'The Persistent Low Inflation Trap Despite 10 Years of Monetary Easing: Will Abenomics Continue?'

Shinzo Abe [Photo by EPA Yonhap News]

[Asia Economy Reporter Park Byung-hee] Former Japanese Prime Minister Shinzo Abe, who died on the 8th, dreamed of a politically and militarily strong Japan. As a former Axis power and defeated country in World War II, Japan’s Constitution Article 9 prohibits the possession of a military and war provocations. Abe sought to amend this article to explicitly recognize the Self-Defense Forces in the Constitution, aiming to establish a nation capable of waging war. Economically, he aimed to rescue the Japanese economy from deflation through the so-called Abenomics.

Although analyses suggested that the possibility of constitutional revision had become higher than ever ahead of the House of Councillors election on the 10th, Abe ultimately passed away without witnessing the constitutional amendment, which he regarded as his lifelong mission. Nearly a decade of Abenomics also failed to accomplish the goal of escaping deflation. As voices criticizing the side effects of Abenomics, often described as “bad yen depreciation,” grow louder, attention is focused on how Abe’s death will impact Abenomics.

Abenomics began with Abe’s “money printing press” remark. On November 19, 2012, then-Liberal Democratic Party (LDP) President Shinzo Abe said at a party meeting, “The Bank of Japan (BOJ) will turn on the money printing press and print unlimited amounts of money.” The LDP won a landslide victory in the general election on December 16 that year, and Abe became the 96th Prime Minister of Japan, starting his second term in office. Despite controversies such as undermining central bank independence and national fiscal collapse, Prime Minister Abe implemented his money printing remark and launched the so-called “Abenomics.”

The BOJ quickly reflected Abenomics in its monetary policy. At the monetary policy meeting in January 2013, it raised the inflation target from 1% to 2% and declared unlimited quantitative easing. In April 2013, Abe nominated Haruhiko Kuroda, former president of the Asian Development Bank (ADB), as BOJ governor to partner with him in realizing Abenomics.

The BOJ’s bold monetary easing caused the yen’s value to drop sharply. When Abe made his money printing remark, the yen was trading at 79 yen per dollar; as of the 9th, it is trading at 136 yen per dollar. Over the past decade, the yen’s value against the dollar has fallen by 72%.

Dollar-Yen Exchange Rate Trends

The depreciation of the yen was an intended result of Abenomics. Abe’s biggest goal was to raise Japan’s prices and escape the long-term deflation described as the “lost 20 years.” By inducing yen weakness, he aimed to expand exports and raise prices, thereby increasing corporate profits, which would lead to higher household incomes and revive the economy.

However, despite large-scale yen easing, Japanese prices did not rise, and the lost 20 years extended into the lost 30 years. This year, due to the impact of the Ukraine war, Japan’s consumer price index (CPI) inflation rate rose to the 2% range, surpassing the BOJ’s monetary policy target, but the BOJ considers this a temporary increase. Moreover, real wages have actually decreased due to inflation. Since household income has not increased in line with price rises, Abenomics is instead hampering domestic demand.

Because of this, controversy over the “bad yen depreciation” has been raging recently in Japan. The yen’s weakness caused by the BOJ’s monetary easing is stimulating prices but worsening the economy. However, Governor Kuroda insists that yen depreciation overall benefits the Japanese economy and intends to continue stimulus measures.

Governor Kuroda, who has led the BOJ for over nine years and promoted Abenomics, will end his term on April 8 next year. Forbes Japan predicted that Prime Minister Fumio Kishida might reveal his own colors without waiting for Kuroda’s term to expire next April. He may change the policy direction that promoted yen depreciation, which is expected to have a significant impact on the economy.

Japanese Prime Minister Fumio Kishida [Photo by AP Yonhap News]

After stepping down as prime minister in September 2020, Abe continued to act as the “retired king” by leading the Abe faction (formerly the Hosoda faction), the largest faction within the ruling LDP. It is widely believed that Abe’s support was crucial for Fumio Kishida to win the LDP presidency last September, defeating Taro Kono, then Minister for Administrative Reform, who had led in opinion polls. After taking office as prime minister in October last year, Kishida’s cabinet was also dominated by members of the Abe faction.

Abe, while leading the Abe faction, is known to have emphasized active fiscal spending, the foundation of Abenomics.

Although Kishida finds it difficult to ignore the Abe faction immediately, he is expected to gradually expand his political scope. When Kishida took office in October last year, he emphasized redistribution and showed some differences in perspective from Abenomics, which focused on growth. When controversy arose, Kishida later clarified that his stance was based on growth.

Hiroshi Namioka, Chief Investment Strategist at T&D Asset Management, said that even after Abe stepped down, the Japanese economy continues to be influenced by Abenomics through Prime Ministers Yoshihide Suga and Fumio Kishida. He noted that whether Abenomics will continue after Abe’s death could be a concern for investors, indicating increased economic policy uncertainty surrounding Abenomics.

This content was produced with the assistance of AI translation services.