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A Tale of Three Arrows
Submitted by Ilinca Drondoe, 11/6/2019
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Long, long ago, in Yamaguchi, Japan, a lord handed each of his three sons a single arrow. “See if you can break them,” he intoned. He watched as each of his sons duly snapped their arrow with ease. With a smile, he produced three more arrows, and asked the boys to snap them all at once. Although all three sons attempted to do so, none of them succeeded. One arrow, the lord said, can easily be broken. However, three arrows together cannot. It is this old Japanese legend that provides the pillar for the nation’s Prime Minister Shinzo Abe’s plan to boost the economy, known as “Abenomics.” Abe refers to his monetary, fiscal, and growth strategies as his “three arrows” towards economic revitalization.
Japan is a paradoxical nation. On one hand, it is geographically isolated and insular in character — generally refusing to accept foreign workers, political refugees, or even foreign investment. On the other hand, Japan’s foreign policy is characterized by a desire for international cooperation and diplomacy as well as a adaptivity to the international system, foreign culture and technology. Over the past decades, collaboration between government and industries, mastery of the latest technology, budgetary success, and strong work ethic among its citizens have helped Japan develop an advanced economy. With the 19th-highest ranking in the Human Development Index, the country also boasts a high standard of living. Arguably, one of the best ways for countries to increase their economic growth is by imitating and implementing the technologies of the more advanced ones. Japan illustrates this example perfectly, as one of the first nations that did not partake in the Industrial Revolution to adopt what are considered modern technologies and medicine. According to the World Atlas, Japan is currently the second most advanced economy in the world, the third largest by nominal GDP, and the fourth by purchasing power parity.
However, the state has fought deflation for decades and faces an aging society and shrinking population. Hence the introduction of the aforementioned “Abenomics” in 2013. The Japanese government expressed that they see “this challenge as an opportunity” and it continues to pursue government interventions to revitalize its economy, combining fiscal expansion, monetary easing, and structural reform. The immediate goal is raising inflation to 2 percent and boosting domestic GDP and demand, while the long term aims include increasing competition, reforming labor markets, and expanding trade partnerships.
The first “arrow” of “Abenomics,” fiscal expansion, involves fiscal stimulus with the goal of reviving economic growth immediately. To achieve this, Japan is increasing government consumption and public works investment. In 2013, the nation commenced the plan with economic recovery measures totaling 20.2 trillion yen ($210 billion,) of which 10.3 trillion ($116 billion) was dedicated to building infrastructure such as bridges, tunnels, and earthquake-resistant roads. In the following years, Abe has continued to push through new spending packages consisting of trillions of yen.
In order to make Japanese exports more attractive and cause moderate inflation (roughly 2%), the Abe administration’s second policy “arrow” focused on doubling the monetary base through a program of quantitative easing. This consisted of printing additional currency, between 60 trillion yen to 70 trillion yen. According to the Council on Foreign Relations, the Bank of Japan has “injected liquidity into the economy.” Aiming for inflation will devalue the yen, which actually would be beneficial for Japan because it would boost exports, as other currencies could then buy more Japanese-manufactured products. That means manufacturers would sell more, increasing business earnings and therefore investment.
The third “arrow” of Abenomics includes the reform of various regulations to make Japanese industries more competitive and to encourage investment in and from the private sector. The Trans-Pacific Partnership, described by economist Yoshizaki Tatsuhiko as potentially the “linchpin of Abe’s economic revitalization strategy,” is a major emphasis of the government’s policy, given that ensuring the success of the partnership makes Japan more competitive through free trade. Other aspects that constitute the “arrow” include minimizing business regulations, liberalizing the labor market and the agricultural sector, cutting corporate taxes, increasing workforce diversity, and encouraging entrepreneurship.
While in the short term, Abenomic policy did result in some short-term improvement, the desired inflation and GDP and wage growth have all proved elusive. As of September 2019, the inflation rate was a mere 0.2 percent, far below the 2 percent target delineated in Abenomics. Growth has been more resilient - Japan’s nominal GDP is currently at a record high according to their government website, as is their level of employment. Regardless of this progress, policymakers and economists see consumer spending and wage growth as falling short of the target rate.
Ultimately, the situation is unlikely to improve much without a major demographic shift. Japan is facing a demographic time-bomb, with an aging and shrinking population, but the nation remains largely resistant to taking in any migrants and lacks a comprehensive immigration policy. Making it easier for immigrant workers to enter the market could drive economic growth.
Another reason that inflation might lag behind is because wages have not risen as fast as Abe expected for his policies to be effective. The Economist points out that the pay of workers in cyclical, insecure positions, like waiters, has risen fairly quickly. However, “the same is not true of Japan’s “core” workers, who account for the bulk of the country’s wage income.” The International Monetary Fund has recommended that Japan adopt an income policy that spurs firms to raise wages, which might be a push towards increasing inflation.
One factor contributing to the modest economic growth Japan has seen is the expansion of global demand for high-tech electronics, of which it is a major producer. Additionally, implementing and manufacturing labor-saving technology has helped the Japanese economy combat the labor shortage it sees due to the resulting boost in productivity. Japanese factories are some of the most productive per unit of labor cost, and the nation is the world’s leader in the production and utilization of industrial robots. Continuing to expand their technological progress could continue boosting economic growth in the nation.
In conclusion, it appears that Japan is the quintessential example of a nation whose economic expansion was fueled by adopting advanced technologies. However, the “arrows” of “Abenomics” have not all reached their targets, especially due to lagging inflation and the ever-shrinking Japanese population. Embracing their technological advantage, taking into account the areas in which Abe’s policies have and have not succeeded, and analyzing the intersection of economic growth with a thriving, growing population are vital for Japan to hit bull’s eye as they aim for economic revitalization.
Japan is a paradoxical nation. On one hand, it is geographically isolated and insular in character — generally refusing to accept foreign workers, political refugees, or even foreign investment. On the other hand, Japan’s foreign policy is characterized by a desire for international cooperation and diplomacy as well as a adaptivity to the international system, foreign culture and technology. Over the past decades, collaboration between government and industries, mastery of the latest technology, budgetary success, and strong work ethic among its citizens have helped Japan develop an advanced economy. With the 19th-highest ranking in the Human Development Index, the country also boasts a high standard of living. Arguably, one of the best ways for countries to increase their economic growth is by imitating and implementing the technologies of the more advanced ones. Japan illustrates this example perfectly, as one of the first nations that did not partake in the Industrial Revolution to adopt what are considered modern technologies and medicine. According to the World Atlas, Japan is currently the second most advanced economy in the world, the third largest by nominal GDP, and the fourth by purchasing power parity.
However, the state has fought deflation for decades and faces an aging society and shrinking population. Hence the introduction of the aforementioned “Abenomics” in 2013. The Japanese government expressed that they see “this challenge as an opportunity” and it continues to pursue government interventions to revitalize its economy, combining fiscal expansion, monetary easing, and structural reform. The immediate goal is raising inflation to 2 percent and boosting domestic GDP and demand, while the long term aims include increasing competition, reforming labor markets, and expanding trade partnerships.
The first “arrow” of “Abenomics,” fiscal expansion, involves fiscal stimulus with the goal of reviving economic growth immediately. To achieve this, Japan is increasing government consumption and public works investment. In 2013, the nation commenced the plan with economic recovery measures totaling 20.2 trillion yen ($210 billion,) of which 10.3 trillion ($116 billion) was dedicated to building infrastructure such as bridges, tunnels, and earthquake-resistant roads. In the following years, Abe has continued to push through new spending packages consisting of trillions of yen.
In order to make Japanese exports more attractive and cause moderate inflation (roughly 2%), the Abe administration’s second policy “arrow” focused on doubling the monetary base through a program of quantitative easing. This consisted of printing additional currency, between 60 trillion yen to 70 trillion yen. According to the Council on Foreign Relations, the Bank of Japan has “injected liquidity into the economy.” Aiming for inflation will devalue the yen, which actually would be beneficial for Japan because it would boost exports, as other currencies could then buy more Japanese-manufactured products. That means manufacturers would sell more, increasing business earnings and therefore investment.
The third “arrow” of Abenomics includes the reform of various regulations to make Japanese industries more competitive and to encourage investment in and from the private sector. The Trans-Pacific Partnership, described by economist Yoshizaki Tatsuhiko as potentially the “linchpin of Abe’s economic revitalization strategy,” is a major emphasis of the government’s policy, given that ensuring the success of the partnership makes Japan more competitive through free trade. Other aspects that constitute the “arrow” include minimizing business regulations, liberalizing the labor market and the agricultural sector, cutting corporate taxes, increasing workforce diversity, and encouraging entrepreneurship.
While in the short term, Abenomic policy did result in some short-term improvement, the desired inflation and GDP and wage growth have all proved elusive. As of September 2019, the inflation rate was a mere 0.2 percent, far below the 2 percent target delineated in Abenomics. Growth has been more resilient - Japan’s nominal GDP is currently at a record high according to their government website, as is their level of employment. Regardless of this progress, policymakers and economists see consumer spending and wage growth as falling short of the target rate.
Ultimately, the situation is unlikely to improve much without a major demographic shift. Japan is facing a demographic time-bomb, with an aging and shrinking population, but the nation remains largely resistant to taking in any migrants and lacks a comprehensive immigration policy. Making it easier for immigrant workers to enter the market could drive economic growth.
Another reason that inflation might lag behind is because wages have not risen as fast as Abe expected for his policies to be effective. The Economist points out that the pay of workers in cyclical, insecure positions, like waiters, has risen fairly quickly. However, “the same is not true of Japan’s “core” workers, who account for the bulk of the country’s wage income.” The International Monetary Fund has recommended that Japan adopt an income policy that spurs firms to raise wages, which might be a push towards increasing inflation.
One factor contributing to the modest economic growth Japan has seen is the expansion of global demand for high-tech electronics, of which it is a major producer. Additionally, implementing and manufacturing labor-saving technology has helped the Japanese economy combat the labor shortage it sees due to the resulting boost in productivity. Japanese factories are some of the most productive per unit of labor cost, and the nation is the world’s leader in the production and utilization of industrial robots. Continuing to expand their technological progress could continue boosting economic growth in the nation.
In conclusion, it appears that Japan is the quintessential example of a nation whose economic expansion was fueled by adopting advanced technologies. However, the “arrows” of “Abenomics” have not all reached their targets, especially due to lagging inflation and the ever-shrinking Japanese population. Embracing their technological advantage, taking into account the areas in which Abe’s policies have and have not succeeded, and analyzing the intersection of economic growth with a thriving, growing population are vital for Japan to hit bull’s eye as they aim for economic revitalization.
