Article on Abenomics

submitted to

PiE-Economics Club

In requirement for the task assigned to

Group-53

By

Vivek Sreenivasan-2011278

Soumya Jain-2011248

Megha Sood-2011133

Urja Singh-2011262

Pradnya Ingale-2011090

Chittaranjan Raut-2011060

Section E

On

19-08-2020
Historical Background Of Abenomics

Abenomics refers to the series of steps taken by Prime minister Shinzo Abe in 2013 to initiate
growth in the Japanese economy. Japan had been witnessing a period of stagnation for the past
two decades. It was not the first time that the Japanese economy was going through such a
downturn.

The Japanese economy was booming in the early nineteenth century during the industrial age.
Japan was in search of parity with the growing powers of Europe. Japan’s per capita GDP grew
from 30% of America’s GDP in 1870 to 41% of America’s GDP pre-World War[1]. World War
II brought down all the growth and development that Japan had achieved throughout the years.
Rise of the Japanese economy post World War is nothing short of a miracle. From 1945 to
1956, their per capita GDP rose at an annual rate of 7.1%. A rapid growth phase followed this
recovery period until the 1980s. Many factors contributed to this tremendous growth rate.
Import of technology in terms of systems and institutions from other countries helped them
create a new support structure for their economy. Competitive spirit among the industries,
facilitated by the government, created a positive environment for business [2]. The discipline of
Japanese organizations to achieve their goals helped them create products of international
standards. Innovation and smooth transition by managers to automation helped their
manufacturing companies to be cost-effective. The transition of laborers from low productive
agricultural jobs to highly productive factories took place with the growth in the manufacturing
sector. They were pioneers in creating a top-notch industrial management system. Toyota was
the first company in the world to initiate the lean management principle, which later was
adopted by many firms. The Japanese government’s reallocation of resources from wartime
manufacturing companies to consumer-oriented manufacturing companies provided a
considerable boost.

Situation that led to Japan’s economy to stagnate

Bank of Japan's (BOJ) monetary policy often gets the blame for this dire state of the economy.
In its objective to control the inflation in the booming market, BOJ raises the interest rates.
Which led to less spending, and less demand in the economy. And instead of curbing inflation,
it takes it to the deflation level where people started hoarding money, in the hopes of fewer
prices in the future.
For example, monetary policy was stop-and-go; concerned about inflation and asset prices, the
Bank of Japan put the brakes on the money supply in the late 1980s, which may have
contributed to the bursting of the equity bubble. Then, as equity values fell, the BOJ continued
to raise interest rates because it remained concerned with still-appreciating real estate values.

In a liquidity trap, low-interest rates, as a matter of monetary policy, become ineffective. People
and investors simply don't spend or invest. They believe goods and services will be cheaper
tomorrow, so they wait to consume, and they believe they can earn a better return by simply
sitting on their money than by investing it. The Bank of Japan's discount rate was 0.5% for
much of the 1990s, but it failed to stimulate the Japanese economy, and deflation persisted.

About Shinzo Abe

Shinzo Abe is the current Prime Minister of Japan. Japan is a unitary state and a constitutional
monarchy, where the executive power is vested in the Prime Minister and his cabinet. Shinzo
Abe was born on 21 September 1954 in Tokyo, Japan and he came from a distinguished family
of politicians. His family played a prominent role in the history of Japan and had both political
and economic influence over the country, throughout pre- war time and post- war time. His
grandfather Kishi Nobusuke served as Japan’s prime minister from 1957 to 1960, and his great-
uncle Sato Eisaku held the same post from 1964 to 1972.

Shinzo Abe’s early education justifies his political roots as he has completed his bachelor's
degree in Political Science from Seikei University, Japan in 1976. He also studied the subject
Public Administration. Later, he moved to the United States to study Public Policy at the
University of Southern California’s School of Public Policy.

After completing his education, he did not join politics right away. Instead, in 1979 he started
working in a company called Kobe Steel Ltd. and he worked there for four years. Since he was
politically affiliated, eventually he became active in the political field and continued his family
legacy. Initially, he served at several government positions such as Executive Assistant to
Private Secretary for different ministry portfolios. In 1982, he started working under his father
Abe Shintaro who was the then Foreign Minister of Japan and was a part of the Liberal
Democratic Party (LDP).
In 1993, Shinzo Abe came to the forefront by winning his first election, he won a seat in the
Lower House of the Diet (Parliament). After working in different positions for a few years he
was appointed as the Secretary General for the Liberal Democratic Party in 2003.

On 23 April 2006, Abe was elected as the president of the ruling Liberal Democratic Party and
on 14 November 2006 he was appointed as the Prime Minister of Japan. He was the youngest
Prime minister since Fumimaro Konoe in 1941. But he did not hold his office for long, he
resigned in 2007.

In 2012, after a lot of political fluctuations and dissolution of the lower house of Diet, general
election was announced. Abe had gained power by then and he came with a slogan of "Nippon
o Torimodosu" (Take back Japan). He understood the scenario and came up with the ideas of
economic revival and promised various policies for the betterment of economic conditions of
the country. On 26 December 2012, he was formally elected as the Prime Minister of the
country. He called his cabinet the ‘Crisis- busting cabinet’. He is currently serving his fourth
term as the Prime Minister of Japan. (2017-present). He has formed several economic policies
during time for his country and his economic strategy is referred to as ‘Abenomics’.

Abenomics

Overview

Abenomics is a nickname given to the multilateral economic program started by Japanese

prime minister Shinzo Abe at the outset of his second term. The name given is very similar and
on the lines of Clintonomics and Reaganomics which were given to the governmental and
economic philosophy of President Bill Clinton and President Ronal Reagon of United States
respectively. Abenomics on a very high level involves boosting the country’s money supply,
boosting government spending and some reforms enacted by prime minister Abe which helped
make the Japanese economy more competitive.

Historical Events which led to Abenomics

The history of Abenomics goes back to the ‘Lost Decade’. Lost Decade was a period of marked
economic stagnation in Japan, following a massive real estate bubble burst in the 1980s and
Japan’s asset price bubble burst in 1990s.

Hence due to this, the Japanese government ran massive budget deficits, funding the public
sector projects. Japan adopted the technique of quantitative reasoning which included cutting
long term interest rates and promotion of spending and raising the inflation expectations, to
successfully break out from the economic stagnation in which it was stuck. This helped
expanding money supply within the country and kept the interest rates in check. It facilitated
an economic recovery which started in 2005 but did not help in stopping deflation. Japan ended
its zero-rated policy in July 2006. Though it still had the lowest interest rate in the world Japan
could not do anything to stop deflation. This was the situation which finally led to
Abenomics.[3]

Policy

When prime minister Shinzo Abe took office in 2012, the country was still recovering from
2008-09 recession. Additionally, Japan had went through long periods of low and even negative
growth in 2000s. Main motive of Abenomics was to increase the demand and achieve inflation
target of 2%. The policies under prime minister Abe were intended to grow trade, increase
competition and raise the rate of unemployment in economy.

Abenomics was a combination of:

• Structural Reforms: The aim of Abenomics was to rebuild various sectors of economy
to help boost Japan's competitiveness in domestic and international arena. A major
problem faced by Japanese economy was the shortage of labour. To overcome this
shortage, prime minister Abe introduced a second version that is Abenomics 2.0, which
was to increase Japan’s birth rate, provide social security for senior citizens and
improve pensions. As a part of this reform more than 2 trillion yen was spent on
childcare and education sector. Additionally, Japan also boosted women in workforce
by bringing women omics plan.
 • Fiscal Policy: The Japanese government had issued 10.3 trillion yen to be spent on the
basic infrastructure including roads, building and bridges as part of fiscal stimulus. The
aim of the policy was to promote spending within the economy to raise Japan’s GDP
as well as promote investment.

• Monetary Policy: Quantitative easing was used by Abe government to increase

liquidity in economy. A large-scale asset purchase program was started by Bank of
Japan (BOJ) to purchase assets worth $660 billion dollar annually. The motive was to
continue purchasing assets until the inflation rate for Japan came down to 2%. Interest
rates were lowered past zero to increase investment and lending by BOJ.

All these policies collectively helped reduce the unemployment rate below 3% for the first time
in almost 2 decades.[4]

Economic Impact and Results of Abenomics.

With the implementation of Abenomics Model, there were a lot of expectations from the Prime
minister Shinzo Abe’s 2nd Term. It not only had an impact on the Japanese economy but also
influenced the World Market. There was a sudden rise in the Japan Stock Market. Abenomics
do assure short term improvements, but in the long run, it has not impacted the economy
expectedly. In order to evaluate the success of Abenomics in major areas like GDP,
Unemployment, Currency, and Inflation, the data from 2012 to 2020 needs to be examined.

Unemployment

According to the “Trading Economics”, the Unemployment rate in Japan in the year 2012 was
at 4.4%. Implementation of Abenomics has created a new wave of jobs bringing down
unemployment to 2.8% in June 2020.[5]

Inflation
The first measure to boost the economy of Japan was to print more money and increase the
money supply in the economy. With more money in the hands of people, the Inflation rates
initially increased with a peak of 2.76% in 2012.[6] Soon the price rates stabilized the inflation
rate dropped to 0.1% in 2020.[6] The target set up by the Bank of Japan was to accelerate the
inflation rate to 2%.

Currency

In order to boost exports, the Japanese government lowered the value of Yen in the
International Market. In 2012, a Dollar was equivalent to 78 Yens. After the Abenomics
implementation, the Yen weakened to 120 per dollar in 2015 and currently stands at 107 Yens
per dollar. [7]

Gross Domestic Product

After Abe was re-elected in 2012, initially in the period of 2 years, the GDP contracted from
6.2 lakh crores USD to 4.85 lakh crores USD. The Abenomics took a time of 3-5 years to
stabilize and change the direction of GDP.[8]

The Abenomics somewhat helped in giving a small boost to the economy of Japan. But because
of low structural reforms, the economy was not able to achieve its target, further increasing the
burden on the next Government.

Future with the pandemic

By now we all have realized that novel coronavirus will be with us for a rather long time &
hence we all have to get along with it. Future would be different from now onwards and few
of the factors are listed down.

Technological boom

• Technology will become the next god now, every business from small scale to
multinational running industry will have to rely on emerging technologies such as
artificial intelligence & reality.
 • From education to day to day activities will be using the technology as the centre body,
hence will challenge traditional school systems to reshape their methodologies.
• Travelling, tourism, logistics, supply chain & many more sectors will have additional
work on their plates now.

Sustainable systems

• Sustainable ways to handle business would be appreciated in future so that we can avoid
the additional damage that we as a human are creating by just existing on this earth.
• Complete life cycle of any product from initial development to final deployment can be
reshaped, hence leading to an economically unstable phase or curve.
• Different bodies of business will opt or behave differently
• Responsibility & accountability these two should be printed on human minds as the
main two key components for the future where all generations can live peacefully &
healthy.
• Saying yes to the environment friendly nature should be encouraged.

Change in psychology of a society

• Society or community should come up with different aspects that are required to
maintain healthy balance to avoid the situations like we are in today.
Exhibits

1. https://www.nippon.com/en/in-depth/a04003/
2. https://hbr.org/1998/01/reinterpreting-the-japanese-economic-miracle
3. https://www.investopedia.com/terms/a/abenomics.asp
4. https://corporatefinanceinstitute.com/resources/knowledge/economics/abenomics/
5. https://tradingeconomics.com/japan/unemployment-rate
6. https://www.macrotrends.net/countries/JPN/japan/inflation-rate-cpi
7. https://www.macrotrends.net/2550/dollar-yen-exchange-rate-historical-chart
8. https://countryeconomy.com/gdp/japan