEFL (Test of English as a Foreign Language), send more students abroad, increase funding for foreigners wanting to learn Japanese, and even provide free child-care so that women can more quickly get back to the workplace after childbirth.

While Abenomics seems promising, it is not without it’s critics. Many worry about Japan’s already large Debt to GDP ratio (over 200%) and see Abenomics as more of the same – spending large amounts of money on inefficient and generally useless construction projects rather than on innovation and real structural reform. While there is much debate, Abenomics is already showing to have some strong effects. In the past month, the yen has weakend from 80 yen to the dollar to over 100 yen, the Nikkei (Japanese Stock Exchange) is at a 5 year high, and inflation seems to on target to reach 1.9% by 2015. Abe is also extremely popular at home, so it looks like whatever the outcome may be, Abenomics is here to stay.

Stay tuned to Japan in the NEWS for more news analysis and stories!

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