Japan's Abenomics

Japan’s AbenomicsJing Zeng

Email: [email protected]@yahoo.co.jp

IE Business School

ContentWhat is Abenomics?

• The economic policies advocated by the Prime Minister of Japan, Shinzo Abe, since December 2012, based upon “three arrows” of monetary policies, fiscal policies and structural reforms.

Background• Economic context

Abe’s “Three Arrows”• Monetary policy• Fiscal policy• Structural reforms

Economic Outlook• Inflation• GDP• Unemployment rate

Shinzo Abe, the prime Minister of Japan, Dec.2012-PresentSource:https://en.wikipedia.org/wiki/Abenomics

Background

Years of Deflation

Consumer Price Index

19901991199219931994 19951996 199719981999200020012002200320042005200620072008 2009201020112012201320142015

-6

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

Source: Bank of Japan

(%)

Source: World Bank

GDP growth

“Lost two decades”

Secular stagnation

Three Arrows Approach

A• Monetary policy

B• Fiscal policy

C• Structural Reforms

Purpose:• Exit from Deflation• Boost Economic Recovery

Monetary Policy

Method: OMO– Quantitative and Qualitative

Monetary Easing(QQE) – Purchasing Japanese

government bonds (JGBs), exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs), CP and corporate bonds.

Source: Bank of Japan

“QQE”

Target: 2% inflation

Monetary Policy“QQE”

Effects-1Price

Quantity

DS1 S2

P1

P2

Source: Bank of Japan

Monetary Policy

Source: Bank of Japan

“QQE”

QQE Money Supply Depreciation

Export

Import

GDP

Inflation

Effects

Monetary Policy

Result: Did it reach 2% ?

Crude Oil Prices and Energy Prices

Consumer Price Index

Source: Bank of Japan

“QQE”

QQE Money Supply Depreciation

Export

Import

GDP

InflationOil Price

InflationOil Price

Effective from Feb.16.

Source: Bank of Japan

Monetary Policy“QQE with a Negative interest rate”

Effects– Negatively affects earnings

of financial institutions.– Positively affects borrowing

for property and business loans.

Fiscal Policy

Issues Increase in fiscal deficit and debt outstanding

– Debt to GDP ratio: around 240%

– Social security expenditures and national debt service increase year after year.

– Continues to run budget deficits where expenditure exceeds tax revenue.

Source: Ministry of Finance of Japan

“Consumption Tax Hikes”

Fiscal PolicyRaise consumption tax

– Raised consumption tax rate from 5% to 8% in April 2014. Plan to increase to 10% in April 2017.

– All of the increased revenue is used for Social Security.

Previous 5%

April 2014 8%

April 2017 10%

Consumption tax rate

Source: Ministry of Finance of Japan

“Consumption Tax Hikes”

Effect of the Consumption Tax Hikes – Raising prices and reducing

households' real disposable income.– Generating a increase in demand

prior to the consumption tax hikes, and a decline in demand after the consumption tax hikes.

– Affected consumption more negatively than explained by the decline in real income.

Fiscal Policy

Source: Bank of Japan

“Consumption Tax Hikes”

Estimated Effect of the FY2014 and FY 2017 Consumption Tax Hikes on GDP

Effects of the Consumption Tax Hikes

Structural Reforms

Source: The government of Japan, Japan’s cabinet

The most serious issue:

Lack of labor force

Labor participation in 2014

Women: 49.2%

Total: 59.4%Men: 70.4%

“Lack of labor force”

Structural Reforms

Solutions:

More female employees

More foreign employees

Is it effective?

Source: The government of Japan, Japan’s cabinet office

“Lack of labor force”Structural Reforms

“Lack of labor force”

Source: Bank of Japan

Structural Reforms

Inflation:

Economic Outlook

When can it reach 2%?

– 2015 → 2016 → 2017

– Effected largely by the crude oil prices

– Employees’ wages did not grow much

Source: Bank of Japan

“Inflation”

Economic Outlook

(%)

GDP growth: Why is Japan’s “Potential growth” rate so low?– Lack of labor force– Effect of stagnation

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

-6

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

0.29

1.692.36

1.301.69

2.19

-1.04

-5.53

4.65

-0.45

1.751.61

-0.100.50

GDP growth

Source: World Bank

Source: Bank of Japan

(%)

Will Japan’s GDP grow quickly?– Unlikely, unless Potential GDP

grows

“GDP growth”

Economic Outlook

Source: Bank of Japan

Unemployment rate:Will it continue declining?

– Depends on GDP growth

– Won’t change muchLife-long employmentLack of labor force

“Unemployment”

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

-6

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

0.29

1.692.36

1.30 1.692.19

-1.04

-5.53

4.65

-0.45

1.751.61

-0.100.50

Wrap-upConsumer Price Index

Source: Bank of Japan

GDP growth

(%)

Source: World Bank

Source: Bank of Japan

Thank you!