(VOVworld) – The International Monetary Fund (IMF) held a seminar on Japanese Prime Minister Shinzo Abe’s economic policy, dubbed Abenomics, in Tokyo on Tuesday. After nearly two decades of deflation, Japan’s economy, once the second biggest in the world, has embarked on a vigorous reform and Abenomics is expected to bring Japan’s economy out of the woods.
Abenomics is an ambitious reform plan initiated by Shinzo Abe following his reelection. Unlike previous economic policies, Abenomics is considered comprehensive in its covering of 3 dimensions namely: higher public spending, an easy going monetary policy, and growth stimulus packages. This plan to revive the sluggish economy, Abe says, will allow Japan to remain strong in the international arena. Abenomics has caught the world’s attention because, if it proves effective, it will not only benefit Japan but also stimulate global growth.
Contextual background
Since the real estate and securities bubbles burst in the early 1990s, Japanese companies have begun to reduce their debts and shift their production to other countries. Japanese consumers have had to curb spending because of stagnant salary growth. Japan’s GDP has not grown at all over the last 20 years. The economy was really crippled by a tsunami and nuclear disaster in 2011. In this context, to revive the economy with an aging population has been an extremely difficult task, causing a number of Prime Ministers to step down. Abe himself failed in 2006 and his first term lasted just 12 months. If his Abenomics succeeds, it will guarantee that Japan’s 6th Prime Minister in 6 years will remain in power.
Initial effects
It’s difficult to foresee the effects of Abenomics but obviously it has given the people hope for a strong economic revival. A public poll by the Kyodo news agency indicated that 65% of respondents think Abenomics will succeed. This faith has spread to the securities market, which has seen record rises despite gloomy regional and global situations. The Topix index of Japan’s securities market has increased 61% since Abe was reelected in December, 2012. Monetary loosening and increased public spending have helped to devalue the Yen on the foreign exchange market. For the first time in 4 years, the USD surpassed the ceiling of 100 Yen, up 30% from 2012. The competitive exchange rate of the Yen has made it easier to export automobiles and electronic products. The Japanese government has approved budget spending of more than 900 billion USD for the 2013 fiscal year. Prime Minister Abe has promised to boost investment in private businesses and formulate a new economic development plan over the next 5 years. The government has set a number of specific targets for the next 3 years. These include increasing investment for businesses by 10% to 700 billion USD and income per capita by another 15,000 USD from nearly 39,000USD over the next 10 years. Efforts will also be made to reduce corporate income tax and renovate the judicial system.
Side effects
Economists say, however, that any reform plan has its pros and cons. According to the IMF, Abenomics is facing many risks including higher public spending and huge public debt, which is twice Japan’s annual gross domestic product, and higher inflation that can lead to increased interest rates. The IMF, however, remains optimistic that the world’s third biggest economy will continue to revive thanks to large-scale public projects and increasing demand abroad. Steady growth may help the Abe government increase tax revenues and reach its targeted growth rate of 2.5% in the 2013 fiscal year. What Abe has been doing gives the public hope that Japan’s economy is on the path to a full recovery.