The aim of Abenomics is to bring Japan out of a two decade cycle of deflation and poor growth, through three different methods:
Structural reform: the aim here is to ensure long-term growth and to improve out-dated infrastructure in Japan.
Double Monetary Base: main aim here is to use programs such as QE to increase money supply in the economy and boost inflation.
Fiscal stimulus: using fiscal policies, such as increased Government spending and lower Taxation to increase aggregate demand and boost inflation (+GDP).
Shinzo has definitely been successful in the short-term. GDP in the first quarter was up +4% and the Y-Y April Current account surplus has doubled thanks to a depreciating Yen.
For Abenomics to be successful it needs to look towards the long-term, which hopefully the structural reform program can achieve.
However Japan must also be careful about its rising debt. It currently has a GDP to Debt ratio of 214%, which poses a major threat when one of the policies of Abenomics is to increase government spending and reduce taxes. Furthermore in order to reach higher inflation real interest rate of bonds and borrowings are likely to rise (especially if economic growth is achieved); Chris Watling’s (@LongviewEcon) research states that if interest rates weere to rise to 5%, then it would cost the government 100% of tax revenues to service just the interest on the government debt.
Despite its potential drawbacks, Abenomics has the potential to bring Japan out of their current economic rut and sometimes you need quite harsh and outstanding reform to achieve this.
Let me know what you think of this by tweeting me @Breadeconomics, or leaving a comment below.