What Is Abenomics, and Will It Work?

I attend lots of conferences. Recently, I spoke at the Milken Institute Global Conference in Los Angeles and the World Economic Forum on East Asia in Naypyidaw, Myanmar. At both events, I sensed how interested the international community is in Japan’s ongoing economic recovery—and how much they want it to succeed. Of course, the man behind the long-awaited upturn in Japan’s fortunes is Shinzo Abe, prime minister since the end of December last year.

From mid-November, when Abe launched his election campaign, he was clear about what he wanted to do: change the whole “economic landscape” and end two decades of deflation and stagnation.

Even before he won, Abe’s platform was bold enough to get the markets moving. The day the election was called, the stock market embarked on a multi-month rise of over 60%, and a 25% fall of the yen. (And those numbers are despite a hefty correction in May!) The real estate market also rose, unemployment fell, and GDP growth ticked up.

Business sentiment is bullish, too. In May, car company Toyota, a bellwether for Japanese industry, announced a near tripling of net profit to ¥1.3 trillion (US$13 billion). For this year, it’s forecasting profit growth of 36%, due partly to the tailwind of the weak yen.

The media has dubbed Abe’s policy package Abenomics. It’s a catchy phrase, but what does it actually mean?

Abenomics consists of three core elements, nicknamed the “three arrows.”

The first arrow is an aggressive monetary policy. Abe appointed Haruhiko Kuroda, former president of the Asian Development Bank, as governor of the Bank of Japan in March. Kuroda has set a target of achieving 2% inflation and doubling the money supply within two years.

Abe’s second arrow is a proactive fiscal policy consisting of a ¥10 trillion (US$100 billion) public works package.

The third arrow is a growth strategy. Structural reforms in Abe’s sights include everything from increasing women’s shares of leadership positions to 30% by 2020 to joining the Trans-Pacific Partnership (TPP), a 12-country free-trade agreement that should drive trade liberalization and deregulation inside Japan.

Far from frightening the electorate with this flurry of policies, Abe has maintained a support rate of around 70%, an astonishingly high level. (By contrast Barrack Obama stands at a lowly 45%!) Anyone who’s visited Japan since Abe’s election can sense that change is in the air. The mindset of the Japanese people is becoming more positive.

As well being the dean of a business school, I chair a venture capital fund. That gives me a ringside seat on the Japanese economy. We’ve done two IPOs for internet-related companies this year. In both cases, the price tripled or quadrupled on the first day of trading. Japanese investors are now lining up to invest in our fund, where previously 80% of our money came from non-Japanese investors.

Still, it would be naïve to think Abe can solve decades of problems in a few months. Skeptical commentators point to major negatives, such as a fiscal deficit of over two times the GDP and skyrocketing energy costs due to the weak yen. (Japan is a major energy importer since the Fukushima disaster took most of the country’s nuclear reactors offline.)

In an April report, economist Nouriel Roubini stressed that “quick policy fixes are not enough.” After the initial fiscal stimulus, the government will have to get a grip on its finances, he argues, and will also need to follow through on promises of structural reform and trade liberalization.

Personally, I believe Abe is deeply committed to “fixing” Japan. I was impressed when I heard him speak at the WEF Tokyo Meeting on June 10, particularly his use of the phrase, “There is no alternative” (abbreviated to TINA), an expression favored by the late reforming UK prime minister Margaret Thatcher.

In Japanese we have a proverb about “a journey of a thousand miles beginning with a single step.” Yes, there’s plenty that remains to be done to get Japan’s economy firing on all cylinders, but thanks to Abenomics we’re off to a great start.