'Abenomics' scheme to save Japan's economy

Country’s leader gives his name to an ambitious plan to end 15 years of deflation and recession

Tokyo

They call it Abenomics, a “Big Government” plan named after Japan’s Lazarus-like Prime Minister, who has returned from the political dead to fix his country’s broken economic engine.

Yesterday, Shinzo Abe’s most ambitious bid to pull the world’s third-largest economy out of its long slide was unveiled: a Bank of Japan (BoJ) scheme to expand the country’s money supply by a staggering ¥60 trillion to ¥70trn (£415bn to £484bn) a year.

The plan is one of the biggest gambles in modern politics. If it works,  Mr Abe and the new BoJ governor, Haruhiko Kuroda, will go down in history as the men who finally ended  15 years of corrosive deflation and serial recessions. Failure will send Japan’s public debt, already the worst in the developed world, spiralling even higher. Deflation means businesses do not invest and consumers do not spend, trapping the economy in a doomed cycle, said Mr Abe this week in a primer speech for the BoJ announcement.

“If prices don’t go up, wages don’t go up. If people believe prices will be higher six months from now, then they will believe it’s best to buy now rather than later,” he said.

The Prime Minister handpicked  Mr Kuroda after widespread criticism that Japan’s central bank had not done enough to end this deflation. Yesterday the governor in effect pledged to soak the Japanese economy in money, doubling its inflation target to 2 per cent in the next two years.

“The previous approach of incremental easing wasn’t enough,”  Mr Kuroda said. “This time, we took all necessary steps to achieve the target.”

He and Mr Abe are betting that this shock treatment will trigger a new cycle of corporate investment and economic growth. But it is very risky because it commits the bank to buying more debt – an extra ¥50trn in long-term government bonds per year. Many investors say Japan’s public debt stock of around $14trn (£9.2trn) a year is already unsustainable.

Mr Abe returned to power for a second time in December armed with what he called three policy “arrows” – fiscal, monetary and reform for national growth – to fire into Japan’s anaemic economy.

An eye-popping ¥10trn fiscal stimulus package has cheered up Japan’s huge construction sector. His verbal bludgeoning of the yen has helped manufacturers and led to higher share prices. The stock market has fattened by more than 40 per cent since November, creating a rise in personal wealth but little tangible signs of wider economic recovery. 

The first BoJ survey of business sentiment under the Prime Minister’s watch, released this week, showed the mood improving among manufacturers for the first time in three quarters.  But the survey found a majority of companies still pessimistic about the future and reluctant to increase capital spending. In February, 80 per cent of companies surveyed by Reuters said they plan to keep wages static or cut them. Corporate reluctance to invest or hike wages could damage the government’s plans to reinflate the economy.

That cautious sentiment is unlikely to improve till a general election in July. The election is expected to see Mr Abe’s Liberal Democrats (LDP) take control of both houses of parliament. If he wins, he has promised to take Japan into negotiations for an ambitious pan-Asia free trade pact called the Trans Pacific Partnership. Farmers, a key LDP voting block, are digging in for a fight against the pact, along with many lawmakers in the party itself.

Mr Abe’s policy of talking down the yen, which has lost 20 per cent against the US dollar in six months, risks igniting a currency war before then.

In the meantime, all eyes will be on whether Mr Kuroda can hit his  2 per cent target without creating too much collateral damage. “I don’t anticipate big side-effects from the policies we’ve decided,” he said yesterday. Time will tell.

Start your day with The Independent, sign up for daily news emails
Life and Style
love + sex
Life and Style
Tikka Masala has been overtaken by Jalfrezi as the nation's most popular curry
food + drink
News
people
Voices
A propaganda video shows Isis forces near Tikrit
voicesAdam Walker: The Koran has violent passages, but it also has others that explicitly tells us how to interpret them
ebooks
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Graduate Application Support Analyst

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Reach Volunteering: External Finance Trustee Needed!

Voluntary post, reasonable expenses reimbursed: Reach Volunteering: Would you ...

Christine McCleave: FP&A Analyst

£36,000 - £40,000: Christine McCleave: Are you looking for a new opportunity a...

Recruitment Genius: Sales Executive - OTE £40,000

£15000 - £18000 per annum: Recruitment Genius: This is a great opportunity for...

Day In a Page

Syrian conflict is the world's first 'climate change war', say scientists, but it won't be the last one

Climate change key in Syrian conflict

And it will trigger more war in future
How I outwitted the Gestapo

How I outwitted the Gestapo

My life as a Jew in wartime Berlin
The nation's favourite animal revealed

The nation's favourite animal revealed

Women like cuddly creatures whilst men like creepy-crawlies
Is this the way to get young people to vote?

Getting young people to vote

From #VOTESELFISH to Bite the Ballot
Poldark star Heida Reed: 'I don't think a single bodice gets ripped'

Poldark star Heida Reed

'I don't think a single bodice gets ripped'
The difference between America and Israel? There isn’t one

The difference between America and Israel? There isn’t one

Netanyahu knows he can get away with anything in America, says Robert Fisk
Families clubbing together to build their own affordable accommodation

Do It Yourself approach to securing a new house

Community land trusts marking a new trend for taking the initiative away from developers
Head of WWF UK: We didn’t send Cameron to the Arctic to see green ideas freeze

David Nussbaum: We didn’t send Cameron to the Arctic to see green ideas freeze

The head of WWF UK remains sanguine despite the Government’s failure to live up to its pledges on the environment
Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Set in a mythologised 5th-century Britain, ‘The Buried Giant’ is a strange beast
With money, corruption and drugs, this monk fears Buddhism in Thailand is a ‘poisoned fruit’

Money, corruption and drugs

The monk who fears Buddhism in Thailand is a ‘poisoned fruit’
America's first slavery museum established at Django Unchained plantation - 150 years after slavery outlawed

150 years after it was outlawed...

... America's first slavery museum is established in Louisiana
Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

The first 'American Idol' winner on how she manages to remain her own woman – Jane Austen fascination and all
Tony Oursler on exploring our uneasy relationship with technology with his new show

You won't believe your eyes

Tony Oursler's new show explores our uneasy relationship with technology. He's one of a growing number of artists with that preoccupation
Ian Herbert: Peter Moores must go. He should never have been brought back to fail again

Moores must go. He should never have been brought back to fail again

The England coach leaves players to find solutions - which makes you wonder where he adds value, says Ian Herbert
War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

The battle for Mosul will unleash 'a million refugees'

Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn