Abenomics: monetary acceleration, fiscal stimulus and the reform that lagged behind

Abenomics was the economic programme of Shinzo Abe's government, launched after his return to power in December 2012 and rolled out over the course of 2013. Its idea was to press three pedals at once: ultra-loose monetary policy from the Bank of Japan, government spending, and structural market reforms. The first part worked quickly and visibly: it weakened the yen, lifted asset prices and brought nominal indicators back to growth. The third, the slowest, was only partly delivered, and that is precisely why the debate over the results of Abenomics remains open to this day.

Why the programme was needed

By the early 2010s Japan had been through what are commonly called the lost decades: after the bubble in land and equity markets deflated in the early 1990s, the economy became stuck in sluggish deflation. Deflation is not simply "prices falling". It changes behaviour: when people expect things to be cheaper tomorrow, a household postpones a purchase, a company postpones an investment, and the real value of debt already accumulated rises on its own, without any new borrowing. Nominal GDP stood still; public debt did not. The classic monetary response had been exhausted: the policy rate was already at zero, and there was nowhere lower to take it.

Abe described the programme with the metaphor of arrows: a single arrow is easy to break, but a bundle is not. Hence the emphasis on acting simultaneously rather than taking steps in sequence.

The first arrow: monetary acceleration

From April 2013 the Bank of Japan, led by Haruhiko Kuroda, switched to quantitative and qualitative easing. The mechanics: the central bank bought government bonds on a massive scale, and later exchange-traded funds as well, expanding the monetary base and pushing down yields along the entire curve. The main target was not so much the volume of liquidity itself as inflation expectations: the Bank of Japan publicly announced an inflation target and committed to keeping policy loose until that target was reached on a sustained basis.

From 2016 two further tools were added: a negative rate on part of bank reserves, and yield curve control — a commitment to hold the yield on long-term government bonds within a set range by buying as much as needed to do so. This is a fundamentally different logic from "we will buy this much": the regulator targets the price of debt, not the quantity of purchases. The side effects that built up were predictable — squeezed bank margins, a frozen secondary bond market, and a central bank that became the largest holder both of government debt and, through funds, of a significant share of the equity market.

The link between the policy rate, yields and bond prices is easier to observe on a familiar market: the OFZ yield curve and the bond market as a whole show the same arithmetic on which Japan's yield curve control rested.

The second arrow: the budget against its own tax

The fiscal stimulus consisted of spending packages — infrastructure, regional support, employment incentives. But fiscal consolidation ran in parallel: the consumption tax was raised in 2014 and 2019, and each time this cut consumption short at exactly the moment demand was starting to pick up. The result was pressing the accelerator and the brake at the same time, one of the most frequent criticisms of the programme. The 2020 pandemic and Abe's departure as prime minister ended the experiment before the fiscal trajectory had become sustainable.

The third arrow: reforms that moved slowly

The structural part was the most varied: bringing more women into the labour force, a cautious expansion in the intake of foreign workers, agricultural and energy reform, a trade agreement in the Pacific region, and corporate governance reform.

The last item is the only one where the effect is clearly visible. The Corporate Governance Code and the Stewardship Code for institutional investors, together with a report on capital efficiency, changed what was expected of Japanese companies: they were now expected to appoint independent directors, unwind cross-shareholdings and deliver a meaningful return on capital instead of endlessly piling up cash cushions. The consequence was rising shareholder payouts and buybacks. The logic is the same as in the dividend policy of any market: if a company cannot invest capital at a return above its cost — see economic value added (EVA) — it makes more sense to return the money to its owners.

What Abenomics added to the common toolkit

Yield curve control, central bank purchases of funds and tying policy to a public inflation commitment are no longer Japanese oddities: after 2020 other regulators also turned to similar techniques. The main lesson is, if anything, a negative one: the monetary arrow can lift nominal values and asset prices, but it cannot restore productivity growth to an economy. That is the job of the third arrow, and it always lags behind, because reforming the labour market or the energy sector cannot be done by a decision of a central bank's board.

What the site's data does not include

To be frank: TradeAlmanac's database contains no Japanese macroeconomic data, yen exchange rates or quotes for Japanese securities — the site covers the Russian market. That is why no numerical illustrations of Abenomics are given here, deliberately; the mechanics are best followed on the instruments that are available: stocks, issuer reports, exchange-traded funds and market news. How payouts respond to changes in corporate rules can be seen in the schedule of upcoming dividends:

Other concepts are explained in the glossary.