December 18, 2014    3 minute read

Mr Abe and His Abenomics

   December 18, 2014    3 minute read

Mr Abe and His Abenomics

Japan’s ruling party has won a two-thirds majority in the general election, seen as a referendum on Prime Minister Shinzo Abe’s controversial economic policy. But what exactly is ‘Abenomics,’ and in the midst of deep recession, where has it all gone wrong?

Japanese media reported that the Liberal Democratic Party, under Prime Minister Abe, has retained its majority in the House of Representatives after the general election held on Sunday. The snap-election, was called by Mr Abe last month after Japan fell into deep recession, and was seen as a way to gain public mandate for his economic policy dubbed ‘Abenomics.’

The election came after the Japanese economy, despite Mr Abe’s extensive attempts at economic revitalisation, plunged into recession in the third quarter of this year. Furthermore, figures released at the beginning of last week showed the economy to have shrunk -1.9%, deeper than the -1.6% that was initially estimated.

Mr Abe, who was elected for his second term in 2012, introduced his policy for Japan’s economic overhaul at the beginning of his first term in office, in 2006-7. His three-pronged approach has involved a combination of monetary, fiscal and structural policy in order to tackle Japan’s stagnant growth and persistent deflation. Monetary policy has included printing additional currency in order to make Japanese exports more attractive and generate modest inflation. Most recently the Bank of Japan agreed to inject 80tn yen into the economy in October.

Structurally, Japan has sought to improve the competitiveness of key industries through regulation, as well as reforming sectors including agriculture, healthcare and energy.

The Japanese government has aimed to spur growth through a stimulus program of extensive government expenditure. However, in addition to the boost in such, the policy has incorporated some tax hikes.  It is the aforementioned tax hikes, and in particular the increase in consumption tax from 5% to 8% in April of this year, which happens to be the crux of Japan’s problem.

It was hoped that the fiscal and monetary stimulus would offset the tax rise in the short term, however the economy went into reverse and consumers literally stopped spending.  As economist at Oxford Economics Jonathon Buss stated ‘The Consumption Tax has really been the crucial point.’

The economy went from growing at 6% to shrinking at -7.3%. Mr Abe and his government brushed it off at a temporary glitch, but figures released in the last month suggest otherwise. Tax increases were an inevitable result of the mounting pressure to deal with Japan’s soaring public debt (250% of GDP), as well as the need to cover an ever-increasing welfare budget. Markets were looking for Mr Abe to deliver on promises of ‘fiscal consolidation,’ a failure to deliver on tax rises may have resulted in shaky investor confidence. As to whether Sunday’s election was truly reflection of Japan’s confidence in Mr. Abe’s policies, or merely a result of a lack of viable alternatives to the current regime remains to be seen.

As the Prime Minister stated on Sunday however, ‘My ‘Abenomics’ policies are still only half-way done.’ One thing is certain, Mr Abe and his Abenomics, regardless of their flaws, are not going anywhere.

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