How the Shock Therapy of ‘Abenomics’ Worked in Japan

Japan’s Prime Minister Shinzo Abe had a bold strategy: shock therapy for an economy that had been stagnant for 20 years and was overtaken by China as the world’s second-largest in 2010. Launched three years later, Abenomics, as the doctrine is known, departed from the piecemeal measures of previous leaders and antagonized powerful political constituencies. Abe told voters that the strong economic medicine was Japan’s last chance to remain a world power, framing his policies as a matter of national security. Progress was patchy at best, however, even before the hammer blow of the Covid-19 pandemic -- and Abe’s decision to step down after a record-setting eight-year run.

The theory behind it was that unprecedented monetary easing and government spending would tackle deflation and buy time to implement much-needed structural reforms. Abe called it a “three-arrow” strategy, borrowing the image from a Japanese folktale that teaches that three sticks together are harder to break than one. The Bank of Japan played a big role. In addition to making massive purchases of government debt, it set itself a 2% target for inflation, a major shift. Rising prices encourage companies to invest and consumers to spend. Other fiscal policies included cutting the corporate tax rate and urging Japan’s state pension fund to buy riskier assets. Another key component — the Trans-Pacific Partnership trade agreement — was eventually signed despite the U.S. pulling out under President Donald Trump.