My thinking of Abenomics

Abenomics refers to the economic policies advocated by the prime minister of Japan, Shinz Abe
since the December 2012. Abenomics is based upon "three arrows" of fiscal stimulus, monetary
easing and structural reforms.
The first arrow is basically pumping the monetary system with cash to kick start the economy, and
make doing business with Japan more attractive to foreign businesses. The second arrow intends to
generate more income for the public purse. Finally, the third arrow aims to restore the confidence of
companies and the public in the Japanese economy, and abolishing deflation.
As well as base wages being raised, these companies are adopting a new remuneration policy.
Currently in Japan employees wages are based on how long they have worked for a company the
older you are the greater you are paid. The largest companies in Japan are now adopting performance
based pay, encouraging the best and brightest to stay on their payroll essential in a country where
the pool of employable young people is shrinking.
These large caps are also increasing what they pay their suppliers meaning small and mid-sized
companies, which employ the bulk of the Japanese workers, will be able to increase what they pay
their staff too. More yen in the pockets of these workers will translate to greater spending, boosting
inflation and the economy.

Abe may potentially hold the keys to Japans success but even those who believe in his transformative
abilities are not flippant about the challenges head.
There are deep cultural challenges embedded in the Japanese economy which are difficult to change
and could ultimately lead Abenomics to fail.
One of these challenges is that more than 50% of household assets are held in cash in Japan a move
that makes sense in a deflationary environment but with the Bank of Japan flooding the system with
cash and wages rising inflation cant be too far behind.
Dowey was speaking in Tokyo last week as part of a Neptune research trip analysing the real effects
of Abenomics on Japans economic and investment prospects. He believes that if the powers that be
can create a prolonged period of inflation, Japanese consumers will do what is required to turn the
countrys prospects around permanently.
Abenomics had made progress, before QQE inflation was -1%. It then rose to positive inflation but
following the sales tax hike and the fall in the oil price inflation fell to 0%. To achieve the Bank of
Japans aim of 2% by 2016 there will have to be significantly more QQE, he said.
Dowey predicts the BoJ will end up doing more QQE than necessary, and more than they have
initially stated just to secure consumer confidence. Once inflation settles in, keeping your savings in
cash will no longer seem an attractive option for the Japanese and they will turn to the stock market.

This demand from retail investors should push the Japanese stock market higher as should the
increased demand for domestic equities in the revised pension portfolios. Before Abenomics only
15% of Japans pension fund was invested in equities, now it is on course to hit 50%. This will be
made up of 25% domestic stocks with global revenues and 25% foreign stocks hedging the future
income of the aging economy against the weak yen of today.
Effects
Abenomics had immediate effects on various financial markets in Japan. By February 2013, the
Abenomics policy led to a dramatic weakening of the Japanese yen and a 22% rise in the TOPIX
stock market index.[1] The unemployment rate in Japan fell from 4.0% in the final quarter of 2012 to
3.7% in the first quarter of 2013, continuing a past trend. [17]
The yen became about 25% lower against the U.S. dollar in the second quarter of 2013 compared to
the same period in 2012, with a highly loose monetary policy being followed.[18] By May 2013, the
stock market had risen by 55 percent, consumer spending had pushed first quarter economic growth
up 3.5 percent annually, and Shinzo Abe's approval rating ticked up to 70 percent. [2] A Nihon Keizai
Shimbun survey found that 74% of the respondents praised the policy in alleviating Japan from the
prolonged recession.[19]
The impact on wages and consumer sentiment was more muted. A Kyodo News poll in January 2014
found that 73% of Japanese respondents had not personally noticed the effects of Abenomics, only 28
percent expected to see a pay raise, and nearly 70% were considering cutting back spending following
the increase in the consumption tax.[20]
Under a weaker Yen, Abenomics increased the cost of imports, including food, oil and other natural
resources upon which Japan is highly reliant. However, the Abe government viewed this as a
temporary setback, as the weaker yen would eventually increase export volumes. Japan also managed
to maintain an overall current account surplus due to investment income from overseas. [21]
Why Abenomics is failing
That's because Japan's "economic problems" are almost entirely rooted in its demographics. Its labor
force has shrunk 0.17 percent a year since 2000. Last year, its population declined for the first time in
almost a century, with significantly more Japanese dying than being born. More than a quarter of its
citizens are over age 65.
HIKONE, SHIGA PREF. This is a follow-up to my column of last month. At its Policy Board
meeting Jan. 29, the Bank of Japan decided to inject into the financial market a powerful drug in the
form of a negative interest rate. The actual implementation of that measure came on Feb. 16.
The purpose of introducing the negative interest rate was to help achieve a pledge made March 21,
2012, by BOJ Gov. Haruhiko Kuroda to raise the rate of inflation to an annual rate of 2 percent in
about two years.
The central bank subsequently pursued quantitative and qualitative easing of its monetary policy
through unlimited purchase of government bonds from private financial institutions. But no
appreciable results have ensued, even though nearly three years have passed.
Indeed, the consumer price index (not including fresh foodstuffs) rose only 0.5 percent in 2013. The
index has unexpectedly continued to remain at a low level. The corresponding figure for 2014, which

took into account the consumption tax rate rise of 3 percentage points from 5 percent to 8 percent that
took effect April 1 of that year, was 2.8 percent and the figure for 2015 was 0.8 percent.
Meanwhile, household consumer spending in real terms, which grew by more than 2 percent in fiscal
2013, helped by a last-minute buying binge in anticipation of the consumption tax hike, contracted by
about 2.5 percent in fiscal 2014. The consumer price index growth rate for fiscal 2015 is estimated to
come down to around zero.
It is no exaggeration to say that household consumer spending has not grown at all even though three
years have passed since Prime Minister Shinzo Abe announced his Abenomics economic policy.
Although the instantaneous visible effect of easy money policy of unconventional dimensions was a
boost in stock prices and a reduction in the value of the yen currency, these trends were completely
reversed after the turn of the year as share prices plummeted and the yen appreciated upward.
The BOJ Policy Board decided to introduce the negative interest rate a powerful drug
presumably in the belief that reversing those trends once again was essential to achieving the inflation
target.
Contrary to the banks expectations, however, this powerful drug has rather accelerated those
tendencies.
Lets trace things back to thee years ago when Abe unveiled in a flashy manner the three arrows of
his Abenomics: bold monetary policy, flexible fiscal policy and growth strategy to induce privatesector investments.
According to the logic of reflationary economists, the first arrow of bold monetary policy alone would
have brought an end to deflation. Contrary to their thinking, however, the grand-scale social
experiment over the past three years has all but proven that the first arrow alone was not sufficient to
bring about the heralded virtuous circle.
With regard to the second arrow of flexible fiscal policy, investments in public works projects did
increase significantly in fiscal 2013 but have since been on the wane. The multiplier effect of public
investments is now barely above 1.0.
This was in stark contrast with the period of high economic growth in the 1960s when public
investments stimulated household consumer spending, private housing investments and corporate
capital investments in the private sector and thus enabled gross domestic product to grow by a margin
that was more than twice the amount of public money poured into public works projects.
As this age of naive Keynesianism has come to an end and the nations fiscal balance is in the red,
the government should refrain from investing heavily in public works from the standpoint of cost
effectiveness.
Fiscal policy measures adopted so far under Abenomics have been limited to tax reforms such as
raising the consumption tax rate, a gift tax exemption for a person receiving money from their parents
or grandparents to purchase a residence or spend for education, and reducing the corporate tax rate.

Not a few economists point the finger of blame at the consumption tax hike of April 2014, calling it a
major cause of the failure of Abenomics. Although it has been touted that reducing the corporate tax
will improve businesses international competitiveness, stimulate capital investments and lead to wage
increases for workers, the overall effect of the corporate tax reduction is hard to predict because the
cut was accompanied by an increase in the pro forma standard tax to make up for the decline in tax
revenues.
Three years into Abenomics, the government has yet to fire the third arrow, namely, a growth strategy
to spur private-sector investments. One of the reasons that the negative interest rate, which was aimed
at shoring up stock prices and devaluing the yen, has so far brought about effects opposite what was
hoped is insufficient demand for funds among businesses and households.
Commercial banks, which dont want to pay a penalty to the BOJ in the form of negative interest for
part of their current account deposits at the central bank, have no choice but to withdraw money that is
above the ceiling.
What is best for the banks is that they can immediately lend the money withdrawn from the BOJ. But
the trouble is that those banks are having a hard time finding low-risk businesses willing to borrow
money, no matter how low the interest rates are set. Blue-chip companies have retained such huge
internal reserves that they dont need bank loans for capital investments.
Moreover, with exports stagnating and domestic consumption sluggish, the private sector is far from
eager to make capital investments. The principal factor that has prevented the easy money policy of
unconventional dimensions from producing tangible results is the fact that the third arrow has not yet
been fired.
In short, the three arrows of Abenomics are so mutually complementary to each other that it is
essential for all three to be fired simultaneously if the so-called virtuous circle is to be achieved.
Lowering interest rates through easy money policy doesnt by itself impel corporations to step up
capital investments. Reflationary economists maintain that monetary easing alone is enough to make
things go well. But they are wrong. Only when a synergy is achieved between easy money policy and
a growth strategy to stimulate private-sector investments can the engine of a virtuous circle get
started.
Why has the firing of the third arrow been delayed so long? The reason is simple. In an economically
mature country like Japan, there hardly exists any strategy that would have an immediate effect of
making the economy grow.
Encouraging innovation, reforming the national universities, deregulation, creating special economic
zones these and other growth strategies are devoid of specific details and immediate effectivity.
Nor is it easy to see what long-term effects they will have.
In January 2013, the government created the Council for Industrial Competitiveness, handing it the
heavy responsibility of drawing up a prescription to restore the competitiveness of Japanese industry,
which has of late lost steam compared with decades ago. Yet even though three years have passed
since its creation, the council has yet to come up with any eye-opening proposals and Japanese
industry continues to lose its competitiveness. The waning of competitive power is testified to by the

sluggishness in the growth of volume-based export of Japans manufactured products despite the rapid
fall of the yens value.
Moreover, the Japanese manufacturing industry lags behind its European and American counterparts
in the on-going Industry 4.0 revolution aimed at developing unmanned production processes with
full utilization of the Internet and artificial intelligence.
Particularly conspicuous is a decline of the Japanese electronics industry. During the first half of the
1990s, this sector earned a trade surplus of 8 trillion to 10 trillion a year, surpassing the auto
industry. In 2013, however, its trade balance plunged into the red as the deficit incurred by industrial
sectors related to computers and communications apparatuses has wiped out the trade surplus
produced by the electronic components sector.
Perhaps the only way to resuscitate the Japanese economy is to catch up with countries of the West in
Industry 4.0. As stated earlier, however, dark clouds hover over its future because of the decline of its
electronics industry.
Japan Recession 2014: Why Abenomics Isn't Working
In the midst of its multipronged economic revitalization program known as Abenomics, Japan is
deeper in recession than previously thought. Data released Monday revealed the worlds third largest
economy contracted more than expected in the July-September quarter, leading many economists to
conclude at least one element of Prime Minister Shinzo Abes recovery plan was ill-conceived:
increasing the country's consumption tax from 5 percent to 8 percent.
Its quite striking that despite the massive scale of monetary loosening, that even just a fairly small
tax increase is enough to plunge the economy into recession, said Jonathan Buss, an economist at
Oxford Economics.
Japan stunned economists in November, unexpectedly falling into recession. The recession prompted
Abe to delay a sales tax hike for 18 months. The tax was meant to follow the consumption tax
increase that went into effect in April and is widely blamed for pushing the economy into recession.
Mondays data revealed Japans GDP for the most recent quarter contracted at an annualized 1.9
percent rate, higher than the initial 1.6 percent annual rate reported last month, igniting concerns
about Abe's effort to spur growth.
Abe, who was elected for a second term in December 2012, launched his plan to bolster Japans
economy at the start of his first term in 2006-07. Abe introduced it as a three-pronged approach to
combat two decades of deflation and stagnant economic growth with new monetary, fiscal and
structural policies.
Abes monetary policy consists of printing additional currency to make Japanese exports more
attractive and generate modest inflation. The second prong, fiscal policy, entails new government
spending programs to stimulate demand while the third approach, structural reforms, includes various
regulations to make Japanese industries more competitive.
The consumption tax has really been the crucial point, Buss said.

The point of Abenomics was to try and engage in fiscal consolidation without harming growth or
jeopardizing the Bank of Japans plans to increase inflation. It was initially thought monetary easing
would be enough to allow Japan to raise taxes without undermining growth or inflation, Buss said, but
Mondays data underscores it wont be easy.
Abes fiscal arrow was a combination of the consumption tax, followed by a stimulus program to
offset the consumption tax in the short run. In October, Japan instituted more monetary easing as
inflation stalled following the tax hike in April. The Bank of Japan agreed to inject 80 trillion yen, or
$720 billion, into the economy through its quantitative easing program.
The consumption tax hike certainly weakened the economy, but it was also an unavoidable step for
Japan. It was just a question of when to hike taxes, said Bill Adams, senior international economist at
PNC Financial Services Group.
But thats not Japans only problem. Lower energy prices are also taking a toll. While some countries
including the U.S. are benefiting from the recent plunge in oil prices, Japan is not.
The devaluation of their currency [and] the devaluation of oil have basically offset each other. So,
where other countries see positive growth because of low energy costs, Japan might not have that on
their side, said Lennon Sweeting, corporate dealer at USForex Inc.
In the meantime, experts forecast the U.S. dollar will be worth 125 Japanese yen before the end of
2014. The dollar Monday traded at 120.72 yen. That could be an advantage for Japan as currency
devaluation could lead to higher exports, Sweeting said.
Japan could get the economy moving because its cheaper for the world to buy Japanese products.
Importers of Japanese goods could buy more than they might have previously and it would be less
costly to do business with them, Sweeting said. But the disadvantage is that a weaker yen leads
Japanese businesses to have far less purchasing power around the world -- limiting access to global
goods and pushing up energy costs significantly.
What they want to do is persuade the world that Japan has inflationary intentions, even if that means
the rest of the world sees Japanese decision-makers as reckless, said Gary Burtless, senior fellow in
economic studies at the Brookings Institution.