Japan’s Fervour for Change

A radical shift is predicted with Abenomics.

Shinzo Abe seems the new hero of Japanese economics. His vision and his capabilities have long been praised to revive Japan from the almost decade-long dormant state. His answers to the economics challenges he faces, did not go unnoticed. The three-pronged strategy by him – monetary stimulus, fiscal “flexibility” and structural reform, to help Japan back on its way to economic vibrancy, have been fancily termed as “Abenomics”.

Japan, known the most for its technologically perceptive industry-goers and rich culture, has been in news for another factor: deflation. To recount the country’s deflationary distress, one must go back to 1989, when it all started with the burst of the housing bubble, the subsequent amplification of savings by consumers, and the resultant decreased spending. The reason Japan has not been able to recuperate since then seems absence of powerful political and financial administration to fulfil priority economic agenda. A general economic stagnancy came about in later years, with increased non-performing loans (a medium term consequence of raised interest rates in 1989), and increase in debt-GDP ratio. This further dampened the expectations of economic growth in the citizens.

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Data Sourced from World Bank

Long before Shinzo Abe came to power, Japan suffered from near-recession type of economic climate, illustrated by a dip in GDP in until September 2012. This situation, as witnessed, was further abetted by natural adversities, and nuclear disasters, and weakening exports. Excessive debt to GDP percentage, a volatile GDP driven by scattered growth in industries across quarters,and therefore a volatile stock market were a worrying phenomenon. To top it all, the worst revelation by the economy was a trade deficit of $32.3 billion, in January 2012, for the first time in three decades.

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Data Sourced from https://www.quandl.com/

An economy that had maintained a superior growth trajectory for over forty years, and had taken care of its labor force with utmost dignity, had come to a point where it was unable to gain faith from its population. Its own strength in technology and research saved the economy’s face many a time. Few good circumstances that Japan has been the bearer of are the shocks in its business cycles demonstrated by firms in technology, and other industries, and external variables, and the resultant increase in GDP in those specific quarters.

A mostly saturnine economy needed a thorough check and more than a nudge towards economic reformation was necessary, and it was hoped that Shinzo Abe would provide the same. The challenges he would encounter were several. The routes to and solutions to be thought out and prioritised were: a long history of deflation that was to be reversed gradually, exchange rate devaluation, and a general spur in economic growth.

The first in line was deflation; the target of a 2 percent inflation was hardly reached by the Bank of Japan, in 2014-2016, though determinants like the unemployment rate have decreased month-on-month. Accompanying this, there are concerns about the ¥28.1 trillion ($276 billion) stimulus package that Abe plans to introduce, in order to boost the economy. Given the already high debt to GDP ratio, there are mixed opinions on this route to recovery, unless the funds are used for long-term welfare and development. Short-term use of these funds would mean creating a gap too soon.Development and welfare must include boosting output, productivity and employment. More importantly, it must aim at introducing the necessary price levels in the economy, and boost aggregate demand. An economy’s long-run goal is to gain reasonable stability across time, along with being internationally competitive and providing a decent livelihood to its population. If employment rate is prioritised, the economy recovers sooner in the right direction, because of the right kind of stimulus in the form of spending. The debt stimulus in such a case, seems the right decision. However, there are still questions about the profundity of reforms in the labor market. Would an inflation target still be too drastic when combined with an increase in wages? Or, would the economy tend to stabilise itself in the face of such power in the hands of consumers?

 

 

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