“Abenomics,” the nickname for the range of largely interventionist economic policies under Shinzo Abe, has been among the more controversial economic policies in recent years. The centerpiece of Abenomics has been the dramatic devaluation of the Japanese yen through massive quantitative easing efforts, which have caused the yen to drop from about 80 yen per dollar to about 100 yen per dollar. Now, economic reports are starting to show that Abenomics may in fact be working.

Abenomics

The Nikkea Stock exchange has broken 15,000 for the first time in five years, and the government now expects exports and corporate earnings to rise in the coming months. This is improving confidence in local markets and the economic situation is causing the government to feel optimistic. As corporate profits increase and confidence continues to build momentum, companies may pick up investment and began to hire more people.

Economic growth hit an annualized 3.5 percent through the first quarter of 2012. This is a huge improvement over 2012. During the last quarter, Japan recorded a growth rate of only 1 percent. And during the two proceeding quarters, the economy actually contracted. While a growth rate of 3.5 percent may not seem like much, it represents a huge improvement over previous months.

The unemployment rate is also slowly trending downwards, having declined from 4.6 percent in mid 2012 to about 4.1 percent now. Most economists consider an unemployment rate of around 4 percent to constitute full employment, so these numbers are quite encouraging. Still, wages have been stagnant in Japan for years and so far no major improvements in wages have been recorded. This is a serious problem given that private sector wages actually fell in all but one year from 2000 to 2010.

Still, while there are many positives to take from the early efforts of Abenomics, it is coming at a high cost. The 2013/14 fiscal year is coming with a $1.02 trillion dollar price tag, and nearly 50 percent of every dollar the government spends will be borrowed. Borrowing is at an all-time high, though fortunately interest rates are remaining low.

The government can fuel this spending through quantitative easing—however, if the central bank is not careful, they could cause people to lose faith in the yen. Further, as the yen has declined, Japan has come under increasing pressure from foreign governments to stop devaluing the currency, or else risk a currency/trade war. As this pressure ramps up, the government will likely be forced to back off of its quantitative easing strategy.

Further, the economic recovery seems to be dependent on quantitative easing. For example, a devaluing yen encourages people to buy now, as 10,000 yen today will buy a lot more today than in a few months. And consumer spending has been a major driver in Japan’s economic recovery. As  Japan comes under increasing pressure to cut back on Q.E., the nation may not be able to sustain its current recovery.

Abenomics may prove to be a great short-term spark, but unless the Japanese government can figure out how to drive growth without quantitative easing, the recovery may prove short-lived. Further, the massive amount of debt that is being accrued under the current strategy may prove to be too great for future generations to repay.

With Japan’s aging population and slow birthrate, in combination with a stagnant job market, there is a serious risk that there won’t be enough people earning enough money to meet future obligations.