Abenomics refers to the economic policy of the current Japanese prime minister Shinzō Abe. The aim of the policy is to stimulate strong economic recovery and help the Japanese economy to escape a cycle of deflation, and low growth.
Can Japan break the cycle of low growth?
The range of policies include:
- Expansionary monetary policy (Quantitative easing, negative real interest rates, and an inflation target of 2%)
- Expansionary fiscal policy (higher government spending financed by borrowing)
- Weakening the value of the Japanese Yen to boost the export sector.
- Supply side policies ‘new growth measures’
How it is supposed to work
- Japan has suffered from a prolonged period of deflation or very low inflation. Since early 1997, the GDP deflator (a broad measure of the price level) has declined by 17 per cent. (FT) This deflation has increased the real debt burden of firms, consumers and the government and acted as a continued depressing factor on spending. (See: problems of deflation) By pursuing expansionary monetary policy and targeting higher inflation, they hope to change expectations of inflation and encourage more private sector investment and spending.
- Expansionary fiscal policy. Fiscal spending will increase by 2% in 2013, increasing the budget deficit to 11.5%. The aim of the expansionary fiscal policy is to make sure that the extra money supply feeds into the real economy. There is concern that quantitative easing alone, just leads to increased bank reserves. But, the extra government spending will provide a direct injection into the economy and provide a stimulus to aggregate demand (AD)
- Confidence and expectation. An important feature of ‘Abenomics’ is trying to change the economic mood and overcome the prevailing ‘economic defeatism’. Opinion polls suggest that many people are supportive of the attempts to overcome recession. This positive effort and talk of economic recovery is improving business and consumer confidence, and will act as a spur to increase consumer spending and private sector investment.