Arigato, Mr. Abe

Japanese Prime Minister Shinzo Abe

In the 1980s, the Japanese economy was the envy of the world. At the time, American companies were slow to adapt to changing consumer trends and new production processes while Japanese manufacturers successfully exported cheap, high quality products like the Sony Walkman and smaller, fuel-efficient Japanese automobiles. Such was the prosperity of the Japanese economy that many were convinced that Japan would overtake the U.S. as the leader of the global economy.

Unfortunately those heady times of euphoria in the Japanese economy only lead Japan into an era of economic stagnation and sluggishness. Japanese financial institutions, flush with capital as a result of the successes from Japan’s export-driven economy, extended credit to lower quality borrowers. This in turn drove real estate prices through the roof and overheated the market. Just like the financial meltdown in the U.S. housing market 20 years later, prices became too high for the Japanese economy to sustain. When Japan’s central bank, the Bank of Japan (BOJ), raised interest rates to control inflation in 1991, the bubble burst. Furthermore, due to the movement of interest rates being directly related to the rise and fall of a currency’s exchange rate, the Japanese Yen gained in value and thus eroded the ability of Japanese exporters to compete effectively with foreign rivals. As a result, the days of 4% growth in real GDP in the 1980s became a distant memory, and for every successive Japanese Prime Minister since then, the challenge of revitalizing the economy to its former glory became the proverbial Gordian knot.

Today, Japanese voters and the world economy at large look to the new Japanese Prime Minister, Shinzo Abe to be the maverick who solves the seemingly endless economic woe of this archipelago nation. This is the result of his new economic plan, dubbed “Abenomics” which seeks to lift the demand side of the economy through stimulus spending, aggressive monetary easing and structural reforms. Though stimulus spending and aggressive monetary easing have succeeded in achieving positive economic growth, many are focusing on how Abe would implement the needed structural reforms that Japan requires as it suffers from an aging workforce. Reforms such as encouraging more women to enter management positions and liberalizing the agricultural sector have been sought by the Abe administration to spur growth but stiff opposition has slowed down their implementation.

Though Abe has gained accolades among many including the IMF and the Nobel winning economist Joseph Stiglitz, there is still some who raise questions on the viability of Abenomics. For instance, the president of the Bundesbank, Jens Weidmann criticized BOJ’s interest rate reductions as having a destabilizing effect in the foreign exchange markets. Many fear that infrastructure investments would only further increase government expenses and the debt burden, which already faces rising obligations from the country’s aging population. Also, in light of China’s rising preponderance in the Asia-Pacific region, many have noted that much of Abe’s stimulus spending has been earmarked for the military and the subsequent reduction in the Yen’s value as a result of monetary easing may be a means to lessen China’s low-cost advantage and steal market share from Chinese exports. Thus some have claimed that Abenomics may fuel further rivalry in the region.

At a time when policymakers in Europe and the United States are advocating for austerity measures to combat economic stagnation, Abenomics and its focus on stimulus spending could prove trailblazing if it succeeds in ensuring a newfound prosperity for Japan. The question is whether Abe has the political acumen to implement Japan’s much needed reforms while maintaining the tolerance of the Japanese electorate.   Anojan Nicholas 

Anojan Nicholas

About Anojan Nicholas

Anojan Nicholas is a finance graduate from the Schulich School of Business at York University. He is currently working as a Tax Operations Analyst at a major bank. He was previously employed at the same bank as a business analyst. His interests include geopolitics and international economics. In the future he hopes to pursue a career that encompasses international economics and finance, political risk and global corporate strategy. You can follow him on Twitter @anojnich