What did Shinzo Abe’s approach to the Japanese economy achieve?

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What did Shinzo Abe’s approach to the Japanese economy achieve?

Towards the end of August 2020, the long time Prime Minister of Japan, Shinzo Abe announced his resignation from his role. He claimed that ill health was the root cause for leaving his position. While some commentators argue it was a decision borne more from getting out while the going was as good as it was going to get, he still arguably did what many Prime Ministers had not managed before him. He revolutionised the Japanese economy that had been struggling for years with deflation through the use of his Abenomics approach to the economy.

But what exactly is Abenomics and what did this approach to the Japanese economy really achieve? Here, we look to investigate what one of Japan’s longest-running Prime Ministers did for the country and its finances.

Abenomics

Given the tumultuous position that the Japanese economy was in when Mr Abe took office, the Prime Minister needed to employ some radical and innovative monetary and fiscal policies to bring about the changes needed. The result was the school of Abenomics that was used by the Government and the BoJ to promote growth in the economy. But how did it do this?

It employed several tactics. It sought to reduce real interest rates and even, at one point, introduced negative interest rates in an effort to get inflation to that haloed 2% point that the US Government targeted for so long. While this target was never achieved during Mr Abe’s time in office, the Yen certainly weakened which gave Abenomics a helping hand. A weakened Yen helped boost the economy by increasing exports and business investment could thus improve. Additionally, Mr Abe sought to change the culture surrounding corporate governance to further improve outside investment opportunities. Boards of companies now have more independent directors than ever before.

Mr Abe also took on other cultural reforms to help the structural side of the economy. With an ageing population, he knew he had to get the most out of the workers the population did have to help boost productivity. As a result, he implemented many policies to encourage women to go back to work and enter the workforce. As a result, free preschool childcare was provided amongst other subsidies to help encourage women to find jobs.

Additionally, he signed up to the TPP or the Trans-Pacific Partnership, which America has now pulled out from. However at the time, it meant that Mr Abe took the politically tough decision to cut tariffs and increase the import quotas for many agricultural goods. Given that his party, the LDP, once counted the farming community as some of its biggest supporters, this was a difficult decision to make.

Finally, Abenomics was perhaps most characterised by its vast amount of public spending and investment. The amount of public debt that Japan now sits on is around 238% of its GDP which is nothing short of huge. While the large spending sprees that the Japanese government went on has yet to be reflected in markets, some commentators fear for the real long term effects that such mountains of debt can have on the prosperity of an economy.

Did Abenomics really work?

While it definitely was not perfect, there are many facts that cannot be argued with which point to Mr Abe’s policies as being successful. Firstly, he managed to turn inflation positive for the majority of the time he was in office. As previously mentioned, he never quite managed to hit the 2% he so wanted in terms of inflation, but the economy did enjoy one of the longest recoveries ever seen in since the Second World War. Additionally, productivity of the country has even beaten the likes of America.

However, there are a couple of negative factors to take into account. Mr Abe, in reaction to the huge public debt that the economy was under, took the decision to raise sales taxes. Economists claim that this decision was ill-timed and one of the biggest causes behind the short recessions that Japan did see in Mr Abe’s tenure.

Ultimately, though, Abenomics managed to reduce unemployment while the Nikkei grew thanks to many of Mr Abe’s policies. Corporate taxes saw a reduction and the aforementioned corporate governance meant that Japanese companies were now bankable shares. Additionally, the weaker Yen also improved outside investment no end as well as helping to boost the profits of many Japanese businesses.

Outlook for Japan’s Post COVID Economy

While Abenomics was arguably fairly successful, the Japanese economy is still beset with problems. The issue of a diminishing population is still present and Japanese culture still has not properly addressed gender roles in business. While women have reentered the workforce on a scale not seen before, they are not taking the top jobs that men enjoy. Additionally, the labour market is largely seen as being fairly inefficient due to the culture of staying at one company for the entirety of a career or being a part-time worker. Plus, the country as a whole has some pretty archaic practices when it comes to technology as well as not employing many greener initiatives that other governments around the world have.

However, the political landscape was definitely steadied by Mr Abe. Previous to him, Prime Ministers of Japan did not stay in power for long and thus could not see out any of their policies. He has therefore undoubtedly managed to make huge inroads into some of the issues that previously plagued the economy for a long time. Additionally, his diplomacy has meant that he not only has the American government on side, he also has the support of the Chinese as an ally, which is a tricky matter to have achieved.

Ultimately, however, commentators fear for the future of the Japanese economy given that COVID19 has wiped out all of the gains that Mr Abe has managed to achieve during his time in office. The economy shrank by 7.8% in the second quarter of 2020 when the pandemic took full force across the world. Given that the pandemic is still with us, and does not look to be going away any time soon, the heavily indebted Japanese economy along with its low inflation may find it difficult to achieve any form of growth. Arguably though, it is still in a much better position than it would have been without the intervention of Mr Abe’s Abenomics.

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