## Japan’s Abenomics: Time to Take Stock

_IMF Blog, October 21, 2013_

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## Bibliographic details
- Authors: Anoop Singh
- Published: October 21, 2013

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### Overview
- Author: Anoop Singh
- Date: October 21, 2013
- Central question: With Abenomics approaching the one-year mark, is the new strategy working?

### Major policy actions in year one
- Bank of Japan (BoJ) adopted a 2 percent inflation target in January.
- New fiscal stimulus measures were introduced early in the year.
- Japan decided to join negotiations over the Trans-Pacific Partnership (TPP).
- Haruhiko Kuroda became BOJ Governor and introduced Quantitative and Qualitative Monetary Easing—an aggressive plan to reach 2 percent inflation in about 2 years mainly through large-scale bond purchases.
- Government agreed to go ahead with the consumption tax increase in 2014 and announced further fiscal stimulus to soften the growth impact.
- Discussions on growth reforms were scheduled to follow, with a special Diet session starting in October.

### Signs of a turnaround — empirical observations
- Reported growth: "growth reaching almost 4 percent in the first six month of the year."
- Financial and external indicators:
  - Rebound in equity markets.
  - Yen depreciation.
  - Continued low and stable long-term interest rates despite rising inflation expectations and yield curve steepening overseas, especially in the US.
  - A fall in real interest rates as nominal rates remain low.
- Inflation and monetary transmission:
  - Inflation turned positive in June helped by higher energy import costs.
  - Long-term inflation expectations have risen.
  - Most core prices are still falling.
  - Monetary easing has been slow to transmit: "most of the liquidity pumped into the economy is flowing right back to the BoJ in the form of growing bank reserves."
  - Some banks have begun to rethink investment strategies and bank lending has begun to rise, but aggregate portfolio rebalancing and capital outflows remain limited.
  - Exchange rate has been relatively stable since July.

### Remaining challenges and key milestones for success
- No clear benchmark for success due to Japan’s history of mild deflation and subdued growth.
- Identified key milestones for Abenomics to be judged successful:
  - Self-sustaining growth propelled by investment, employment, and earnings growth.
  - Re-anchoring of inflation expectations at 2 percent and a steady rise in headline inflation driven by price increases of non-food and non-energy items.
  - Falling real interest rates as monetary easing keeps nominal interest rates low.
- Current assessment: "Against these metrics, Abenomics has done well, but it also has some ways to go."
- Private demand transition: "Private investment has not taken off and labor markets, while tighter, have not generated much wage growth."

### Policy recommendations and the need for growth reforms (the "third arrow")
- Long-term problems to address: raising trend growth and reducing public debt.
- Fiscal credibility: The consumption tax increase is cited as a clear signal that the government is serious about fiscal reform.
- Urgent need for concrete action on growth reforms, including:
  - Labor market reform.
  - Deregulation.
  - Revamping the agricultural sector.
- Recommendation: Japan needs "a signature initiative similar to the consumption tax increase on the fiscal side" to sustain momentum.
- Timing: The special Diet session in October provides an opportunity to take action and keep reform momentum going.

### Conclusion and outlook
- One year earlier Japan was entering its third recession in 5 years and the outlook seemed bleak.
- Abenomics has generated "for the first time in a long time—a real chance to bring Japan back on the road of sustained growth."
- Continued rapid pace of reforms, especially structural reforms, is necessary to avoid getting stuck again.
- Note: Japan’s economic prospects were slated to be discussed at an IMF sponsored seminar "Abenomics approaching its one-year mark" taking place in Tokyo on October 29.

*Source: Japan’s Abenomics: Time to Take Stock — Anoop Singh, October 21, 2013.*

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## Content in this bundle

- **Asia and Pacific Regional Economic Outlook––October 2013 Update**
  - [Asia and Pacific Regional Economic Outlook––October 2013 Update (Markdown version)](/external/pubs/ft/reo/2013/apd/eng/areo1013.pdf.md){rel="alternate" type="text/markdown"}
  - [Asia and Pacific Regional Economic Outlook––October 2013 Update (PDF)](/external/pubs/ft/reo/2013/apd/eng/areo1013.pdf){rel="external" type="application/pdf"}

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_Source: https://www.imf.org/en/blogs/articles/2013/10/21/japans-abenomics-time-to-take-stock_