When he stepped down in 2020, former Japanese Prime Minister Shinzo Abe was asked what he thought were his legacies. “We were able to end 20 years of deflation with the three arrows of Abenomics,” Abe replied. Well, ‘Abenomics’, certainly, is the greatest legacy of Abe, whatever little success it might have produced.

Japan’s economic troubles date back to the asset price bubble that burst in the early 1990s. Japan’s malady of prolonged economic stagnation might be closely related to the country’s traditional ‘deflationary mindset’ by which companies and households hold off on spending on expectation that low growth and wages persist for long. In 2015, the Financial Times observed that Japan “...suffers from an ageing population, persistent deflation, and knotty structural problems in its labour market and energy supply. Its fiscal position is awe-inspiringly bad...”

Different prescriptions were suggested since the bubble burst and Paul Krugman’s 1998 paper titled ‘Japan’s Trap’ (https://web.mit.edu/krugman/www/japtrap.html) deserves special attention. “Japan is an economy that is almost certainly producing well below its productive capacity — that is, the immediate problem facing Japan is one of demand, not supply,” Krugman described Japan’s economic malaise.

The three arrows

He had three main recommendations for the Japanese economy: “structural reform, fiscal expansion, and unconventional monetary policy.” Following Krugman’s suggestions, Japan expanded the money supply which, despite a short-term economic recovery, couldn’t stop the deflation.

In late 2012, Abe became prime minister for the second time. To reignite the economy after years of subpar growth and falling prices, with the world still in shock of the Lehman crisis, Abe tried something coherent. He devised a three-pronged strategy, widely known as the three arrows of Abenomics.

These are: large-scale monetary easing — the introduction of a 2 per cent inflation target and a programme of quantitative and qualitative easing (QQE); fiscal spending — large-scale increases in public spending; and structural reforms — equated to a range of measures including regulatory reform, corporate governance reform, and the reduction of corporate taxes.

The Economist explained Abenomics as a “mix of reflation, government spending, and a growth strategy designed to jolt the economy out of suspended animation that has gripped it for more than two decades.” Well, if we look at it carefully, the three arrows of Abenomics might not be way different from Krugman’s suggestion of 1998.

Within months of its introduction, Abenomics showed some quick short-term positive effects — wealthier Japanese shoppers were spending more after a decade-and-a-half of self-imposed austerity, giving retailers a boost. Some experts even termed it Abenomics’ kimono effect.

In fact, Abenomics saw some long-term successes in employment — Japan’s unemployment rate, which was at 4.4 per cent in May 2012, came down to 2.6 per cent in May 2022.

Following the introduction of Abenomics, the Bank of Japan (BOJ) set a 2 per cent inflation target in two years. In 2013, BOJ’s Governor Haruhiko Kuroda deployed his ‘bazooka’ asset-buying programme to shock the public out of a deflationary mindset by pledging to double the pace of money printing. Initially, of course, it helped weaken the yen, giving exporters windfall profits that trickled down to wages and new jobs. Not by much, though.

After five years of aggressive monetary easing, the inflation rate remained below 1 per cent and some negative side-effects were also seen. As inflation kept missing its target, in 2018, the BOJ stopped issuing quarterly assessments of the expected timeframe for hitting 2 per cent inflation. Subsequently, after years of shock-and-awe monetary stimulus, BOJ has now quietly dismantled radical policies introduced by Governor Kuroda.

In fact, when in 2016 Shinzo Abe postponed the planned tax hike, it was a tacit admission that Abenomics was a colossal failure. Then, Japan’s potential growth rate slid near-zero just before Covid from around 1 per cent before Abenomics began, according to BOJ estimates.

Structural reform — the third arrow of Abenomics — has proved elusive, and is the glaring failure of Abenomics. Deflation in the Japanese economy proved stubborn. Also, the growth strategy suffered in 2019 from a sales tax hike and the Sino-American trade war. Then came the once-in-a-century pandemic that became instrumental to Japan’s biggest-ever economic slump. The Covid also wiped out some short-term benefits brought by Abenomics, such as an inbound tourism boom, reflated growth, and rising job availability.

The fourth arrow?

Was there a hidden fourth arrow of Abenomics? In September 2013, Tokyo won the bid for the 2020 Olympics. “For 15 years, Japan has stagnated because of deflation and a recessionary trend. I am convinced we can accelerate growth in the economy if we all work toward the dream and goals we were just granted,” Abe said in Buenos Aires after the announcement.

And Tokyo 2020 Olympics was widely perceived as the fourth arrow for Abenomics by experts — Tokyo’s successful Olympic bid was expected to boost Japan’s economy. The travel industry was expected to attract millions of tourists to the Games and thereafter, the GDP was expected to enhance by 0.3 per cent, and economic impact of ¥3 trillion ($30 billion) from Olympics-related investment and spending was calculated, and 150,000 new jobs were expected to be created.

Some experts predicted an even better effect of the Olympics on the economy. However, the Covid-eclipsed delayed Olympics didn’t help the tourism and other Olympics-related stimuli at the expected level.

Importantly, Abe was flexible with his economic reforms. In 2015, he announced the ‘new three arrows’ of Abenomics, namely a strong economy that creates hope, support for child-raising that fosters dreams, and social security that gives citizens a sense of reassurance. It aimed to halt the decline in Japan’s birthrate and create a society that promotes women’s involvement in the workforce. Also, a concept known as Society 5.0 was introduced aimed at further digitalisation of Japan.

Overall, Abenomics surely wasn’t a sufficient push to dismantle the age-old rigid deflationary mindset of Japanese society. But, still, it was undoubtedly a valiant attempt and the highlight of Abe’s premiership. During his resignation from the prime minister’s post in 2020, Abe said: “There has been talk that Abenomics has been having a harmful impact, so I think the focal point will be on suggestions on how to make changes to it.”

That’s the enduring legacy of Shinzo Abe and his flexible Abenomics, for sure.

The writer is Professor of Statistics, Indian Statistical Institute, Kolkata