Grading Abenomics

TOKYO – It has been almost a year since Prime Minister Shinzo Abe launched his plan to lift Japan’s economy out of two decades of deflation and recession. How has “Abenomics” fared so far?

Answering this question requires breaking Abenomics down into its three components – massive monetary easing, expansionary fiscal policy, and a long-term growth strategy – which Abe, referring to the tale of Motonari Mori, a sixteenth-century daimyo (feudal lord), calls the “three arrows.” According to legend, Mori instructed each of his three sons to snap an arrow in half. After they had succeeded, he told them to tie three arrows together, and break the whole bundle at once; none was able to do it.

Like Mori’s three arrows, the three arrows of Abenomics are supposed to reinforce each other. But Mori’s arrows were bound together in parallel, whereas Abe’s policy arrows are connected through underlying structural relationships. While the first and second arrows aim to transform Japan’s actual growth path, the third operates on the economy’s potential growth path, which assumes the optimal use of all available resources and technologies.

Since Abenomics was launched, the “deflation gap” (the difference between actual and potential output) has dropped from roughly three percentage points to below 1.5. This implies that, while the first two arrows are helping to improve Japan’s actual growth path, the third arrow has yet to do much for potential growth.