Friday, 28 June 2013

A Look At Japan's "Abenomics"

The deflation problem for Japan started in 1997 when the country's consumption tax was increased from 3% to 5%. Nominal GDP growth rate was below zero for most of the 5 years after the tax increase. Under Shinzo Abe's "Abenomics", fiscal spending is expected to increase by 2% of GDP, at the same time raise deficits to 11.5% of GDP for 2013. Kokkai (Japanese legislature), commonly known as The National Diet passed a bill in 2012 to increase consumption tax rate to 8% in 2014 and 10% in 2015 to balance the national budget, a deliberate and an aggressive attempt to discourage consumption.

Shinzo Abe, Creator of Abenomics
Shinzo Abe (PM of Japan) is desperately trying to solve Japan's long lasting deflation problems. "Abenomics" (Abe + Economics) are a set of economic policies heralded by Japan's PM. Under this "aggressive collection" of policies are "inflation targeted at a 2% annual rate, correction of the excessive yen appreciation, setting negative interest rates, radical quantitative easing, expansion of public investment, buying operations of construction bonds by Bank of Japan (BOJ), and revision of the Bank of Japan Act" -Wikipedia.

"Abenomics = fiscal stimulus, structural reforms and, most of all, central bank money-printing" - The Economist Intelligence Unit.

Is it not surprising that an economy which wants to discourage consumption will opt for printing more
money? But the results has been a strong GDP growth for the first quarter of the year. Stocks are up, but the value of the Japanese yen has depreciated to 102 yen to a dollar (it was mostly stable at 80 to a dollar in 2012). Deflation though, still remains a major concern for the Japanese economy. 

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