Abenomics: The objectives and the risks

An investor looking at a stock market board in Japan Japanese stocks have surged recently on hopes that Abenomics will revive growth

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Shinzo Abe has a mission - that of reviving the Japanese economy, which has been stagnant for two decades.

And in his quest to do so Mr Abe, who won a return to office as Japan's prime minister in December, has launched one of the most aggressive policy moves in Japan's history.

Such has been the scale of his plan, that observers have even named it after him, calling it "Abenomics".

It is based on three key pillars - the "three arrows" of monetary policy, fiscal stimulus and structural reforms - to ensure long-term sustainable growth in the world's third-largest economy,

And with initial surveys indicating a big victory for the ruling coalition - led by his party - in the weekend's upper house elections, he is expected to be able to push his plans with even more assertiveness.

While the markets, investors and Japanese exporters have cheered his moves so far, some have warned of the risks and threats posed by them in the long run.

People walking along a shopping street in Japan Getting consumers and businesses to spend more is key to the success of Abenomics

Monetary policy

The move The objective The risks
  • One of the first steps that Mr Abe took was to get Japan's central Bank, the Bank of Japan, to double its inflation target to 2%. He has even suggested that the bank print "unlimited yen" to help achieve its inflation target.
  • Earlier this year, the Bank of Japan unveiled a massive stimulus measure in an attempt to boost growth and meet its inflation target.
  • The central bank said it would increase its purchase of government bonds by 50 trillion yen ($500bn; £330bn) per year, the equivalent of about 10% of Japan's annual gross domestic product (GDP).
  • Japan has been battling deflation for more than a decade. Falling prices depress spending as consumers and companies put off purchases in the hope of getting a cheaper deal later on.
  • Policymakers hope that with more money sloshing about in the system, and with low borrowing costs, consumers and businesses will raise their spending, triggering rising prices.
  • The move has also resulted in the yen dipping nearly 25% against the US dollar since November, making Japanese goods cheaper to foreign buyers and boosting profits of exporters. The hope is that as profits rise, firms will spend more on their facilities and increase worker salaries.
  • Some analysts say that if the measures work and prices start to rise, then eventually interest rates will too. This would see the government's interest payments go up substantially.
  • In a worst-case scenario, the government may have to raise more money to meet those payments, triggering a vicious cycle of rising rates and government austerity.
  • There's a flip side to the weak yen - cost hikes for imports, in particular energy, which Japan is having to import more of after its nuclear reactors were shut following the 2011 tsunami and earthquake. Japanese consumers and business may have to eventually bear these additional costs.
Pedestrians crossing busy street in Tokyo Mr Abe plans to boost infrastructure spending to spur a fresh wave of economic growth

Fiscal Stimulus

The move The objective The risks
  • The second part of Abenomics revolves around boosting government spending to help spur growth.
  • In just three months, from January to April, Mr Abe said that his government would spend an extra $114bn (£75bn).
  • He has said the extra funds will be used to fix schools and roads and reinforce earthquake defences. He has also said that the government will make funds available for scientific research and renewable energy.
  • The stagnant growth in Japan's economy, coupled with years of deflation, has resulted in companies and consumers holding back on spending, which perpetuates the weak growth.
  • The idea is that as the government boosts its own spending, that will help spur a fresh wave of economic growth. Policymakers are hoping that this will inspire confidence among businesses and consumers, and trigger them to start spending as well.
  • Critics say that Japan has been doing this for many years already and it has not yielded the desired result.
  • They warn that the increased spending will further undermine Japan's finances. Japan's public debt, which stands close to 240% of its GDP, is already the highest among industrialised nations.
  • The biggest fear is that if the increased spending fails to trigger economic growth, Japan may find it even tougher to rein in its debt levels.
Women working on a farm in Japan Mr Abe has said that he wants to introduce reforms in key sectors such as agriculture

Structural reforms

The move The objective The risks
  • The "third arrow" in Mr Abe's grand plan is the structural reform of key sectors such as agriculture, healthcare and energy.
  • Though he has yet to detail his plans for many of these sectors, his government has already taken some first steps.
  • Earlier this year, Japan said that it wanted to join the talks on the Trans-Pacific Partnership (TPP), a free trade agreement being negotiated among 11 countries.
  • The agreement aims to foster closer ties and boost trade between member countries.
  • The TPP trade pact is expected to substantially reduce tariffs between member countries, and even eliminate them in some cases, opening up trade in goods and services.
  • It is also expected to boost investment flows between the countries, further supporting their economic growth.
  • The countries involved in the talks have a combined population of more than 650 million people. A free trade agreement could turn this into a potential single market for many businesses in Japan.
  • The biggest risk is to agriculture. If and when the TPP is agreed, it will substantially reduce tariffs on farm products.
  • A concern is that this may lower the incomes of Japan's many ageing farmers, who would then rely more on government support, adding to the burden on regional government finances.
  • Others say falling food prices may reduce the cost of living, especially in urban areas, meaning consumers have extra cash to spend. But some fear that it will widen the gap between the rich and poor in Japan and create regional disparities.

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