Opinion

All you wanted to know about

PARVATHA VARDHINI C | Updated on March 12, 2018 Published on December 29, 2014

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With Shinzo Abe re-elected Prime Minister of Japan in a snap poll last week, Abenomics is back in the news.

What is it?

After the economic boom of the 1980s, Japan faced a prolonged spell of deflation, weak consumer spending and low growth that stretched on for two decades. Until end 2012, attempts by successive governments to put the economy back on track did not meet with much success.

When Shinzo Abe was elected for a second term as Prime Minister in December 2012, he formulated the three arrows policy, using monetary easing, fiscal stimulus and structural reforms to boost growth. This was dubbed Abenomics.

Why is it important?

These tools are not new, with governments from the US to Europe to India using a combination of monetary and fiscal measures to pull their economies out of a slowdown. But Abenomics stands out for the size and scale of these measures. It was necessary because, prior to Abe’s three arrows, despite keeping interest rates at zero per cent for many years and having attempted quantitative easing (QE) on a modest scale, Japan’s deflationary situation persisted and demand did not revive.

Abe tried to reverse this through a massive QE where the central bank bought up government debt and other asset-backed securities valued at $ 1.4 trillion to infuse a flood of liquidity into the economy. The easy monetary policies were intended to bring down exchange rates, trigger a rebound in production, increase corporate earnings, push up stock prices and lead to higher wages, all this boosting consumer spending.

To create employment and spur growth, Abe also ordered a $116 billion stimulus package for infrastructure projects.

These measures resulted in inflation moving up, the yen depreciating, stock markets rallying and growth coming back to Japan.

But wages did not increase much and a consumption tax increase in April 2014 to boost government finances saw consumers tighten purse strings again, leading to a recession once again.

Why should I care?

For one, with Japan being the world’s third largest economy after US and China, its return to growth is critical to the struggling global economy. Two, with the US downing shutters on its QE3 programme, Japan’s expansion of its QE announced in end- October 2014 is expected to keep the money flowing into emerging markets like India.

Ultra low interest rates in Japan have always been good for global markets because of the ‘carry trade’, where investors borrow money in the Japanese Yen and invest it in high yielding markets like India.

A further depreciation of the yen against the rupee could also make import of components cheaper for the many Japanese auto and electronics companies that have set up shop in India.

The bottom line

While Abe’s re-election is a sign that the Japanese have kept faith in Abenomics, its real success lies in the third arrow – the ability to implement reforms such as liberalising industry, pruning taxes and reforming labour laws. Sounds remarkably like what we want from Modinomics, isn’t it?

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Published on December 29, 2014
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