AJISS-Commentary
The Association of Japanese Institutes of Strategic Studies
NPIRIPS

Nakasone Yasuhiro

The Japan Institute of

Research Institute for

Peace InstituteInternational Affairs

Peace and Security(Secretariat)

Editorial Advisory Board:

No. 286

Akio Watanabe (Chair)
Ichiro Fujisaki
Masashi Nishihara
Kenichiro Sasae

12 February 2021

Editorial Committee:
Tsutomu Kikuchi
Fumiaki Kubo
Tsuyoshi Sunohara
Shujiro Urata andTomiko Ichikawa

AN ASSESSMENT OF ABENOMICS AND
CHALLENGES FOR THE SUGAADMINISTRATION

Editor & Online Publisher:
Kenichiro Sasae
President, JIIA

Shin-ichi Fukuda

・ Abenomics improved
various economic
indicators but its structural reforms were far
from sufficient.
・ Structural problems that had plagued the Japaneconomy before the COVID-19 pandemic arestill unresolved.
・ The most important policy agenda item for theSuga administration is how to implement
effective
structuralreformsfor
thepost-COVID-19 world.

The views expressed in this piece are the author’s own and should
not be attributed to The Association of Japanese Institutes ofStrategic Studies.

AJISS-Commentary
The Association of Japanese Institutes of Strategic Studies

Abenomics, the economic policy of the Abe administration, aimed to realize
sustainable growth in Japan by pulling the economy out of prolonged deflation.
Abenomics improved various economic indicators through the "three arrows" ofunconventional monetary easing, flexible fiscal spending, and a growth strategy tostimulate private investment. The second arrow, flexible fiscal spending, had limited
impacts because of accumulated fiscal deficits. By contrast, the first arrow, aggressive
monetary policy by the Bank of Japan (BOJ), was successful in lifting the economy outof deflation. After the start of Abenomics, employment improved remarkably. The
corporate sector showed a significant increase in profits, and stock prices rosesignificantly. The GDP gap (demand-supply gap) turned positive, indicating that thelong-standing shortage in demand in the Japanese economy had almost been resolved.
However, under Abenomics, there were a number of weak indicators in theeconomy. In the labor market, despite a serious labor shortage, nominal wage growth
was modest and real wages declined. Consumption was sluggish, particularly after theconsumption tax rate increase in April 2014. Increases in consumer prices were far
below the BOJ's 2% target. In the corporate sector, productivity only showed slow
recovery and cash/deposit holdings accumulated substantially.
A more critical issue was that various structural problems remained unresolved.
The birthrate continued to decline and the population to age at a pace unparalleled inother countries. Despite increased tax revenues, the accumulation of government debt
reached unprecedented levels because of dramatic increases in social security
expenditures. Until such structural problems are resolved, it will be difficult to enhance
private consumption and capital investment. To revitalize the Japanese economy, theimplementation of effective growth strategies has been indispensable.
Under Abenomics, a variety of structural reforms were proposed to increase
productivity and to create new frontiers backed by human resources and technology.
The Abe administration aimed to end Japan's declining birthrate and slow the aging ofthe population. It also aimed to realize a drastic reduction in social security expenses(medical care, nursing care, and pensions). However, most of the reforms wereinsufficient. Structural reforms would have been useful not only to enhance growthpotential from the supply side but also to push up the economy from the demand side. InJapan, there has been strong pessimism about future growth prospects in both thehousehold and corporate sectors. If effective structural reforms can eliminate thepessimism, domestic consumption and capital investment will increase and the

http://www.jiia.or.jp/en/commentary2

AJISS-Commentary
The Association of Japanese Institutes of Strategic Studies

prolonged stagnation will be resolved. To stop the prolonged stagnation, we need toimpose rapid and sometimes painful structural reforms.
On 16th September 2020, the new prime minister Yoshihide Suga took office inthe midst of economic turmoil brought about by the COVID-19 pandemic. He indicatedthat he would continue many elements of Abenomics. The initial economic policies,
however, needed to diverge from those of Abenomics in a few key areas, owing to theinfluence of the pandemic. A fragile economy faced a sensitive tradeoff between
economic activity and the spread of the coronavirus. Until things return to normal,
face-to-face service industries such as restaurants, tourism, and entertainment will be inserious trouble. Redistribution policies will remain important to support the troubled
industries. However, we need to pursue wise fiscal spending to ensure that the money
will be distributed to those who really need it. The key is how to distribute limited
financial resources efficiently.
The most important policy agenda item for the Suga administration is theimplementation of effective structural reforms for the post-COVID-19 world. Mosteconomists predict that the world economy, which experienced unprecedented outputdecline in 2020, will show substantial recovery in 2021. However, the economic
recovery in 2021 is expected to be slower in Japan than in the USA and Germany. Mostof the structural problems that had plagued the Japanese economy before thepandemic are still unresolved. Abenomics did not devote enough political capital toeffective reforms. The Suga administration needs to accomplish these reforms. Many ofthe industries hit hard by the pandemic are those with low profitability. It is necessary torestructure these industries and to promote new industries that will contribute tosustainable growth of the Japanese economy.
Figure 1. Predicted growth rates of Japan, the USA, and Germany in 2020 and 2021

Source: Consensus Economics, December 2020.

http://www.jiia.or.jp/en/commentary3

AJISS-Commentary
The Association of Japanese Institutes of Strategic Studies

It will be a hard task for the Suga administration to promote effective structuralreforms. However, it is good news that the Suga administration is more enthusiastic
about structural reforms than the Abe administration. These reforms target not only
mobile phone charges and regional bank restructuring, but also a wide range ofindustries including manufacturing, retail, transportation, renewable energy, healthcare,and agriculture. Utilization of information technology is one of the key structural reforms.
The Suga administration plans to form a digital agency to accelerate seamless sharingof information. Human resource development for information technology is urgent. It isalso important to accept foreign engineers skilled in the digital industries.
Local revitalization is another promising reform to revitalize the economy.
Economic concentration in the Tokyo metropolitan region has progressed ever sinceWorld War II, but the negative effects of such concentration have become apparent inrecent years. With the spread of telecommuting and teleworking, there is growing
momentum to rectify the unipolar concentration in central Tokyo in the post-COVID-19
world. If an environment is created in which people can work and live in rural areas, theJapanese economy will have more room to achieve a balanced growth path.
There is no doubt that structural reforms are desirable. However, those who
generally support structural reforms have sometimes voiced opposition when it came tospecifics. It has thus been difficult to put such reforms into practice. Policies thatsignificantly change the current economic structure are subject to strong opposition frompeople who depend on it. On the other hand, their immediate benefits are so small thatthose who support specific reforms are limited. Firm political leadership in the face ofvested interests is needed to advance effective reforms. The true value of the Sugaadministration will depend on how successful its growth strategy is.

Shin-ichi Fukuda is Professor at The University of Tokyo.

http://www.jiia.or.jp/en/commentary4