Japan's Economic Shock Therapy


As Japan’s sixth prime minister in seven years, Shinzo Abe is pushing a bold strategy to ensure that he sticks around. It’s shock therapy for an economy that’s been stagnant for 20 years and was overtaken  by China in 2010 as the world’s second-largest. Abenomics departs from the piecemeal measures of previous leaders and antagonizes powerful political constituencies. Abe tells voters that the strong economic medicine he has pursued over the last two years is Japan’s last chance to remain a world power, framing his policies as a matter of national security.

The Situation

Abe called an early election and won a mandate in December to push ahead with his plan, which includes unprecedented  monetary easing, government spending and business deregulation to snap Japan out of its malaise. He calls it a “three-arrow” strategy, borrowing the image from a popular Japanese folk tale that teaches that three sticks together are harder to break than one. Optimism that Abenomics will work sent the benchmark stock index soaring to its biggest gain in 40 years in 2013. Economic growth briefly returned — helped by a weaker yen that boosted exporters — then Japan slid back into recession and inflows from foreign investors slowed. Growth was hurt by an increase in the sales tax designed to claw away at the world’s biggest debt burden. An unpopular plan to increase it further was shelved and the government will cut the tax rate on corporate income to help boost the economy. Investors are still waiting for details of more controversial efforts to promote private-sector competitiveness, such as changes to labor regulations dating from the 1960s that offered lifetime employment at large companies. Abe is also trying to lure more women into the workforce and pushing Japan’s biggest pension fund to buy riskier assets. This is where the 60-year-old Abe must take on tough vested interests — including farmers, drugmakers and utilities — or Abenomics will fail.

Source: Japan Ministry of Internal Affairs and Communications
Source: Japan Ministry of Internal Affairs and Communications

The Background

Since Japan’s real estate and stock market bubble burst in the early 1990s, companies have focused on cutting debt and shifting manufacturing overseas. Wages stagnated and consumers reined in spending. That led to two lost decades, with no nominal growth in the economy. Prices of goods such as fresh food and sake kept falling, creating deflation that sapped optimism. Japan’s devastating earthquake, tsunami and nuclear meltdown in 2011 didn’t help. The challenge of growing the economy of a nation with a dwindling, aging population has vexed a series of prime ministers. Abe himself had a failed 12-month first term starting in 2006. He returned to office in December 2012 and has now stayed longer than any of the last five prime ministers. This time the country’s central bank joined with policy makers and set a target for inflation of 2 percent, a shift so significant that it has been compared with the rate increases that ended high levels of U.S. inflation after Paul Volcker became chairman of the Federal Reserve in 1979. Rising prices encourage companies to invest and consumers to spend.

The Argument

Proponents of Abenomics see the Bank of Japan’s mammoth purchases of government debt as the only way to shake off deflation and avoid more stagnation. The International Monetary Fund warns that the scale of monetary expansion could roil the world’s markets by causing a spike in government bond yields and rendering the nation’s debt unsustainable. For now though, Japan’s bond yields remain the lowest of any developed nation. The debate has left investors looking for signs that Abe is willing to take more bold steps needed to make his plan a success, such as pressing ahead with a U.S.-led trade agreement to allow greater access for foreign goods and services.  

The Reference Shelf

  • The IMF’s August 2013 country report on Japan gives forecasts for the economy and the impact of Abenomics, and it published an update in May 2014.
  • A Bloomberg News profile of the architects of Abenomics, including retired Yale University professor Koichi Hamada. Bloomberg Markets profile of Akira Amari.
  • The Japanese government’s statement on regulatory reform to stimulate growth.
  • The Bank of Japan’s statement introducing its new easing policy.
  • Bloomberg QuickTake on proposed changes to the Government Pension Investment Fund.

First Published Oct. 9, 2013

To contact the writer of this QuickTake:

Andy Sharp in Tokyo at asharp5@bloomberg.net

To contact the editor responsible for this QuickTake:

Leah Harrison Singer at lharrison@bloomberg.net