refers to the economic policies implemented by the Government of Japan led by the Liberal Democratic Party (LDP) since the December 2012 general election. They are named after Shinzō Abe, who served a second stint as Prime Minister of Japan from 2012 to 2020. Abe was the longest-serving prime minister in Japanese history. After Abe resigned in September 2020, his successor, Yoshihide Suga, has stated that his premiership will focus on continuing the policies and goals of the Abe administration, including the Abenomics suite of economic policies.
Abenomics is based upon "three arrows:" monetary easing from the Bank of Japan, fiscal stimulus through government spending, and structural reforms. The Economist characterized the program as a "mix of reflation, government spending and a growth strategy designed to jolt the economy out of suspended animation that has gripped it for more than two decades".
During Abe's tenure, the rate of Japan's nominal GDP growth was higher, and the ratio of government debt relative to national income stabilized for the first time in decades. However, the "third arrow" of structural reforms was not as effective as observers had hoped.
The term Abenomics is a portmanteau of Abe and economics, and follows other political neologisms for economic policies linked to specific leaders such as Bidenomics, Clintonomics, Obamanomics, Reaganomics and Rogernomics.
Background
Japanese economic conditions prior to Abenomics
In 1996 GDP increased by 3 percent, promising recovery from the bursting of a major asset-price bubble in the early 1990s. The Japanese government raised the consumption tax from 3% to 5% in April 1997, with the view to further increases in 1998.
There was a Financial Crisis in East and South East Asia, following the collapse of the Thai Baht peg on July 2, 1997, which had widespread consequences in the entire region. Government revenues subsequently decreased by 4.5 trillion yen as consumption faltered. Nominal GDP growth remained below zero for most of the five years following the tax hike. Japan's average annual wages grew between 1992 and 1997, but began declining after the 1997 tax hike. Since 1997, wages have decreased faster than nominal GDP.
In 2012, the Diet of Japan under previous Prime Minister Yoshihiko Noda passed a bill to increase the consumption tax to 8% in 2014 and 10% in 2015 in order to balance the national budget; this tax hike was expected to further discourage consumption.
World economic conditions prior to Abenomics
During the global economic recession, Japan suffered a 0.7% loss in real GDP in 2008 followed by a severe 5.2% loss in 2009. In contrast, the data for world real GDP growth was a 3.1% hike in 2008 followed by a 0.7% loss in 2009. Exports from Japan shrank from 746.5 billion in U.S. dollars to 545.3 billion in U.S. dollars from 2008 to 2009, a 27% reduction. By 2013, nominal GDP in Japan was at the same level as 1991 while the Nikkei 225 stock market index was at a third of its peak.
Ideological basis of Abenomics
Abe's economic policy is also related to the rise of China as an economic and political power. Abe's supporters drew explicit parallels between Abenomics and the Meiji era program of fukoku kyohei (enrich the country, strengthen the army). In addition to providing a stronger counterweight to China in the Asia-Pacific region, strengthening the Japanese economy is also intended to make Japan less reliant on the United States for defense.
Note: NGDP is valued at 2006 market prices
Implementation
Abenomics consists of monetary policy, fiscal policy, and economic growth strategies to encourage private investment. Specific policies include inflation targeting at a 2% annual rate, correction of the excessive yen appreciation, setting negative interest rates, radical quantitative easing, expansion of public investment, buying operations of construction bonds by Bank of Japan (BOJ), and revision of the Bank of Japan Act. Fiscal spending will increase by 2% of GDP, likely raising the deficit to 11.5% of GDP for 2013.
Two of the "three arrows" were implemented in the first weeks of Abe's government. Abe quickly announced a ¥10.3 trillion stimulus bill, and appointed Haruhiko Kuroda to head the Bank of Japan with a mandate to generate a 2 percent target inflation rate through quantitative easing. But Kikuo Iwata, the deputy governor of Bank of Japan, suggested that BoJ does not strictly aim for the 2 percent price target in two years. Iwata implied that BoJ would not loosen again its monetary policy, aimed at halting economic stagnation, soon after the increase in the sales tax in April 2014.