Abenomics: Success Lies In The Fourth Arrow

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Distinguished economists Willem Buiter and Ebrahim Rahbari present their view on four economic challenges confronting Japan and the solutions to these problems.

What is Abenomics

‘Abenomics’ is the name given to a suite of measures introduced by Japanese Prime Minister Shinzo Abe after his December 2012 re-election to the post he last held in 2007. His aim was to revive the sluggish economy with “three arrows”: a massive fiscal stimulus, more aggressive monetary easing from the Bank of Japan, and structural reforms to boost Japan’s competitiveness. (Source: Financial Times Lexicon)

Japan’s economic challenge 1: Deflation

Abenomics challenge1

Chronic deflation has assailed the Japanese economy since the 1990s. Citi estimate that deflation became entrenched in the economy around the year 2000, based on CPI data.

The economic leadership was tasked with the challenge of ending deflation and in fact getting inflation to rise to at least 2%.

Economic challenge 2: Poor growth

Abenomics challenge2

Japan has suffered from sub-normal growth over its ‘lost decades’ as well as more recently due to the financial crisis, as clear from the graph below.

Abenomics  low-growth-graph

There are unfavorable repercussions of low growth such as rising unemployment, as well as declining earnings.

Economic challenge 3: Aging population

Abenomics  challenge3

Japan’s demographic profile is worsening steadily due to a rapidly aging population that is also declining in numbers since 2011. This could adversely affect the long-term prospects for growth: “There are plenty of reasons to expect a falling population and a rising dependency ratio to be associated with declining output per capita.”

Economic challenge 4: Deteriorating external position

Abenomics  challenge4

First, the authors point out that Japan’s external terms have deteriorated sharply post-1995, and this is reflected in the performance of the index of exported commodities prices to imported commodities (the white line in the above graph). Secondly, external surpluses, both trade and current, have turned down significantly.

In a related development, China’s economic rise became a sore point of comparison, not least because it overtook Japan to become the #2 economy in the world.

The solutions presented by Abenomics

These solutions, termed ‘arrows’ by the authors, and ‘bazookas’ by the Japanese Finance Minister, are the following:

  • Decisive monetary easing. Large scale asset purchases of a massive magnitude. (Arrow already fired, with promise of more if required)
  • Temporary fiscal stimulus to stimulate infrastructural spending. (Arrow fired, Y10.3trn under implementation)
  • Structural reforms to boost efficiency and factor productivity. A package of supply side measures to boost output growth – these could meet up with some political resistance, but the chances of implementation are much better this time around
  • Measures to restore fiscal-financial stability, such as graded increases in consumption tax and other fiscal measures such as cuts in public spending, to be fired when circumstances so demand

Note: The Abenomics as per the Japanese government actually envisage only the first three arrows, but the authors believe the fourth arrow exists, unsaid, and is perhaps not mentioned by oversight.


The first two arrows will likely be successful because, “a sufficient dose of helicopter money can always boost effective demand and raise the inflation rate by the desired amounts.” The third arrow, traditionally fraught with political tension, may succeed given the economic compulsions and Prime Minister Abe’s solid political mandate. The last arrow, to be used intermittently, may depend for launch on market conditions.

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