Abenomics: Japan's New Economic Policy Package

By Patrick, Hugh | Economics, Management and Financial Markets, December 2014 | Go to article overview

Abenomics: Japan's New Economic Policy Package


Patrick, Hugh, Economics, Management and Financial Markets


This paper addresses Japan's economy, its new economic policy package, and the new term - Abenomics - that is used to describe the three pillars, or "arrows," of the Abe government's focus on the Japanese economy and on economic policy. The term Abenomics is an example of brilliant branding. At the same time it is risky, since it implies Prime Minister Abe's success or failure will depend on the success or failure of Abenomics. Before going into more detail, this paper makes three major points.

First, it is far too early to tell whether Abenomics will be successful - in ending deflation, bringing about price stability and getting the economy onto a stable, full employment growth path. The initial evidence is certainly positive, but there is a long way to go.

Second, perhaps the most important change is the shift in people's feelings about Japan's future, from resignation - sho ga nai - to optimistic hope. Revitalization is a somewhat strange term, especially regarding the economy, but that is one catch word that is being used. Economists use the term expectations, but what is going on is deeper than that. This optimism is propelled in large part because many Japanese are sick and tired of the malaise of the past two decades, and have been eager to buy into Abenomics, probably a lot more than buying into Abe himself as an outstanding leader. However it is not at all clear that this new mindset will become deeply engrained and sustained.

Third, we should distinguish between Abe and Abenomics. It is possible that both will succeed. Or it is possible that Abe will fail as Prime Minister but that his successor will embrace the Abenomics economic policy program, and forward momentum will continue. Or, the three arrow package will not be implemented sufficiently well, and Abenomics and Abe will fail. But that does not mean the end of Japan. Japan will muddle through once again; it is quite experienced and good at that.

It is easy to label Japan as having suffered from its so-called two lost decades. In a broad sense that is true - modest but pernicious deflation, inadequate domestic demand, mediocre growth below potential, weak labor markets and a widespread sense of malaise. Over the period growth has been volatile - recessions, recoveries, growth, the sharp decline in 2009 as the global Great Recession hit all high income countries, Japan's partial recovery and then slide back to modest recession again in 2012, and now rapid recovery - at least this year.

But that is too simple a statement of what has been going on in Japan over the past two decades.

First, there has been a great deal of change in institutions, organizations, corporate and personal behavior, generational values, and various other changes below the radar screen. Japan is quite different today from 20 years ago.

Second, the demographic realities of a declining labor force since 1995 and now declining population have already had a big effect and will continue to have a big effect; and they provide lessons for Korea and China as well as Europe.

Nevertheless, Japan has not done so badly in a comparative context. We have to stop focusing simply on GDP growth rates, given the new demographic context, and emphasize the growth of GDP per capita, GDP growth per worker, and especially labor productivity, Japan has done better than Europe, and almost as well as the US in the past decade, with even higher growth rates of these variables in the 1990s. Japan's performance should not be so surprising, since its labor productivity and GDP/capita are still below that of France, Germany, and the UK, and especially the US where the gap has actually been widening. However, Japan's good productivity performance has been hidden in aggregate terms by the decline in the Japanese labor force. Nonetheless, even with that decline, Japanese labor is still misallocated and underutilized, due to poor growth relative to potential and the employment system rigidity for regular workers. …

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