[Kishidanomics is Coming] ① Abenomics Relied on Yen Depreciation... Japan Has Become Poorer

Injecting Money to Boost Economy Hits Limits
Prices Rise While Wage Growth Stalls
Economic Growth Falters Amid Slowing Consumption

Since the bubble burst in the early 1990s, the Japanese economy has fallen into a slump. Former Prime Minister Shinzo Abe, who positioned himself as a savior, implemented 'Abenomics,' a large-scale monetary easing policy, but last year, the Japanese economy recorded only low growth in the 1% range. The failure of the economy to recover easily despite the central bank's money printing is attributed to the Japanese government's misjudgment in trying to revive the economy solely through monetary policy.

◆'Corporate profits rise and stock prices go up'... Abenomics used as a tool for Yen depreciation

Former Japanese Prime Minister Shinzo Abe [Image source=Yonhap News]

Abenomics refers to an economic policy based on the so-called three arrows: large-scale fiscal spending, accommodative monetary policy, and growth strategies to promote private investment. The Abe cabinet lowered short-term interest rates into negative territory to create an environment where companies could easily obtain loans and implemented a large-scale economic stimulus package worth 234 trillion yen (approximately 2,297 trillion 37.6 billion KRW). This amount is equivalent to 40% of Japan's gross domestic product (GDP).

The purpose of the large-scale money printing under Abenomics was to raise the exchange rate. The goal was to lower the value of the yen to increase the profits of export companies and boost stock prices. Hideo Hayakawa, former director of the Bank of Japan, explained to the Asahi Shimbun, "The monetary policy of Abenomics can be defined as a policy of yen depreciation," adding, "Yen depreciation was a means to achieve a 2% inflation rate."

In terms of stock prices and corporate business conditions, these measures seemed to achieve success. Japan's Nikkei 225 index nearly tripled under the Abe administration, and in 2021, corporate ordinary profits increased by 33.5% compared to the previous year, reaching an all-time high.

◆Prices rise but wages stagnate... Consumption slump causes economic growth to fail

Employees of the Japanese foreign exchange brokerage firm Gaitame.com are working in the dealing room in Tokyo, Japan, in front of a monitor displaying the yen-to-dollar exchange rate. [Image source=Yonhap News]

However, the annual economic growth rate still failed to escape low growth in the 1% range on an annualized basis. In the fourth quarter of last year, Japan's GDP growth rate recorded only 0.1%, far below the market forecast of 2.0%. In particular, private consumption, which supports the domestic market, increased by only 0.3% compared to the previous quarter, dragging down the overall economic growth rate. Ultimately, despite massive money printing, the Japanese economy recorded zero growth, and Abenomics ended in failure.

Experts analyze that the yen depreciation caused by money printing and low wage increases were reasons why Abenomics inevitably failed. Yukio Noguchi, an emeritus professor at Hitotsubashi University and former Ministry of Finance official, pointed out that the decline in the yen's value impoverished workers' lives. After the Japanese government's monetary easing policy, the yen's value fell, causing import prices to rise and consumer prices to surge. Furthermore, the Russia-Ukraine war caused raw material prices to soar, pushing inflation even higher. In January, Japan's core consumer price index (excluding fresh food) recorded a 4.2% increase compared to the same month the previous year, marking the largest rise in 41 years and 4 months.

[Image source=Yonhap News]

Meanwhile, during this period, the wage growth rate of the people remained stagnant. Last year, Japan's real wages fell by 0.9% compared to the previous year. With prices rising but wages not increasing, consumption slowed, and the Japanese economy failed to revive.

The consumption slump also negatively affected companies and stock prices that initially benefited from Abenomics. Although import prices rose, consumers' wages did not increase, so companies could not pass the increased costs onto product prices. As companies could not raise product prices, profits decreased, and stock prices fell. In fact, when yen depreciation accelerated starting in September 2021, Japan's Nikkei average index fell from 30,670 on the 14th to 27,678 in October.

Professor Noguchi stated, "In a situation of yen depreciation, companies can easily make profits, so they are reluctant to develop new technologies or transition to new business models," adding, "As a result, wages do not rise either. Relying on the drug-like effect of yen depreciation, Japan has become poorer."

◆Kishida and Ueda caution against monetary policy omnipotence... Need to raise potential growth rate

Haruhiko Kuroda (left), the current Governor of the Bank of Japan, and Kazuo Ueda (right), the newly appointed Governor of the Bank of Japan [Image source=Yonhap News]

Successor Prime Minister Kishida, learning from the lesson that economic growth relying solely on monetary policy has limits, decided to implement economic policies that build fundamental strength. This involves raising wages and redistributing the economic gains concentrated in companies to society. Kazuo Ueda, the new governor of the Bank of Japan and successor to Haruhiko Kuroda, who led Abenomics, shares the same view on Kishida-style economic policies.

Governor Ueda emphasized that the limited effect of Abenomics was due to "Japan's declining growth potential," and warned that unless the potential growth rate is raised, there will be no economic room to lower interest rates further.

The Asahi Shimbun pointed out, "Under Governor Kuroda, the 'reflationists' who advocated a monetary policy omnipotence approach of stimulating the economy by printing money led economic policy," adding, "The Japanese economy is stagnant not because the monetary easing policy was weak, but due to a declining labor force and employment conditions that prevent wage increases."