The election of Shinzo Abe as Japanese prime minister in December 2012 introduced the world to his vision for turning around the Japanese economy – an approach jovially referred to as ‘Abenomics’.
The strategy comprises of ‘three arrows’, which is a cultural reference for the Japanese to a well-known legend. This relates to a lord teaching his three sons a lesson about working together. He asks each of them to take an arrow and snap it, which they all do. He then tells them to take three arrows and try to snap them, which they can’t, thus showing that while one arrow can easily be broken, three cannot.
Prime minister Abe has used this to illustrate his plans for reform in Japan, with the three ‘arrows’ of monetary policy to tackle deflation, fiscal policy to reduce government debt and boost the economy and finally structural reform, particularly of the Japanese labour market.
Dan Carter, deputy manager of the Jupiter Japan Income fund, explains: “If we look at the main problems that exist in the Japanese market or economy, it is extremely low growth, you’ve got an awful lot of government debt, you’ve got a declining population – which is something that Abenomics can’t really tackle too much – and you’ve got a deflationary environment. Deflation is really the most significant thing. If deflation can be tackled and creeping inflation can be brought about then that solves quite a lot of Japan’s issues.”
The manager says that in the past previous politicians and governors of the Bank of Japan (BoJ) have appeared less concerned with deflation as in the short term it means government debt is cheap to service, but Mr Abe and new BoJ governor Haruhiko both see the end of deflation as being key to providing a stable and growing macroeconomic environment.
Mr Carter says: “The way they’re trying to beat it is with this bold monetary policy, which is essentially printing money to buy Japanese Government Bonds (JGBs). Basically what he’s [Mr Abe] said is ‘we’ve got a 2 per cent inflation target and we will do whatever is necessary to get there’. That is quite important because people are often second-guessing whether it will be enough. Some people have talked about it as unlimited QE, which in a way I suppose it is.”
Meanwhile, Abbas Owainati, economist for the multi-asset team at Old Mutual Global Investors, points out that under the fiscal stimulus arrow, Mr Abe’s government has rolled out ¥10.3trn (£68.9bn) of stimulus, or roughly 2.7 per cent of GDP since February.
However, it is the third arrow – the structural reform – that many see as the most important.
Mr Owainati says: “Implementation of this third arrow was always pending the Upper House vote. With control of both the Lower and Upper House it is expected that Mr Abe will pass his growth strategy. It had been anticipated that it would include an industrial revitalisation (such as labour reform and mobility). However, little was included on the key issues of the labour market. Encouraging workers to be more mobile and corporations to move staff within is insufficient.
