Abe’s Arrows

Japenese Prime Minister targets deflation and stagnant growth

KAZUHIRO NOGI / AFP / Getty Images
Tokyo’s Nikkei recently hit 22,000 points as markets cheered the re-election of Shinzō Abe. In Japan, red indicates an increase and green a decrease.

Japanese prime minister Shinzō Abe knew very well what his biggest challenge would be when he entered office in 2012: the economy of Japan has had stagnant growth and continuing deflation for the past two decades. His plan, nicknamed Abenomics, consists of three ideas, which he calls “arrows.” Abe’s first arrow is to increase the money supply by printing ¥60 to 70 trillion, or $530 to 600 billion, in addition to lowering interest rates. His second arrow is to increase government spending to spur demand. Finally, his third arrow deals with reforming regulations that have inhibited Japanese industries from being globally competitive. One example is the ability to fire ineffective workers, something that has been historically difficult. His third arrow also proposes ideas such as modernizing the agricultural sector as well as reforms in the pharmaceutical and utility industries.

Two weeks ago, Prime Minister Abe won by a landslide in the Japanese election, which puts him in power until 2021. The result came as no surprise, as his three arrows seem to have been working. According to the Pew Research Center, the overall optimism on the Japanese economy has exceeded its previous highest level, which occurred in the early 2000’s (during the dot-com boom). Under Prime Minister Abe, much of the growth has stemmed from small and mid-sized businesses, which are run mostly by the middle class. In fact, the Japanese economy has grown for the last six financial quarters. This growth leads experts to proclaim that Abenomics is working.

Many of Japan’s larger businesses will benefit from this election, such as large exporters, defense contractors, nuclear power providers, and casinos. One of the country’s largest exporters is Toyota, who since the fall in the value of the yen, which started in 2011, has benefited greatly. Fanuc, Canon, and Nintendo have also profited off this because many of their sales come from overseas. In the defense sector, Mitsubishi, Kawasaki, Toshiba, and IHI have been invested in by the Japanese government. The decision to invest in parts of these companies is in response to the threat of North Korean nuclear weapons. Prime Minister Abe campaigned on the strong reputation his administration has earned from his response to North Korea’s missile tests and has promised to open up more nuclear reactors. Mitsubishi, who also supplies the defense industry, is one of the largest suppliers of nuclear power, which will make it easier for Prime Minister Abe to implement that plan. 

Nonetheless, Prime Minister Abe is experiencing some setbacks, and certain sectors of the economy might encounter small problems in the future. To further grow the economy, he has agreed to allow the development of casino resorts. However, this idea has proved to be unpopular with many voters, and political opposition has slowed those plans. There may not even be any casinos open until 2023. During his election campaign, Prime Minister Abe proposed the idea of decreasing the sales tax from 10% to 8%, a move that is intended to increase consumer spending. However, to pay for these cuts many retailers such as Aeon, Seven & i, and Kirin might expect to see higher taxes. The tobacco industry will also see a rise in taxes due to the popularity of electronic cigarettes.  

The Japanese economy has improved substantially under Prime Minister Abe, which is reflected in the Nikkei 225 Stock Average, where stocks have been at two-decade highs and a 15-day winning streak, its longest ever, recently ended. 

We will have to see what the next four years have in store for Japan’s economy, the second largest in Asia. Will Abenomics continue to work, or is Japan destined to return to stagnant growth and deflation?

RELATED: Japan Shinzō Abe