Academic journal article Brookings Papers on Economic Activity

Abenomics: Preliminary Analysis and Outlook

Academic journal article Brookings Papers on Economic Activity

Abenomics: Preliminary Analysis and Outlook

Article excerpt

ABSTRACT In early 2013, Japan enacted a monetary regime change. The Bank of Japan set a 2 percent inflation target and specified concrete actions to achieve this goal by 2015. In 2013, Shinzo Abe's government supported this change with fiscal policy and planned structural reforms. Together with the Bank of Japan's aggressive monetary easing, this policy package is known as "Abenomics." We show that Abenomics ended deflation in 2013 and raised long-run inflation expectations. Our estimates suggest that Abenomics also raised 2013 output growth by 0.9 to 1.8 percentage points. Monetary policy alone accounted for up to a percentage point of growth, largely through positive effects on consumption. In both the medium and the long run, Abenomics will likely continue to be stimulative. However, the size of this effect, while highly uncertain, thus far appears likely to fall short of Japan's large output gap. In part this is because the Bank of Japan's 2 percent inflation target is not yet fully credible. We conclude by outlining a way to interpret future data releases in light of our results.


A great monetary experiment is taking place in Japan today. In early 2013, the Bank of Japan announced a monetary policy regime change. Along with this monetary expansion, the government is enacting complementary fiscal policy and structural reforms. The hope is to end two decades of stagnation and deflation. In this paper, we provide a preliminary evaluation of these policies.

That Japan needs some new policies is clear. The Japanese economy has stagnated since 1992. Between 1993 and 2012, real GDP growth averaged just 0.8 percent. (1) Prices have fallen most years since 1998. Economists have blamed Japanese policymakers for an insufficiently aggressive response to these trends. (2) But they do so no longer. Shinzo Abe became prime minister on December 26, 2012. A member of the Liberal Democratic Party, Abe campaigned on a platform of radical action to end economic stagnation. His economic program (dubbed "Abenomics") consists of monetary expansion, fiscal stimulus, and structural reforms. In a reference to a Japanese legend, these three components are referred to as the "three arrows" (Eichengreen 2013).

The first arrow is a monetary policy regime change. Beginning in November 2012, then-candidate Abe argued that the Bank of Japan should increase its inflation target and engage in "unlimited easing." After his election on December 16, Abe threatened to revise the law granting the Bank of Japan independence if it did not agree to a higher inflation target. (3) The Bank of Japan acceded to Abe's demand, announcing a 2 percent inflation target at its meeting on January 22, 2013. While hardly extreme, 2 percent inflation would be the highest year-on-year inflation rate in Japan since 1991. In what we show was a more significant announcement, on April 4, 2013, the new Bank of Japan governor, Haruhiko Kuroda, promised to reach this target in two years through open-ended asset purchases and a doubling of the monetary base (Bank of Japan 2013b).

The second arrow is fiscal policy. In February 2013, the Diet passed a 2 percent of GDP "supplementary budget" (Ito 2013), although the actual stimulus being carried out is much smaller than this headline number suggests. (4) Our preferred measure of stimulus size compares the cyclically adjusted primary budget balance forecast by the IMF before Abe's fiscal measures were announced with that forecast in late 2013. Doing so suggests that the actual stimulus in 2013 was one percent of GDP. (5) This stimulus has been dwarfed by tax increases. Consumption taxes rose from 5 to 8 percent in April 2014, and they will rise by an additional 2 percentage points in October 2015 (Ito, 2013). Thus, the IMF projects that the cyclically adjusted primary budget deficit will fall from 8.5 percent of potential GDP in 2013 to 6.0 percent in 2014 and then to 4.8 percent in 2015. …

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