Abenomics — A Bold initiative and a possible direction to the world going ahead

With the stepping down of Prime Minister Shinzō Abe in August 2020 because of the long-faced ulcerative colitis marks the end of an era. ‘Abenomics’ was a revolutionary move undertaken by the former PM Shinzō Abe when he came to power in his second term in 2012. The goal was to remove his country from the long holding shackles of the dire growth rate. Demand was in lacklustre, exports were dwindling, the growth rate was -4% and there was a fear that Japan was barrelling into a dark rabbit hole of recession. So the role of PM Abe was cut out clear, it was to give a shock to the world’s 3rd largest market economy in the world.

Abenomics was supposed to transform the face of the Japanese economy, drive growth and promote excessive exports. PM Abe credits the motivation of this strategy to an old folktale —

Once upon a time, there lived a king who had three sons. His kingdom had been threatened, and the war was imminent. One day, he gave a singular arrow to one of his sons and asked him to break it. The son snapped the arrow in half without breaking a sweat. Then, the king bound three arrows together, and gave them to another one of his sons, asking him to break them all at once. The son tried with all his might, but couldn’t put so much as a dent in them. Upon which the king said, “Like this singular arrow, one person may easily be defeated. But if you stand united, nothing can overpower you.”

This is a very well-known fable. PM Abe believed this folktale guides them to pull up multiple levers at the same time which drives the growth and economy to work together. Fiscal Policies, Monitory Policies and Structural reforms were the three pillars of this movement — which could eventually drive Growth and pull the country out of this negative cycle of deflation.

These are the issues which many countries face and have addressed them in various ways, but Japan’s case was a bit different because of the spending habits and priorities of its masses. This required a genuine authentic initiative which should be tailored to Japanese to address the challenge of Deflation.

Explaining deflation in layman’s language is a very tricky situation, wherein the prices of things are continuously falling because of various reasons such as economic crisis, job loses, spending culture etc. Basically, people are pessimistic about the future and this drives into a difficult to escape situation, as everyone expects prices to fall more into future thereby making them postpone their spendings. Countries have already tackled with the situation of inflation and are quite successful in handling it to an extent, but Deflation is something which is hard to address and is a long strenuous effort to address.

Going back to the topic of this article, the reasons which were responsible in the case of Japan were quite unique.

For Instance, Japanese consumers do not spend a large amount of their income. They are just not big spenders. This is a challenging situation, as private companies just can’t invest more if there is not going to be an increased demand foreseen in the future. This reduces the FDI’s coming into the country, thereby reducing the jobs available which in turn lead people to spend the available money with grudges in mind and make them sceptic of the situation. So someone had to come in and fill up the spending gap.

Under Abenomics, Japan invested heavily in Infrastructure and Government spending making it to a total of 10.3 Trillion Yen. With this money added in the economy, the government expected the spending to increase in domains like Steel, Heavy Machinery and Vehicles. In 2014, the government added another 5.5 trillion Yen. All this massive amount of money was pumped in the economy with a desperate need to boost demand.

But there was something else that was affecting the economy, it was a restricted flow of credit. In the 1990s the banks in Japan faced massive losses because of reckless lending. Many economists believed after that many Japanese corporate banks started being tentative about lending. This is a problematic situation. As many corporations are worked on debts and lending. So if there is no availability of low-cost debts, businesses would not be willing to invest more.

So under Abenomics, Japanese central bank was asked to restructure it’s strategy so as to allow easy flow of credit. In this attempt, in Japan interest rates dropped to zero. Already even before PM Abe took the control, the interest rate was low, but during his tenure, the Japanese Central Bank took it one step ahead. They started paying money to people to borrow from the banks when they made an interest rate drop to below zero. Along with this, they also started printing out more money. This is basically under the policy of Quantitative Easing, in other words printing more money.

If you are worried about this step, that it might lead to the rise in prices of goods and services i.e. inflation this is the smallest of other challenges that are grappling the Japanese economy. This is because they trusted the spending pattern of the Japanese. Even after distribution of more money, they were sure their citizens won’t spend much. In fact, the Japanese government would have been pleased to see the rising Inflation because it is a testimony to the fact that there is an increasing demand in the market. It was a goal of PM Abe to bring the Inflation rate to 2%, which was expected to be an endeavouring task owing to the nature of the Japanese economy.

Ergo, there was something altogether different that was holding back the country’s growth. It was the issue of decreasing population and labour. The unemployment rate was on an increase.

Japan’s birth rate was ever-dwindling and it was expected that one-third of the population would disappear by 2060. This required a structural reform right from policy planning in the central government. The Japanese government spent over 2 trillion yen on childcare and educational reforms to boost birth rates. They also augmented it with social welfare programs so that people could always take care of their children. The hope was that building confidence on the child-rearing front would induce couples to procreate. Meanwhile, the government also tried to induct women into the workforce to solve the more immediate problem of the labour shortage. So it’s safe to say that Abe threw the kitchen sink at solving the labour crisis unfolding right before his eyes.

So this leaves us with a final question, did Abenomics fare at a time when the man leading the change is stepping down?

Well, for starters the unemployment rates have dropped to below 3%, an all-time low in 20 years. The growth is back on a positive track and was growing at a satisfying rate until the pandemic crippled everything down. Many scholars and economist believe the idea of excessive spending by the government was not able to totally address the issue.

On a closing note, ‘Abenomics’ like every other policy had a few hits and a few misses. But one thing for sure, PM Abe was very open about the kind of challenges that were facing their economy. He knew there were gaps which needed to be filled and he never conceded it from his citizens about this massive problem. The policy would be a legacy for the world as PM Abe steps down from the power in these tough times because of health reasons.

A quote by IMF head Christine Lagard will give a complete sense to the situation faced by Japan today and hope not by the rest of the world in days to come by.

If inflation is the genie, then deflation is the ogre that must be fought decisively.