For the first time in two years, The Bank of Japan initiated changes to its monetary policy. In the article published July 2018, “Bank of Japan tweaks ultraloose monetary policy in bid for flexibility”, the author Cory Baird brings to attention the changes in the central bank’s monetary policy specifically their aim to keep interest rates low and asset purchases (otherwise known as quantitative easing) flexible (Baird, 2018). Japan has long been fighting economic stagnation and problems such as low wage growth, slow gross domestic product (GDP) growth, labour shortage and deflation etc. These flexible monetary policy changes under Abenomics come as an economic stimulus where government is encouraging more activity in the economy by introducing or tweaking fiscal or monetary policies to help stimulate the economy. This paper will take a closer look at how Japan’s economy crashed after years of enjoying strong economic growth, the two-decade long stagnation, the problems it faced and actions the government have been undertaking to stablise the economy.
As seen in the graph below, Japan’s GDP had been growing steadily pre-World War II thanks to policies made during that time but with the onset of World War II, the whole economy took a turn for the worse – undoing the progress it took years to achieve. (https://www.nippon.com/en/in-depth/a04003/)
Image result for japan gdp from 1945
Japan rose from the economic and physical devastation of World War II within a quick span of less than two decades with the per capita GDP rising at an average rate of 7.1% per annum from 1945-1956. The Japan economy was growing in leaps and bounds much to the envy of many other countries and by 1991, the per capita GDP was 85% that of US. After the recovery period post-World War II came the growth period. Many private companies borrowed heavily from the to expend their businesses and despite government advice to merge their different companies together, they opt to separately produce their own products. It was also during these few years after the war where now famous corporations like Sony and Honda started. The Japanese focused on new innovations, technology and exporting their goods overseas. Japan was prospering, the Japanese were prospering, they were enjoying record-low interest rates, they were speculating on stocks and real estate not knowing that a dark cloud was looming around the corner. The speculations coupled with the low interest rates caused many to ’invest’ in the property market and thus creating a housing and asset price bubble. The housing and asset price bubble did not only affect the property market, it affected the whole economy causing hyperinflation. In the early 1990’s, the economic growth came to a screeching halt when the government, knowing that such bubble would not sustain, stepped in to do something about it. The Japanese Finance Ministry increased the interest rates overnight attempting to control the speculation. This move caused many to default on the loans that they took out for their speculative activities. From there, it quickly snowballed to a stock market crash which ultimately needed government bailouts. (https://www.thebalance.com/japan-s-lost-decade-brief-history-and-lessons-1979056) They say that majority of economic crisis is usually preceded by economic boom and in this case, Japan followed it to the letter.
Following the actions by the government to control the economic bubble, Japan spiraled downwards into what is now called the Lost Decade. The Lost Decade was a prolonged period where the whole Japan economy suffered low growth, high deflation, stock markets remained low and the property market stagnant. Different economists had different takes on what caused the problem, some blamed the Japanese propensity to save more than they spend, others blamed the aging population and yet others blamed the monetary policies and the central bank’s (‘Bank of Japan’) slow response to the bubble. The Japanese reacted to this crisis by saving even more money, from an average of 10% savings per household in the 1950’s it increased to more than 20% on an average per household by the 1970’s. (http://www.iun.edu/~hisdcl/h207_2002/jecontakeoff.htm) This propensity to save caused the aggregate demand to be affected negatively which led to deflation and caused the Japanese to control their spending even further. Ever since the Lost Decade, the Japan economy has never seen recovery of the economy to rival that of their economic growth in the 1980’s.
Abenomics was introduced under Abe Shinzo, the current Prime Minister of Japan since 2012. His policies consisted of ‘three arrows:
Aggressive Monetary Easing
Structural Reforms
Flexible Fiscal Policy
Abenomics primary goals were to reduce deflation and to improve the nation’s economic growth with the implementation of his aggressive ‘three arrows’. The aggressiveness of Abenomics is a step away from the past where other policy makers employ tamer measures to address the issues at hand.
The Japan government acknowledged that the countrJapan Inflation Ratey was suffering from deflation in 2001. (https://asia.nikkei.com/Economy/Japan-sees-new-phase-in-long-struggle-against-deflation2) As seen from the graph below, after a pick up in the inflation rate during the late 1990’s, the inflation rate changed to deflation at the turn of the century. While deflation might seem beneficial to a normal citizen, it holds deeper trouble if the deflationary period is over long periods of time. Deflation brings problems such as falling or stagnant wages, higher unemployment, lower spending by consumers leading to lower aggregate demand. An unconventional monetary policy was adopted in 2001 by the Bank of Japan to aid with the deflation. The unconventional monetary policy, also known as quantitative easing (QE) involved asset purchases by the central bank in the open market in aid of lowering interest rates and increasing the money supply. (https://www.investopedia.com/terms/q/quantitative-easing.asp) One of the first change to the monetary policy when Abe Shinzo took over was to increase the QE spending drastically. In 2013, they unveiled the plan to pump in $1.4 trillion to double the nation’s money supply through quantative easing. (https://www.theguardian.com/business/2013/apr/04/japan-quantitative-easing-70bn) Under this new plan, they would spend 7 trillion yen a month on government bonds with hopes to push up demand and prices. To put the amount into perspective, the US Federal Reserve was only spending $85 billion a month compared to the $70 billion the Bank of Japan was planning to spend.
The country has long been suffering from labour shortage due to a few contributing factors from an aging population to low birth rate to the patriarchal culture. The stressful society in Japan has been one of the main causes of suicide among the young people. Between 2016 – 2017, the suicide rate among youth was the highest since 1986. (https://edition.cnn.com/2018/11/05/health/japan-youth-suicide-intl/index.html) This too affects the labour market as there are fewer young people to join the workforce, fewer young people to get married and contribute to declining birth rate. Japanese lifespan have also been increasing over the years with the life expectancy at 83 as of 2016. https://data.worldbank.org/indicator/SP.DYN.LE00.IN?locations=JP The Japanese culture of the men being the breadwinner have also been a contributing factor to the labour shortage. The male dominated environment has made it challenging for women to jobs of a similar position, pay scale and benefits as their male counterparts. (https://chicagounbound.uchicago.edu/cgi/viewcontent.cgi?article=1034&context=international_immersion_program_papers)
Slow GDP Growth – when comparing the GDP between US and Japan, Japan’s GDP over the past 28 years shows that it has been fluctuating drastically.
Japan GDP
Aggressive Monetary Easing – early 2001, the Bank of Japan introduced an unconventional monetary policy – Quantitative Easing. (Moss, 2014) According to Ivestopedia, quantitative easing “is an unconventional monetary policy in which a central bank purchase government securities or other securities from the market in order to lower interest rates and increase the money supply.” https://www.investopedia.com/terms/q/quantitative-easing.asp
Abenomics have been met with mixed reactions from critics worldwide. Though the economy is still the third largest in the world (insert statistics), it falls short of the target (insert statistics) which Abe Shinzo promised when he stepped in as Prime Minister.
Moss, D 2014, A Concise Guide to Macro Economics, Harvard Business Review Press
https://www.japantimes.co.jp/news/2018/07/31/business/economy-business/bank-japan-adjust-ultra-loose-monetary-policy-lower-inflation-forecast/#.XBfOLVJ7Ech
https://www.japan.go.jp/abenomics/index.html
https://www.thebalance.com/japan-s-economy-recession-effect-on-u-s-and-world-3306007
https://www.investopedia.com/terms/a/abenomics.asp
https://chicagounbound.uchicago.edu/cgi/viewcontent.cgi?article=1034&context=international_immersion_program_papers
https://ig.ft.com/sites/numbers/economies/japan/