When Prime Minister Shinzo Abe came to power, the Japanese economy was in a bad way. The country was suffering from long term deflation, a strong yen that was ultimately damaging exports and growth had been hovering around zero for the past twenty years. However, Abe was elected on the potential of his economic plan – so called ‘Abenomics’. But three years on, the Japanese economy is still having a rough time – so what is it exactly, and has it worked?
What is ‘Abenomics’?
Abe’s plan involves several different strategies. Firstly, it involves an increase in fiscal stimulus, using quantitative and qualitative easing to pump cash into the Japanese monetary system. The scale of this easing has dwarfed that in the US and european counties and will hope to drive down the currency, making it more attractive to foreign businesses.
The biggest part of the plan is structural reform of the Japanese economy aiming to restore consumer confidence and abolish deflation once and for all. This is the so-called “Japan Revitalisation Strategy”, and aims especially to help Japanese businesses.
The government is trying to encourage growth through a number of methods, including lowering corporation tax by 2.4 percent, making Japan more attractive to businesses, creating more jobs for women to increase the size of the work force, and welcoming foreigners into business in Japan.
So is it working?
At the moment, the results are disappointing. Asia’s second largest economy shrunk by 0.8 percent between July and September, plunging the country back into recession for the fourth time since 2008. Core inflation in Japan recently fell back below 0% in August, causing some people to declare that full-blown deflation has returned and Japan has a debt equivalent to a staggering 230% of its GDP.
However, at 3.3%, Japan’s unemployment is at an enviable level – one which is almost unheard of for Western economies. In fact, Japan’s labour market at its very worst rarely records unemployment of over 5%. Incentives to get women back into work are also working, with female employment in Japan now higher than in the US. Core inflation, despite the recent setback, has been responding positively since the regime was introduced – which is impressive, for an economy that has been at a standstill for two decades.
It is clear that the reform the the Japanese economy will be a slow process, but it’s not a failure. In his article for Business Insider, Mike Bird thinks that “what we’re seeing is the first genuine increase in the price level since at least the Asian crisis, if not since the bursting of Japan’s colossal equity bubble in 1990. It’s the most serious and sustained effort at revitalising the country’s supply-side too.”
Japan may not have seen a dramatic turnaround since the implementation of Abe’s plan, but it has seen a little more stability than it has for the last twenty years. How it will fare the future remains to be seen.
Miranda Wadham on 19/11/2015