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What is Abenomics?

Tuesday, November 18, 2014 - 15:38

[TOKYO] Japan slipped into recession, official data showed this week, an unexpected reading that delivered a body blow to Prime Minister Shinzo Abe's attempts to revive the world's number three economy, dubbed Abenomics.

So, what is Abenomics, has it failed, and what lies in store for Japan's long-suffering economy?

The three-pronged plan, launched shortly after Abe swept to power in late 2012, is meant to drag Japan out of about 15 years of growth-sapping deflation.

It consists of big government spending - such as infrastructure projects - as well as massive monetary easing by the Bank of Japan and an overhaul of the highly regulated economy.

The cornerstone is a 2.0 per cent inflation target, reversing the price drops that gave consumers an incentive to hold off purchases in the knowledge goods would be cheaper in the future.

That held back wage growth and new hiring. Abenomics aims to slay this "deflationary mindset" and spur a so-called virtuous cycle of spending - consumer and corporate - that drives job growth, pushes up wages and powers the wider economy.

What went wrong?

Abenomics initially helped sharply weaken the yen, a plus for exporters such as Sony and Toyota, driving up stock prices and company profits. That was followed by modest wage hikes and an uptick in consumer spending.

Prices also began to rise but, crucially, that was largely driven by the weak currency pushing up import costs, rather than a broad-based jump in consumer demand - and it dug into the real value of people's incomes.

Gross domestic product expanded 1.6 per cent - or 6.7 per cent at an annualised rate - in the first quarter of 2014 and things seemed to be working.

But Mr Abe had to answer growing calls for Tokyo to rein in an eye-watering national debt that is more than twice the size of the economy.

So, the premier gave the green light for a plan to raise sales taxes for the first time in 17 years, to 8.0 per cent from 5.0 per cent in April, to slow the growth of the huge debt pile.

As a result domestic spending - which accounts for 60 per cent of the economy - tumbled as consumers took fright and tightened their purse-strings.

What happens next?

Despite pleas from finance ministry officials who want to pare the debt pile, a second tax rise - to 10 per cent in October 2015 - will almost certainly be shelved.

Mr Abe is also expected to call an snap election for December, hoping to stamp his authority on his party ahead of a three-yearly leadership poll in September.

Yet more stimulus is expected, putatively as economic medicine, but undoubtedly sweetening voters' choice.

The Bank of Japan may also weigh in with even more easy money in the wake of the GDP figures, after expanding its already huge programme in October.

Mr Abe's reforms, including a pledge to draw more women into the workforce and overhaul the protected farming sector, will be under even more scrutiny as they are seen as critical for the ultimate success or failure of the Abenomics project.

AFP