The legacy of 'Abenomics' explained as Japan's Shinzo Abe steps down

As Japan’s long-serving prime minister Shinzo Abe steps down due to health reasons, let’s take a look at the legacy of his hawkish strategies and his signature economic policies, known as “Abenomics.”

Elected first in 2006 as the country’s youngest PM since World War II, Abe quit after a year of political scandals, lost pension records and voters outrage.

Abe launched his aggressive economic plan to lift Japan — the world’s third largest economy— out of a two decades long stagnation, after he was re-elected PM in 2012.

During his historic two-term tenure he also beefed up Japan’s military to counter China, improved relations with the United States and helped Japan win the 2020 Olympics for Tokyo.

The self-named Abenomics game plan to revive the Japanese economy used a three “arrows” system.

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What are the three arrows of Abenomics?

• Monetary policy: The goal of the proposed easy monetary policy was to reduce real interest rates, enabling consumers and businesses to borrow money and spend more. Although this had a negative side effect on Japan as it weakened the Yen, it boosted demand thus lifting the country’s GDP as exporters were able to buy more Japanese manufactured goods.

• Fiscal Stimulus: A short term stimulus aimed to pump money into the economy, by giving companies financial incentives like tax breaks or the government spending more on things like infrastructure, to aid immediate domestic growth.

• Structural reforms: This looked at introducing reforms across the country to cope with a fast-aging, shrinking population. From corporate reforms by adding more women to the workforce to labour liberalisation. It also focussed on economic partnerships, industrial renewal and allowing migrants into the workforce to help ease labour pressure.

Structural reform was arguably the most important aspect as the success of the plan hinged on this prong. While monetary policy and fiscal stimulus were aimed to facilitate short-term economic relief, the third “arrow” was key to improving medium-term growth.

However, despite his pledges during his run for PM in 2012, and while the Japanese economy has done well under Abe’s tenure he hasn’t been able to hit the targets he set.

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Japan, with its population of 126.5 million has the highest public debt ratio in the world at a record 253% of its gross domestic product (GDP) in 2019. Inflation remains well below the 2% target set in 2013, with the average rate at or near 0.48% in 2019.

Initially, Abenomics boosted growth and sentiment through a weaker Yen and higher stock market, and spurred corporate profits, but momentum fizzled out soon as the country’s economy is in recession after GDP shrank for three consecutive quarters.

Add to that a struggling domestic demand amid a sluggish wage growth, with the average annual wage in 2018 the equivalent of $48,000 (£36,000) — a 2% increase — on the $45,000 in 2002, and you’ll understand why Abe’s plan has mixed opinions.

One positive to note however is, the rise of women’s employment rate in the last decade. In 2018, women represented 44.1% of Japan’s entire workforce, with 52.5% of women aged 15 and over participating in the nation’s labour force in 2018. Abe’s “Womenomics” plan also added more women workers aged 65 and over and migrant workers.

Internationally, Abe is also lauded for agreeing free trade deals, including one with the EU, as well as a free trade agreement with the US, Australia and 11 other Pacific Rim countries. It is currently negotiating a post-Brexit free trade deal with the UK to increase the UK trade to Japan by about £15bn a year.

A Pew Research Survey showed that while Japanese people feel upbeat about their country’s economic situation, many are still worried about the future — particularly the youth and middle-aged working professionals.

The 65-year-old will remain as PM until a successor is appointed. The Nikkei 225 Index (^N225) closed down 1.4% on Friday after the news of his resignation.