Abenomics

Japan suffered from the “lost two decades” from the early 1990s until 2012 when Abe Shinzo was elected as a new Prime Minster and he began to implement his ambitious economic recovery plan commonly known as “Abenomics”. Discuss the causes and consequences of the longest and most severe recession in Japanese history and the future of Abenomics.

Abstract

In the period between 1990 to 2012, Japan witnessed the most significant economic recession that took a tailspin on the stock exchange and real estate market. According to Nobel Laureate, Paul Krugman, Japan’s recession was primarily due to a liquidity trap that has interfered with the bank’s ability to apply monetary policies that aid in regulating interest rates. However, empirical studies have shown that Japan’s problems stem from other sources such as the aging population problem, banking behavior, fiscal policy, liquidity trap, and transfers from central Government to the Local Government. There are numerous resources that argue that the Japanese recession happened due to the growing vertical I.S. curve rather than the alleged liquidity trap. To date, massive loopholes still exist in the economy following the severe economic downturn that hit Japan in the period 1990-2012.  The recovery of the once modest economy was been set back by the March 2011 earthquakes and Tsunamis that struck Japan. With the country having the third-largest economy in the world, its economy is vulnerable to three main problems. Firstly the stagnant economic growth due to the structural problem in the 1990s is still deep-rooted in the system. However, critics forecast the possibility of the Abenomics strategy collapsing as the Government does not provide sufficient details of the progress of the initial steps to accomplishing the overall plan. After four years of single stimulus allocation and policy implementation, the country’s economy has moderately bloomed, inflation is below target, national’s debt and effects of structural reforms continue to prevail, and monetary easing remains a highly contentious issue. With the U.S. Federal Reserve continuously increasing their interest rates and abandon quantitative easing policies, it is uncertain what the future holds for the Japanese economy.

Keywords: Abenomics, Economic recession, Liquidity trap, monetary policy, Fiscal policy, Qualitative easing, Quantitative easing

Abenomics

Introduction

In the early 1990s, Japan experienced an economic slowdown that took a significant toll on the stock and the real estate market. The period leading to 2010, Japan suffered stagnant economic growth due to the weak economy that lasted for almost a decade. In the years 1995-2002, Japan’s annual average growth stood at 1.2% a relatively small compared to the G7 countries such as Canada with a gross index of 3.4%, the United Kingdom 2.7%, France 2.3%United States 3.2% and Germany 1.4%.  Also, the countries lagged behind compared to less than half of all the other larger economies of the Economic Co-operation and Development (OECD) countries such as the Republic of Korea 5.3%, Spain (3.3%), Australia 3.8%, Mexico 2.6%, and the rest of the Eurozone annual economic growth. Japan’s average yearly economic growth is also slightly lower than the OECD-wide average, which stands at 2.7%. Japan’s economic recession serves as a benchmark for other countries to study how low economic growth can affect the economy.

According to Nobel Laureate, Paul Krugman, Japan’s recession is primarily due to a liquidity trap that interfered with the bank’s ability to apply monetary policies that aid in regulating interest rates. However, empirical studies have shown that Japan’s problems stem from other sources. There are numerous resources that argue that the Japan recession was caused by the I.S. curve rather than the alleged liquidity trap. At the moment, there exists a wide range of reasons that influenced long-term stagnation, such as Japan’s aging population problem. With one of the highest life expectancy rates, the older people in Japan make up a significant percentage of the community. As of now, Japan’s retirement age is 60 years old. The yearly turnover of this age bracket leaves the job industry grappling in a low workforce, which simultaneously causes small production. The number of older people is increasing while the younger generation is on the spiral decrease. The elderly consume less than the young people; therefore, this population difference causes reduced domestic consumption leading to slow economic growth.  Other factors include the reshuffling of the centralized Government and commissioning of powers to the Local Government as well as the stringent banking measures labeled as Basel Capital requirements that curtailed banks from lending money to small startups business and SMEs. These rigorous measures halted Japanese innovation and technological advancements, which is a significant contributor to economic growth. This paper discusses the causes, consequences, and future of the most prolonged and severe economic recession in the history of Japan…..

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