Crisis or opportunity? The changing nature of Abenomics



Japan has long experienced the prosperity of a highly developed and strong economy, while also having public finances with the largest debt ratio in the world. As the economy has continually stagnated over the past three decades and with the apparent failure of Japanese Prime Minister, Shinzo Abe’s ‘Abenomics’ economic policy to deliver higher growth, many are looking for a restructure of the market-oriented economy.

When Japanese Prime Minister Shinzo Abe took office for the second time in 2012, he faced a different set of circumstances than he had previously experienced when he first entered power in 2006. The Japanese government’s gross debt as a percentage of GDP had increased from 185% to 238% between his two administrations. With a $10 trillion public debt and an economy little over half that size, the Japanese government is now redirecting its economic policies towards fiscal stimulus, seeing that the solution to an ‘inevitable implosion’ may be to spend more.

The accumulation of this debt rests on a simple premise that governmental tax revenue is less than the government’s spending requirements. The traditional solutions to this involve two often complementary functions; cutting spending or increasing taxes, commonly known as austerity if both are implemented simultaneously.

In another form, to make up for this deficit, governments can issue ‘government bonds’ and ‘IOU’s’ – a promise from the government to pay a stated sum after the expiry of the loan period and sell these to investors along with paying interest. Japan has previously employed this method and the Central Bank of Japan is issuing 10 year government bonds at a negative interest rate, which means the interest is paid by the lenders. Moreover, what has been long beneficial for Japan is the lengthy period of low interest rates, which has allowed a small percentage of the government’s revenue to be diverted to existing interest repayments.

Traditional economic planning indicates that if debt levels are small compared to tax income, then the interest rate will maintain a relatively small value. However, once government spending increases, without a new flow of revenue, national debt increases inevitably leading to higher interest rates.

Shinzo Abe’s solution to the debt problem was characterised by the three arrows approach; aggressive monetary policy, flexible fiscal stimulus and a comprehensive growth strategy. Abenomics was intended to be a mixture of economic reflation, that is, the expansion of the level of economic output usually triggered by government stimulus, as well as a growth strategy intended to kick start the economy out of stagnation.

Abe's austerity measures seemed in contradiction to his three arrowed stimulus approach. However, what is more pertinent and continues to be so is that by cutting spending, Abe wished to regain market confidence in the Japanese economy. This was carried out in order to stabilise the economy enough so that his three arrowed approach would not create shock waves in the economy.

Abe’s stabilisation measures have worked to a certain degree, with debt levels falling below 200% for the first time since 2008. In an effort to further trim the deficit, Abe has pledged to increase the sales tax from an 8% rate. But Abe has failed on this pledge twice before, as the previous increase from 5% to 8% hampered domestic consumption levels and GDP growth. The consequence of stalling on the tax increase has been the stalling of a primary budget surplus for the Japanese government.

To reach this target, Japan would need to have more cutbacks and thus more austerity measures. This would deplete the national income from which the debt can be repaid, as occurred during the previous tax increase. The result would be continued levels of austerity reinforcing the cycle of debt which fails to cancel itself out through the normal operations of the market.

By maintaining a stimulus package, what Abe is attempting to do is to make his debt more sustainable. In rendering this debt sustainable, Abe will need to combine this stimulus package with a reduction in the degree of austerity to allow the private sector to grow, which would consequently increase the credit flow to profitable enterprises, thereby increasing the tax base on which the debt can be repaid.

However, Japan's circumstances are not as gloomy as they may appear. Japanese tax revenue since Abe took office in 2012 has risen from $3.8 billion to $5.28 billion, the result of which has been a slowly reducing public debt. This has allowed the Central Bank of Japan to buy back the government bonds that they issued in order to supply the financial system with additional capital.

Japan offers a unique example in the study of debt reduction. Abe has proven with his stimulus packages that spending can be the most effective measure. However, the degree of austerity needs to be minimised so as not to create a shock wave in Japanese economic development. Shinzo Abe faces a mammoth task in achieving a sustainable debt. By investing in the productive capacity of the nation, Abe will hopefully stimulate economic growth, reduce government debt and catalyse economic growth.

Conor McLaughlin is an Australian Government Endeavour Scholarship recipient with the Association of Foreign Affairs at Lund University, Sweden.

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