Abenomics: The overlooked third arrow

Japan, having grappled with deflation during the lost decades (the 1990s-2010s), has repeatedly pursued government interventions in the hope of revitalizing its economy. One such strategy was ‘Abenomics’, a shock-and-awe stimulus policy that was the signature in the economic realm of Japan’s longest-serving Prime Minister – Shinzo Abe. The term, ‘Abenomics’ is a portmanteau of Abe and economics, similar to other political neologisms for economic policies that are associated with specific leaders such as Bidenomics in the United States, Likonomics in China, Buharinomics in Nigeria, and so on. Launched late in 2012, Abe had sought to jolt Japan’s economy back to life – from decades of stagnation – with a three-pronged approach that focused on reflation, government spending, and structural reforms.

Viewed from the discipline of economics, Abenomics as a policy mix is just conventional economics. Abe’s economic quiver had three ‘arrows’ that combine fiscal expansion, monetary easing, and structural reform:

• Monetary policy: ultra-loose monetary policy to reduce the cost of borrowing, and encourage spending.
• Fiscal policy: aggressive fiscal expansion by spending on things like infrastructure, or giving financial incentives to companies like tax cuts and/or breaks.
• Structural reforms: implement supply-side reforms such as reforms to corporate governance, labour market reforms, business process reforms, and so on, in order to increase competition and attract private sector investment to Japan’s economic sectors, while also expanding trade partnerships, with the ultimate goal of achieving sustainable economic growth.

Since structural reforms would involve some pain on the populace and its results were not expected to materialize until the long term, the monetary and fiscal measures introduced were meant to cushion the harsh impact of reforms in the interim as they were being implemented to return the Japanese economy to a growth path. Therefore, the linchpin of Abenomics was structural reforms, while quantitative easing (QE) and fiscal expansion were meant to be temporary measures.

True to the program, the Bank of Japan (BoJ) implemented QE, while Abe presided over massive public works spending – worth tens of billions of dollars – on new infrastructure and cash handouts. The BoJ’s “bazooka” stimulus program lifted business sentiment and helped weaken the yen – giving exporters windfall profits that trickled down to wages and new jobs. Japan’s over 20-year deflation spiral was also truncated in 2013, as inflationary expectations materialized in foreign exchange and stock markets, driving up share prices. Corporate governance reforms drew in huge investments, increasing foreign ownership of Japan’s listed stocks.

While the first two pillars of the program yielded resounding results, the third arrow had proved elusive amid insufficient political will to implement tough economic and trade reforms. Due to the daunting political challenges he faced, Abe was unable to complement his monetary and fiscal achievements with structural reforms. Perhaps out of concern for his approval rating, Abe toned down his touting of structural reforms during the course of his tenure, and what was eventually regarded as structural reforms was various subsidies and support for companies. Changes to the content of intended structural reforms – the core pillar for Abenomics – meant that QE and fiscal expansion lost their purpose. Although they were important arrows, they were not sufficient for achieving a fundamental overhaul of the economy, and only managed to keep the lights on before the pandemic struck.

Under Abe’s watch, economic growth picked up from the doldrums of the 1990s and 2000s, corporate pre-tax profit and tax revenues saw significant increases, exports rose, and unemployment dropped to its lowest level in decades, but compared to the performance of many of its peers, Japan’s economy failed to impress. Abe’s ambitious target of boosting nominal GDP to ¥600trn by 2020 never materialized and remains unmet to this day. Inflation and wage growth also fell short of expectations, putting a damper on the policy’s gains. Government debt is much higher, and Japan’s trade barriers and corporate governance remain as complex as ever.

As an exercise in political branding, Abenomics was certainly a success, but it fell short of Abe’s own key economic targets. Therefore, it was only partially successful in changing the fortunes of the world’s third-largest economy. Structural reforms were the overlooked piece of Abenomics that caused it to fail – becoming no more than QE. The first two policy arrows were designed as the premise for the execution of painful structural reform measures – on which they fell short.  However, the lack of progress on structural reforms was not down to Abe being strategically wrong. Abenomics did help drive growth, though not at the desired pace, and may have protected the Japanese economy to some degree from a sharp downturn when the pandemic struck. But the policy failed largely because of Abe’s inability to overcome entrenched domestic interests and governmental inertia to fully embrace and execute all the arrows.