--By Sanjeev Sharma

 

After more than two decades of recession, the world's once industrial and innovation power hub, Japan is gradually registering economic growth. The effective use of 'Abenomics' - a Japanese version of Keynesian economic model - is helping the country to re-achieve its lost glory. The proactive interventionist approach of Prime Minister Shinzo Abe who has been serving Japan since December, 2012 has started to bear fruits as the country is observing an end in falling price levels or deflation, rising trade competitiveness and above all - achieving economic growth. 

 

Japan witnessed substantial economic stagnation starting from the late 80's that led to what is commonly known as 'lost decades.' The enormous asset price bubble burst and stock market crash, coupled with rising deflation and the country's unique demographics - shrinking workforce and a rapidly aeging population - led to the painful contraction of Japan's Gross domestic product (GDP). After having registered an average annual real GDP growth of 4.6 per cent in the 'bubble years' (1981-90), Japan saw its GDP sliding down to 0.7 per cent in between 1993-99. Similarly, a meager GDP growth averaging 1.5 per cent was seen in between 2000-07 followed by a contraction of 0.2 per cent in 2008-12, in the successive years after the global financial crisis. 

 

Japanese companies suffered much in the last two decades. The stronger Yen not only took away their income and profits but also significantly eroded business competitiveness - in both domestic and international markets.  Japan's already fatigued  growth engine came to a grinding halt in March, 2011 following the natural and nuclear disasters resulting in massive disruption in supply chains, energy crisis, interruption of production activities along with peaking value of Yen. 

 

In this precarious scenario, Prime Minister Abe's decision to effectively introduce Abenomics proved most successful economic policy Japan's governments have adopted in the past two decades. The "three arrow" policy - architected by Kochi Hamada, a professor emeritus at the Yale University who is also premiere Abe's chief economic advisor - incorporates an ultra-loose monetary policy, expansive fiscal policy and structural reforms. The "first arrow", fired immediately after PM Abe took over the office targeting to bring down the prolonged deflation and aims to achieve consumer inflation of 2 per cent, seems to be hitting the target. For this, the Bank of Japan (BOJ) has been engaged in extensive quantitative easing through bond purchases. 

 

The monetary stimulus resulted in Japan observing over 1 per cent rise in consumer price levels in 2013. The consumer confidence also grew substantially over the period signaling that Japanese consumers are finally opening their wallets. The ultra-loose monetary policy supported by zero interest rates and massive liquidity pumping into the country's financial system helped consumers and businesses to access cheap loans easily. The strong Yen, a cause of headache for policymakers and businesses, also declined by over 40 per cent last year. This resulted in the rise of income of Japanese exporters as their products became more competitive in international markets. The positive impact was immediately reflected in the Japanese stock market. The Nikkei index of leading shares gained a whopping 57 per cent in 2013, the biggest annual rise in the index since 1972.  Nevertheless, the move triggered an outcry among economists as they fear that Japan government's direct intervention in the forex market to bring down the value of currency would set an unwarranted precedence elsewhere, worsening the international 'currency war'. Apart from this, the independent status of Japan's central bank is also often being questioned as many experts opine that BOJ is more and more becoming a part of the executive body. 

 

The "second arrow" of Abenomics or the fiscal stimulus policy is another major weapon that is inflicting positive impacts on the ailing Japanese economy. The policy which is accompanied by fiscal consolidation plan includes a package worth over USD 100 billion targeting large-scale public investments in infrastructures along with other governmental works. 

 

 

The "second arrow", drawn parallel to the first arrow is boosting Japan's economic growth with the rise in government expenditures. Towards the end of second quarter in 2013, the country recorded an economic growth of 4 per cent, nothing of such scale seen over the past twenty-year period. Nevertheless, the policy has faced challenges as it involves significant increase in short-term government spending in order to achieve a permanent tax hike. As many analysts put it, without achieving sustainable economic growth, the permanent tax hike wouldn't be sustainable as long as confidence among consumers and businesses remain shaky.  Japan's high debt to GDP ratio (which is the highest among the developed economies) and rising fiscal deficits have also raised concerns. 

 

The impact of the "third arrow" or the structural reform policy is yet to be seen. The policy targets to achieve higher long-term economic growth by boosting competitiveness of Japanese companies and institutions. Late last year Abe announced plans to the latest tranche of Japan's growth strategy aiming to triple infrastructure exports and double farm exports by 2020 alongside boosting private investments. Abe set an ambitious target for an annual domestic private sector investment of 70 trillion Yen (USD 687 billion). Meanwhile, doubts have been cast on the effective implementation of "third arrow" as analysts argue that major challenges remain for the Japanese private sector, which is heavily pinned down from the country's high corporate taxes and rigid employment system. However, the Japanese Premier sounds optimistic and stands firm to his plans. "What is important about the third arrow is to convince those who resist the steps I am taking and to make them realize that what I have been doing is correct, and by so doing, to engage in structural reform… And I hope that this will create opportunities for new investments and businesses in the medical sector, which in turn, will lead to the increased health of our citizens," he told CNN's Fareed Jakaria in an interview in January. 

 

Along with the three arrows, the Japanese economy seems to be increasingly moving forward to capitalize on the Tokyo 2020 Summer Olympics what analysts are calling the "fourth arrow" of Abenomics. According to them, the successful bid to host the Olympic events has provided an opportunity to the country for solving its debt sustainability problem. Professor Takatoshi Ito, the dean of the University of Tokyo's Graduate School of Public Policy in a blog post of Asian Development Bank Institute writes, "A month before the 2000 Sydney Olympic Games, Australia increased its consumption tax from zero to 10 per cent. This enabled the country to raise tax revenue and offset the construction and tourist booms arising from hosting the games. Japan should do the same. Between 2015 and 2020, Japan could gradually increase its consumption tax from 10 per cent to 20 per cent. This would turn the Japanese government’s budget deficit into a surplus and begin the process of reducing its huge public debt. It would also help the country mitigate the investment boom before the 2020 Tokyo Olympic Games and prepare for the post-Olympics downturn."