Yoshihide Suga has been formally appointed as Japan’s new Prime Minister in September, succeeding Shinzo Abe, the longest-serving Prime Minister in the history of Japan. The former Prime Minister’s resignation, due to ill issues, was unexpected and has raised doubts whether Mr Suga would stay true to Abenomics. 

Yoshihide Suga, however, has promised continuity. This decision has been welcomed by the investor community that has expressed positive response towards the continuation of economic support when Mr Suga’s candidacy was announced. This news, therefore, led to an increase of the Nikkei 225 of 450 points during intraday trading on Wednesday, September 16th, 2020. 

The legacy of Abenomics 

“安倍ノミクス”, better known as Abenomics, refers to the economic policies implemented by Shinzo Abe in late 2012-early 2013 as a getaway from stagnation and a permanent deflation triggered by Quantitative and Qualitative Easing (QQE). 

What is the “Lost Decade”?

Japan has had more than a decade of stagnation. The low GDP growth rate and inflation rate, a stock market crash and the ageing of the population characterized this period. While during the 1980s the country achieved an average real GDP growth rate of about 4%, in 1990 and in the first decade of the 2000s the growth rate declined respectively to less than 2% and 0.8%. Two bubbles in stock price and land price followed: the Nikkei 225 fell to ¥ 15,066 in 1992 from a peak of ¥ 37,724. The stock market crash led to an increase in insolvent loans, a credit crunch and a decrease in employment and domestic production.

Mr Suga has certainly inherited the ageing demographics problem which continues to be responsible for the country’s poor economic performance and its growth-tightening real GDP.

Which policies have been implemented?

The principles on which Abenomics is based on have been already individually attempted in the past. However, Abenomics brings together these policies in a joint coordination effort highly sought after. These policies, often referred to as “three arrows”, are:

  • Aggressive Quantitative Easing: It was implemented by Abe administration together with Bank of Japan’s strategic plans to overcome deflation and reviving economic growth. On 4th of April 2013, Haruhiko Kuroda, the 31st Governor of the BOJ sought to change markets’ expectations and public sentiment by unveiling a QE program. The QE increases the stock of money held by financial institutions and is typically applied at times when interest rates are near or equal to zero and cannot be reduced further. The BOJ planned to rise Japan’s monetary base from ¥ 135 trillion to ¥ 270 trillion in December 2014 through a massive purchase of long-term government bonds. This ambitious purpose was reinforced in October 2014 when the BOJ extended the average maturity of government bonds purchased.
  • Flexible fiscal policy: In less than a month into office, Mr Abe announced a ¥ 10.3 trillion-stimulus package as part of the supplementary budget (mainly used in sight of exceptional events) that was equivalent to nearly 2% of Japan’s GDP leading to 600,000 jobs. Mr Abe also established a tax hike, increasing the consumption tax rate from 5% to 8% in April 2014, in line with a 2012 agreement with the Democratic Party of Japan, and from 8% to 10% in 2015 (but introduced in 2019) to promote consumer spending and control state spending.
  • Strong reforms for longer-term growth: The reforms concerned taxation, trade, labour, agriculture, energy and finance. Mr Abe decided to lower corporate taxes from 35.6% to a rate between 20% and 29%. He promoted Free Trade Agreements (FTAs) with the members of the Trans-Pacific Partnership (TPP), started to cope with young workers’ employment stimulation and gender inequality and weakened the “JA-Zenchu”, the Central Union of Agricultural Cooperatives by removing barriers to entry in the energy market allowing new players to produce distribution networks. Regarding the banking industry, Mr Abe aimed to a change in asset allocation, encouraging the creation of portfolios with more equities and riskier assets.

Abenomics successes and failures

Overall, the Japanese economy experienced significantly better results during Mr Abe’s term with positive low inflation, unemployment down to 2.2%, the weakening of the yen, a boost in corporate profits and a re-established optimism. Furthermore, the QE program made the bond yields and the yen fall while total lending grew. However, more than one thing did not work out the way Mr Abe hoped. 

The consumption tax increase from 5% to 8% and the subsequent increment to 10% drove the country into a technical recession. Although these tax rises were necessary in order to contrast the growing fiscal deficit, they have undone the benefits gained with previous fiscal stimulus measure. 

The inflation target of 2% was never reached: in 2019 it was 0.48%, 0.5% less than the level of 2018 and not even close to the former target introduced in February 2012 of 1%.

Finally, looking at the following graph, QE measures did not give any acceleration to Japan’s Real GDP. Conversely these measures, along with negative interest rates and a cap on 10-year bond yields, stopped the deflation.

Source: Bloomberg Professional

In May 2020 Japan’s economy fell into the second technical recession. During Q3, exports and business investment dropped respectively to 15.7% and 10.5% followed by a 7.5% decline in the household consumption.

Takeshi Yamaguchi, chief economist at Morgan Stanley noted that “the severity of the impact on department store sales [in the first half of February 2020] was close to the one seen in the post-Lehman period” highlighting once again that the “three arrows” did not had any impact on Japan’s ability to withstand shocks. This data includes the effects of COVID-19 that has been and continues to be a disruptive factor to the country’s slow growth and that has, inevitably, worsened the entire picture.

And now, Mr Suga, who at that time commented that the situation was not as tragic as that of 2014, must deal with the effects of this sold well but not so effective mix of policies.

Suga’s first steps

“I’d like to maintain the same relationship with the Bank of Japan” said Mr Suga at the beginning of his mandate, meaning that the massive monetary easing and the fiscal stimulus measure will be left untouched, choice reinforced by the disruptive effects of COVID-19.

Fiscal Policies implemented

How aggressive the Japanese government is in fiscal policy without being affected by the COVID-19 situation is showed by the size, only second to that of the US, of the fiscal measures either implemented or planned to cope with COVID-19.

Since the beginning of the pandemic, the Japanese government has already delivered two supplementary budgets that add up to ¥ 58 trillion and a third of ¥ 1.5 trillion destined to regional revitalization. The latest package announced by Mr Suga was ¥ 73.6 trillion and it included loan schemes and government spending of around ¥ 40 trillion. Mr Suga’s main objective is “maintaining employment and keeping businesses going” and to hope in recovery after three-quarters of contraction. In accordance with Mr Suga’s political plans, the package features a $ 20 billion green tech fund designed to support projects including renewable energy development and pollution reduction.

Nevertheless, as can be seen from the figure shown below, economists, despite being in favour of the package, reckon that the government is over-estimating the impact of the stimulus which is expected to reach 3.6% of gross domestic product.

Nonetheless, according to the economists Koya Miyamae at SMBC Nikko Securities Inc. and Yuki Masujima, the positive effect on the GDP won’t reach respectively 1% and 0.5% even in an optimistic scenario Hence, according to their opinion, the latest extra budget could be far less effective on the GDP than the stimulus generated with the second budget.

Source: Cabinet Office

The course of the pandemic and the government’s intention to declare a state of emergency as the nation reaches a record-breaking 4,520 new COVID-19 cases could slower this impact as well.

The changes undertaken in the labour market

Under Mr Abe a major achievement has been the improvement of the labour market conditions: unemployment reached 2.2% (the lowest since 1992) before the COVID-19 outbreak, after which it rose to 3.0%. However, Mr Abe has managed to employ more women reaching a female labour-force participation rate higher than the one in the US. Of Japan’s current population, about 18.15 million people are 75 or older. The fastest-ageing prefecture is the town where Yoshihide Suga grew up, Akita.

In one of the efforts made to solve this issue, the government has planned to rise health care fees for the richest class of elderly who receive at least ¥ 2 million in their annual pension to reduce the burden by ¥ 88 billion on younger people.

As can be observed from the figure below, this pronounced ageing is also expensive. Every year, the shrinking working class is forced to bear the burde of an increasing number of pensioners. This explains why Japan’s living standards are falling behind rich countries with expanding populations.

Source: Federal Reserve Bank of St. Louis

Reforms and foreign policy under Yoshihide Suga

Among the measures planned by the PM with the intent of reviving the economy there is the promotion of digitalization and the intention to build a digital society. Before embarking on this topic, it is better to highlight that in order to bring structural changes in the industrial sector, the regulatory framework should be the subject of a deep reform. For instance, the rise of the FinTech Industry in Japan has forced the government to revisit regulations governing fund transfers and the trading of financial products. According to Ōta Hiroko, economic policy Professor at the National Graduate Institute for Policy Studies, there are three challenges to consider:

  1. Either knockdown or lighten regulations that unnecessarily hinder the utilization of digital technology in specific sectors;
  2. Generate new regulations consistent with the services, products and models linked to digital innovation;
  3.  Digitalization of bureaucratic processes to remove the use of paperwork and decrease time processing, in fact, only 12% of all administrative work is done online.

The latter is the priority. The Council for Promotion of Regulatory Reform is currently reducing administrative red tape as a facet of regulatory reform. But Japan still has progress to make: the lack of highly qualified IT specialists within the government and the presence of several systems does not help. However, these issues do not halt Mr Suga. The cabinet has announced plans to create a single system and has proposed a national budget for 2021 of ¥ 105 trillion that places digitization of government services front and center.

Concerning foreign policy, Mr Suga’s first overseas visit was to Vietnam, highlighting the strengthening of the relationship with the country, already based on development assistance and infrastructure building. The PM has challenged expectations that his foreign policy inexperience could restrain him by following Abe doctrine’s footsteps:

  • Increased investment in Southeast Asia;
  • Expanded defence ties with a host of like-minded powers;
  • A more combative policy on China.

Regarding the last point, as Mr Suga said, “[to maintain] a stable relationship between the two countries is important not only for Japan and China but also for the region and the international community”. The two countries agreed to cooperate on international and regional issues trough trade deals and the fight against COVID-19, leaving out security concerns and disputes over the Diaoyu Islands.

Even though it will be difficult to see major changes in Japan’s diplomacy, the continuation of the Abe administration’s foreign policy is a safe harbor, especially during the turmoil caused by COVID-19.

The economics experiment that continues to allure other economies

All things considered, Abenomics has been and still is a bold economic solution to compensate the regime of deflation and minimum growth that Japan has experienced in late 1991. This set of policies, with its pros and cons, has, more than once, provided lessons to the entire world: from the choice to give (too much) autonomy to a Central Bank to the limits of a growth strategy.

Japan was the first country to try a form of QE, to implement zero interest rates and to become a “bed test” for all the uncommon monetary policies that had not yet been fully experimented by the other countries until after the 2007-2008 financial crisis.

Japan is not the exception; it only acts differently.


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