How the Shock Therapy of ‘Abenomics’ Worked in Japan

(Bloomberg) -- Japan’s Prime Minister Shinzo Abe had a bold strategy: shock therapy for an economy that had been stagnant for 20 years and was overtaken by China as the world’s second-largest in 2010. Launched three years later, Abenomics, as the doctrine is known, departed from the piecemeal measures of previous leaders and antagonized powerful political constituencies. Abe told voters that the strong economic medicine was Japan’s last chance to remain a world power, framing his policies as a matter of national security. Progress was patchy at best, however, even before the hammer blow of the Covid-19 pandemic -- and Abe’s decision to step down after a record-setting eight-year run.

1. What is Abenomics?

The theory behind it was that unprecedented monetary easing and government spending would tackle deflation and buy time to implement much-needed structural reforms. Abe called it a “three-arrow” strategy, borrowing the image from a Japanese folktale that teaches that three sticks together are harder to break than one. The Bank of Japan played a big role. In addition to making massive purchases of government debt, it set itself a 2% target for inflation, a major shift. Rising prices encourage companies to invest and consumers to spend. Other fiscal policies included cutting the corporate tax rate and urging Japan’s state pension fund to buy riskier assets. Another key component — the Trans-Pacific Partnership trade agreement — was eventually signed despite the U.S. pulling out under President Donald Trump.

2. What was the background?

After Japan’s real estate and stock market bubble burst in the early 1990s, companies focused on cutting debt and shifting manufacturing overseas. Wages stagnated and consumers reined in spending. That led to two lost decades, with no nominal growth in the economy. Prices of goods such as fresh food and sake kept falling, creating deflation that sapped optimism. Japan’s devastating earthquake, tsunami and nuclear meltdown in 2011 didn’t help. The challenge of growing the economy with an aging population has vexed a series of prime ministers.

3. Did it work?

To some extent. The economy was growing for a few years, albeit modestly, and jobs were being created. Abe staved off deflation but the goal of spurring inflation remains elusive, especially now with the Covid-19 slump. The Bank of Japan, which introduced negative interest rates in early 2016 to encourage spending, hasn’t gotten very close to its 2% target, if you exclude the impact of a sales-tax hike that took effect in 2014. (Inflation briefly touched the halfway mark of 1% in 2018 before dropping off.) Meanwhile, some have complained that years of aggressive monetary stimulus were hurting parts of the economy: robbing savers of returns, crushing banks’ profit margins and keeping unproductive companies alive by cheap credit. Proponents of Abenomics see the Bank of Japan’s mammoth purchases of government debt as the only way to shake off deflation and avoid more stagnation. But Abe told lawmakers in July 2019 that his real economic goal was achieving full employment, not 2% price growth. And anyway, the rest of the world is now mirroring Japan’s strategy of super-loose fiscal and monetary policy.

4. And now?

Policy makers were expecting the economy to rebound this year following another sales tax hike on Oct. 1, 2019. But that was before the pandemic erupted. Now, after three straight quarters of contraction -- including the worst on record -- the economy has shrunk back to its size after the 2011 disasters. Still, Japan’s bond yields remain among the lowest of any developed nation, indicating investor confidence. Few are anticipating drastic changes from the next Japanese prime minister, given the lack of open dissent in the ruling Liberal Democratic Party. Still to do: Abe had been trying to promote more women into the workforce and enforce a new corporate governance code that promotes boardroom transparency. These are areas where there are tough vested interests — including farmers, drugmakers and utilities.

The Reference Shelf

• QuickTakes on Japan’s elusive 2% inflation target, the sales tax increases, its feud with South Korea and the trade talks with the U.S.
• Bloomberg Opinion’s Daniel Moss assesses eight years of Abe’s leadership.
• Bloomberg Graphics on Japan’s aging and shrinking population.

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