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Beyond Abenomics

Prime Minister Shinzo Abe's government has transformed Japanese monetary and fiscal policy over the last seven years. But the Abenomics experiment shows that enhancing demand is not enough to boost economic growth when an economy also faces massive supply-side constraints.

TOKYO – Since taking office at the end of 2012, Japanese Prime Minister Shinzo Abe has transformed the country’s macroeconomic management. But the “Abenomics” experiment may soon start drawing to a close. Although Abe’s term as head of the ruling Liberal Democratic Party does not end until the autumn of 2021, the succession debate has already begun. It is therefore an appropriate time to assess the effectiveness of his policies, and what might come next.

The hallmark of Abenomics has been aggressive monetary easing under Bank of Japan Governor Haruhiko Kuroda, whom Abe appointed in March 2013. Kuroda, previously one of the leading internationalists at the Ministry of Finance (MOF), has been instrumental in rapidly expanding the BOJ’s balance sheet – to a degree comparable to the BOJ’s American and European counterparts. This represents a clear break from the policies of his predecessor, Masaaki Shirakawa, who belonged to the BOJ’s mainstream conservative bureaucracy.

Under Kuroda’s watch, Japan’s average annual inflation between 2013 and 2019 was 1.1%, according to the International Monetary Fund. That represented a marked improvement from the previous five years under Shirakawa, when inflation averaged -0.2%. In fact, as Columbia University’s Takatoshi Ito and Takeo Hoshi of the University of Tokyo argue in their recent book The Japanese Economy, the BOJ’s tight monetary policy before Abe took office worsened Japan’s deflation problems.