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Published on May 24th, 2013 | by Sanat Misra
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The Power of Abenomics

After a lost decade of battling deflation, Japan’s then newly elected Prime Minister, Shinzo Abe announced radical measures of monetary stimulus in the hope to spur the ailing Japanese economy. His three-pronged approach backed by quantitative easing and a new inflation target of 2% aims to encourage investment against not only Japan’s stagnant macroeconomic history but also in a murky global financial climate.

Since the announcement in early April to inject $1.4 trillion into the economy, the Nikkei has soared to higher levels and the yen has depreciated significantly in value – with the headlining breakout against the dollar last week. Moreover, the stimulus provided by the Bank of Japan has allowed the Japanese economy to grow at its fastest pace in the last quarter. The economy grew at an annualized rate of 3.5% outpacing the US which grew at 2.5% in the first quarter of 2013. The weaker yen has certainly helped spur growth with cheaper imports but what is equally important is to see a rise in domestic demand fuelling some of the growth. Shock tactics adopted by the Bank of Japan have in fact sparked an increase in both business investment and private consumption. The sustainability Japan’s recent growth will only be tested in time, but initial results hint towards a brighter future – especially with details of the ‘third prong’ expected in June, at the G8 summit.

Against the outlook of sunshine in the Japanese economy, there is a lingering threat of heavy showers. A cheaper Yen may prove to be good news for exporters but bad news for people living in Japan facing higher energy costs. That’s one thing the Bank of Japan must keep on its mind and focus on a healthy balance by implementing structural reforms.

There has also been an increasing worry of a currency war because of the Bank of Japan and the Federal Reserve in the US implementing vast amounts of quantitative easing in order to boost liquidity in their respective economies. The immediate effect of this liquidity of course means a devalued currency and increased competitiveness, something that might just negatively spill-over to other countries relying on boosting export-led growth. But, at least for now, it is accepted that although these spillover effects exist, the aim of expansionary monetary policy is focused on countering domestic issues in the respective countries.

This isn’t the first time Japan has attempted to resurrect its economy, it happened in the late 1990s – early 2000 but recovery was choked off and business hurt by a false sense of security from a devalued Yen. Although business investment needs to be boosted further, many are resistant to be swept off their feet with recent progress. But, in time, with greater conformation of sustained recovery, Japan can hope to revive itself.

The markets’ initial reaction towards ‘Abenomics’ has been promising and for those seeking a solution to the eurozone crisis, lessons can be drawn from Japan –especially after gloomy growth figures from France, Italy and even Germany earlier this month. Despite some structural differences between the two economies, it would be hard to argue that easing off austerity, and pumping some life into the economy by attempting to recapitalize banks (and encourage lending) wouldn’t help the eurozone economies. It’s important to act fast too, as Mark Carney has also expressed, before it’s too late and a whole generation inherits a bleaker future.

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About the Author

Sanat Misra

graduated from the University of York in 2012 where he read Politics, Philosophy and Economics. He is starting a masters in International Political Economy at Warwick in October 2013. He is interested in political and economic issues in the domestic and international stage. Follow him on twitter @sanmisra

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