Economic Insights
The Legacy of Abenomics
The Legacy of Abenomics<br/>安倍經濟學的傳承

The Legacy of Abenomics<br/>安倍經濟學的傳承

The Legacy of Abenomics<br/>安倍經濟學的傳承

Before Shinzo Abe, it had been unusual for a Japanese Prime Minister to hold office for more than a couple of years. In the two decades before 2012, when he took office for the second time, Japan changed Prime Minister on average every 17 months. Abe’s early resignation in September due to ill health, at a time when Japan is struggling to deal with a deep coronavirus recession and the postponement of the 2020 Summer Olympics, has unavoidably brought concerns about the nation’s economic prospects.  

Abe, the longest-serving Prime Minister in Japanese history, in terms of both continuous term length and overall duration, held office twice: between September 2006 and September 2007, and from December 2012 until he stepped down last month. 

When he took office for the second time in late 2012, Japan was suffering from the aftermath of the global financial crisis, fighting its long battle against deflation, and healing from the after-effects of the Tohoku earthquake and tsunami. The challenge he faced was considered insurmountable: Abe’s predecessors had repeatedly attempted and failed to pull the economy out of decades of stagnation. It was particularly hard to convince investors and the corporate sector that a Prime Minister would be in power for long enough to push any meaningful reforms forward.

In an effort to revive the Japanese economy and end the infamous deflationary period which had dogged Japan for two decades, he introduced “three arrows”: aggressive monetary policy, fiscal stimulus, and structural reforms – also known as Abenomics. 

Abe began by introducing a fiscal stimulus package worth 20.2 trillion yen (around HK$1.5 trillion) in 2013, focusing on infrastructure projects. With the appointment of Haruhiko Kuroda as Governor of the Bank of Japan in 2013, the monetary base rose from 132 trillion yen before he became head of the central bank to 572 trillion yen by August 2020, thanks to the introduction of unprecedented asset purchase programmes (Figure 1). Negative interest rates were adopted for the first time in 2016. 

During the period of 2013 to the end of 2019, just before the Covid-19 pandemic, the Japanese economy had shown some improvements - with annual economic growth averaging at 1% compared to -0.2% in the preceding five-year period, and 0.8% in the preceding ten-year period; and the unemployment rate dropping from 4.2% to 2.2%. A weaker yen also enhanced the competitiveness of Japanese goods in export markets. 

However, the inflation rate remained tepid and was still well below the 2% target set by the Bank of Japan, albeit switching back into the positive territory (Figure 2). Meanwhile, high levels of government debt in Japan, exceeding 230% of GDP and the highest among OECD countries, limited the capacity of the Abe administration to ramp up fiscal spending more vigorously despite low interest rates. 

Two consumption tax hikes, respectively in April 2014 and October 2019, had doubled the consumption tax rate from 5% to 10%, cancelling out some of the government’s efforts in boosting domestic demand and subsequently pushing the economy into contraction. There are also concerns that the unorthodox monetary policy may do more harm than good by eroding banks’ interest margin and undermining consumer and business confidence. 

The coronavirus may eventually wipe out at least part of the economic gains made during the Abe era. As a matter of fact, real GDP of Japan in the second quarter of 2020 was 4% smaller than it had been in the same quarter in 2013. 

Nevertheless, the legacy of Abenomics should not be underrated. His third arrow - structural reform - has brought more long-lasting and positive impacts to Japan. For instance, corporate-governance codes have been revised so that listed companies have to include more independent directors on boards; the workplace has become more female-friendly with the introduction of free preschool education and other subsidies for child care; and immigration has been made easier to the extent that the number of foreign workers in the country more than doubled during Abe’s tenure.

These reforms, aided by Abe’s political longevity, were in the right direction to enhance Japan’s competitiveness and appeal to international investors, and also bolster the country’s shrinking workforce, although real progress has been limited and slowed towards the end of his premiership. In fact, foreign ownership of Japan’s listed shares rose to a record high of 31.7% in 2014 from 28% in 2012, only falling to 29.6% in 2019. There are also disappointments regarding the effectiveness of Abenomics in altering the country’s demographic challenges in the long term. 

Following his departure, the question is whether Abenomics will continue. The new Prime Minister, Yoshihide Suga, who served as Chief Cabinet Secretary of the Abe Administration, is considered a close ally of Abe. This should ensure consistency in policymaking at least until the next election, due in September 2021. 

Inheriting an ageing population and a massive public debt, his top priority will undoubtedly be getting the coronavirus under control and kickstarting an economic recovery from the impact of the pandemic. The Prime Minister may have more centralised power to influence senior bureaucrats and push policies forward thanks to a political reform in 2014. How Suga makes use of that will help shape his premiership and decide whether he will be viewed in future as an interim leader or more.

Wilson Chong, wilson@chamber.org.hk  

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