In the Lower House general election which was held on December 16, 2012, the manifest of the LDP (Liberal Democratic Party) led by President Shinzo Abe declared the following goals: Clearly set an annual price escalation target (inflation target) of 2%, create a mechanism for strengthening the partnership between the government and the Bank of Japan while considering amendment of the Bank of Japan Act, and seek to break away from deflation and a rising yen through bold monetary easing. The LDP and the ruling coalition party of the New Komeito Party won more than two-thirds of the seats in the Lower House, which resulted in President Abe becoming Prime Minister and leading the Japanese government for the second time. Immediately after the election, I wrote the following in my editorial which was published on December 20, 2012: “The monetary policy declared from before the general election by President Abe’s administration is fundamentally correct and reasonable. Although the Bank of Japan has made absolutely no attempt to implement such monetary policy, it is nothing more than global standard monetary policy which is normally implemented by America’s FRB and the central banks of advanced nations other than Japan.” (reference literature) Afterwards, the economic policy of the Abe administration became known as Abenomics. Specifically, and according to explanations given by the Abe administration itself, Abenomics consists of three arrows which are 1) bold monetary policy and 2) flexible fiscal policy as macro-economic policies, as well as 3) a growth strategy with a slight nuance of structural reform. The Abe administration won its third term in the Lower House general election which was held in December 2014 after the administration announced its decision to postpone the consumption tax increase. The long-term continuation of an administration has been rare in Japan in recent years. At the time that this article was written in June 2016, three and a half years have already passed since the start of Abenomics. Accordingly, I would like to evaluate the achievements and problems of Abenomics at the current point in time.
Achievement of Abenomics
The primary engine propelling Abenomics is the first arrow of bold monetary policy. The organization responsible for executing the first arrow is the Bank of Japan, which operates under a new system led by Governor Haruhiko Kuroda, Deputy Governor Kikuo Iwata, and Deputy Governor Hiroshi Nakaso, all of whom were appointed by the Abe Cabinet in March 2013. In April 2013, the Bank of Japan announced a monetary policy which was known as a different dimension of monetary easing. Specifically, the policy calls for “doubling the monetary base of 138 trillion yen which existed at the end of April 2012 to 270 trillion yen within two years, which will be achieved mainly through the purchase of long-term government bonds.” In actuality, the Bank of Japan then proceeded to increase the monetary base in accordance with this plan. Furthermore, with the intention of appealing to the inflationary expectations of people and eradicating the deflation mindset, the Bank of Japan declared that all possible methods would be used in order to achieve a 2% inflation target. The monetary policy of the Bank of Japan under the new system is a prototypical reflationist policy which proposes a reflationary policy seeking to break out of deflation by intentionally creating mild inflation by having central banks set an inflation target of about 2% annually.
Since the start of Abenomics, noticeably favorable changes have appeared in the exchange rate, stock prices, bank lending, employment, and nominal income when compared to previous levels (for further information on numbers mentioned below, refer to Chapter 9 of reference literature). In 2012, when the DPJ (Democratic Party of Japan) was in office and Governor Shirakawa of the Bank of Japan was in charge of monetary policy, the Nikkei Stock Average fell to 8,000-yen level and the yen was super strong with an exchange rate of 1 USD to a 70-yen level. This placed extreme pressure on the profit of exporting corporations. However, in August 2015, two and a half years after the start of Abenomics, the Nikkei Stock Average had exceeded 20,000 yen. Moreover, at one point in 2015, the yen had depreciated to an exchange rate of 1 USD to a 120-yen level. Afterwards, Japan swayed back toward falling stock prices and an appreciating yen due to a worldwide drop in stock prices caused by the collapse of the Chinese economic bubble. Even so, as I wrote this article in early June of 2016, the Nikkei Stock Average remained around 17,000 yen, and the exchange rate around 1 USD to 110 yen. If Japan were to have suffered an external shock like the collapse of the Chinese economic bubble amidst conditions prior to the start of Abenomics (i.e. a Nikkei Stock Average of 8,000-yen level and an exchange rate of 1 USD to a 70-yen level), it is possible that the Nikkei Stock Average could have fallen to a 5,000-yen level, the exchange rate to 1 USD to a 60-yen level, and the overall unemployment rate could have risen to a 7% level, which would be more than twice the actual overall unemployment rate of slightly more than 3% as of June 2016. Under the DPJ in 2012, lending by Japanese banks was approximately 460 trillion yen. In 2015, this number increased to approximately 495 trillion yen. In other words, in contrast to the assertions of some critics who stated that “there is no demand for funding; therefore, bank lending will not increase even if the Bank of Japan relaxes monetary policy,” bank lending increased by approximately 35 trillion yen during the three-year period since the start of Abenomics. In regards to employment, in 2012, Japan had an employed population of approximately 62.5 million people and an overall unemployment rate of approximately 4.5%. In 2015, these numbers improved to approximately 63.8 million people and slightly more than 3%, respectively. Following the bankruptcy of Lehman Brothers, the employed population of Japan decreased by more than 1.5 million people from 2008 to 2012. However, during the three years since the start of Abenomics, the employed population has increased by approximately 1.3 million people. This is despite the continued decline in the working-age population of Japan. Immediately after the start of Abenomics, the first increases were observed in irregular employment. However, recently, a shift from irregular employment to regular employment has begun. Furthermore, since the start of Abenomics, there has been a resurrection of the term “wage base increase,” which had been rendered obsolete by deflationary conditions. Although gradual, nominal wages have begun to rise, and nominal GDP has followed suit. According to an article written by Yoichi Takita and published in the April 4, 2016 morning edition of the Nihon Keizai Shimbun, nominal GDP only increased by 4 trillion yen under DPJ leadership from 2010 to 2012. However, during a three-year period under the Abe administration, nominal GDP increased by 24 trillion yen, from 475 trillion yen in 2012 to 499 trillion yen in 2015. In the midst of deflationary conditions, the annual number of suicides was more than 30,000 people. Since the start of Abenomics, this number has decreased by approximately 10,000 people. In particular, there has been a noticeable decrease in suicides attributed to economic reasons (according to Jiji Press).
Increase in consumption tax as hindrance to Abenomics
Almost all of the desirable changes discussed above are thought to have been brought about by the monetary policy of the Bank of Japan, otherwise known as the first arrow. This is because there is almost no substance to the third arrow of a growth strategy, and the second arrow of fiscal policy has actually had the negative effect of suppressing economic growth due to the increase in consumption tax which was enacted in 2014. This phenomenon can be explained using the table shown below.
Japan GDP growth rate and inflation rates from FY2011 to FY2015
|FY / Annual Rate (%)
g = nominal growth rate (growth rate of nominal GDP)
gR = real growth rate (growth rate of real GDP)
p = g - gR ≒ rate of increase in GDP deflator (inflation rate)
Source: Economic and Social Research Institute, Cabinet Office
As shown in this table, the Japanese economy can clearly be described as being in deflationary depression in 2011 and 2012, prior to the start of Abenomics. Then, in 2013, after the start of Abenomics, the nominal growth rate and real growth rate were both high. Moreover, although the inflation rate was still negative, there was a shift toward escaping deflation. However, in 2014, the real growth rate was -0.9%, despite a nominal growth rate of 1.5%. This was caused by a one-time-only increase in prices of 2.4% due to consumption tax being raised from 5% to 8% in April 2014 (a one-time-only increase in prices due to such reasons cannot be labeled as inflation).
If the growth rate of nominal GDP were zero, then a price increase of 2.4% due to an increase in the consumption tax would decrease the real GDP by 2.4%. However, thanks in part to the results of relaxing monetary policy by the Bank of Japan, the nominal GDP grew by 1.5% and the decrease in real GDP was limited to -0.9%. In 2015, a relatively high growth rate of 2.2% was achieved for nominal GDP due to the effect of continued relaxation of monetary policy by the Bank of Japan. However, it was not possible to remove stagnation in consumption which had been caused by the consumption tax hike in 2014, and the growth rate for real GDP was low. As a result, this disproved the assertion made by the Ministry of Finance (MOF) and some economists/critics under the influence of the MOF that “an increase in consumption tax will have little effect on the economy.”
The increase in consumption tax in April 2014 was enacted by the Abe administration on schedule based on the law to increase consumption tax from 5% to 8% in April 2014 and then to 10% in October 2015 as agreed upon in 2012 by the DPJ administration led by Prime Minister Noda, the LDP, and the New Komeito Party (the latter two were opposition parties at that time). However, this tax increase significantly suppressed economic growth and offset the effects of monetary easing by the Bank of Japan, ultimately becoming a great hindrance to Abenomics. Based on this bitter experience, the Abe administration has accepted the recommendations of Paul Krugman and Joseph Stiglitz, both winners of the Nobel Prize in Economics, first postponing the tax hike scheduled for October 2015 by one and a half years to April 2017, and then postponing the tax hike scheduled for April 2017 for two and a half years to October 2019. This postponement has removed the greatest hindrance to Abenomics, and I believe that the probability has increased that the Abe administration will achieve its nominal GDP target of increasing nominal GDP to 600 trillion yen by 2020. Please note that the space limitations of this article have prevented me from discussing the meaning of the negative interest which was implemented by the Bank of Japan in January 2016. For information on this topic, please refer to the reference literature
- ^Toichiro Asada: Economic Basis for the Monetary Policy of the New Administration of President Abe (Chuo Online; December 20, 2012)
- ^Toichiro Asada: Lecture on Fundamental Macro-Economics, 3rd Edition (Chuokeizai-Sha, June 2016)
- ^Yoichi Takahashi: The Truth about Negative Interest (Kadokawa, May 2016)