Lost decades of growth

The  Japanese economy has experienced economic stagnation for around 20 years, nicknamed the ‘lost decades‘. Due to the property bubble burst in the 1980s, policy mistakes and an ageing, shrinking population, the Japanese economy has encountered slow growth and deflation (the sustained fall in the average price level) ever since the fallout from the financial crisis. The central government debt stood at at over 1 quadrillion at the end of March 2016, well in excess of 240 per cent of GDP, a level more than any other developed country in the world. Efforts to stimulate the Japanese economy out of its sluggishness , like the monetary policy were inefficient and fiscal policy measures were repeatedly back tracked.

Abenomics Policies

In 2012 Shinzo Abe the Prime Minister of Japan proposed an economic revitalisation plan, dubbed “Abenomics“, which involved 3 ‘arrows’ (3 forms of macroeconomic expansion). The first arrow is a fiscal stimulus worth about 2% of GDP in the current fiscal year. Fiscal policy centers around changing government expenditure and taxes in order to influence aggregate demand in an economy. Japan’s government increased spending by 10 trillion yen ($84 billion).

The second arrow is a monetary stimulus (expansionary monetary policy) via massive purchases of government bonds. Quantitative Easing (QE) and low interest rates were used. The Bank of Japan (BoJ) increased the amount of QE in 2014, injecting $60 trillion ever month, up almost 20%.The first 2 arrows aimed at kick- starting the economy.

The final arrow involves supply-side structural reforms in the labour market (aimed at increasing job flexibility, opportunities for women & dealing with its primarily ageing and shrinking population), competition policy (Japanese markets are shielded from foreign competition through regulation, protection and subsidies which causes inefficiency) and international trade improvements.

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Early impressive impact

The early impact of the monetary and fiscal stimulus had been remarkable. Financial markets improved drastically and yen which had previously appreciated sharply now remained at more competitive levels. This boosted consumption and restored the price competitiveness in many of Japan’s thriving industries.Additionally, there was a significant acceleration in growth for the first half year, with inflation slipping back into positive seawater.

Japan’s deflationary spiral

Abenomics aimed at delivering a 2% inflation target by 2015. However, he BoJ now says it will not reach its 2% inflation target until the 2017-18 fiscal year -three years late.This is due to the persistence of deflation and lack of consumer confidence. Japan’s consumer prices dropped for the fifth month in a row in July 2016 -another blow to Prime Minister Shinzo Abe’s attempts to fight the war against deflation and revive the world’s third-biggest economy. The 0.5% drop in July – worse than a 0.4% fall in June marked the biggest annual fall in consumer prices for more than three years.

 

References:

Economics Today March 2015 – Is Japan’s Abenomics going to work? {Rachel Cole}

Economics Today January 2014- Is Japan winning the battle against deflation? {Grant Lewis}

The Guardian- Japan’s deflationary spiral worsens as ‘Abenomics’ falters

Japan Times- Japan’s national debt climbs to a dizzying ¥1,049.37 trillion

 

 

 

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