The news of the assassination of former Japanese Prime Minister Shinzo Abe shocked the world, which has since caused the exchange rate of the yen against the U.S. dollar to rise rapidly, while the Japanese stock market plunged almost in an instant. The death of Abe also marks the uncertainties of Japan’s decade-old economic policy of "three arrows". Many economists have since announced Abenomics has reached its end, believing that Japan needs to re-examine and adjust its macro policies. Yasunari Ueno, the chief economist at Mizuho Securities, said, “Ex-Prime Minister Abe was the person who led the appreciation of the yen and the stock price”. He analyzed that the market is aware of the opposite trend and reacts with the appreciation of the yen, and the fall in the stock market. According to an analysis on the website of the Japan Broadcasting Association (NHK), the market's reaction means that Abe's assassination may shake the position of Abenomics in Japan's monetary policy. Some analysts believe that after the passing of Abe, Japan's economic policies could very well lean toward those of Fumio Kishida. It is expected that Prime Minister Kishida will adjust Abenomics in the future and implement corresponding economic policies around his "new capitalism".
However, researchers at ANBOUND pointed out that the adjustment of Japan's economic policy, or the lack of it, depends on the current internal and external situations facing the country’s economy. In the current situation of rising inflation and high debt, the shift from Abenomics to "new capitalism" will be anything but smooth. As the yen continues to depreciate and inflation rises, the dilemma facing the Japanese economy limits the room for maneuver and adjustment of its economic policies.
After the heavy blow of the financial crisis in 2008, by promoting the economic policy of Abenomics, Japan has managed to push its economy back onto the growth track and promoted the gradual recovery of the capital market. Abenomics, therefore, is considerably effective in this respect. In 2020, the Nikkei has recovered amid continued monetary easing, indicating that the Japanese stock market has recuperated from the post-1990s catastrophe. However, Abenomics still faces a long-term unresolved conundrum of sluggish domestic demand. Continued easing fails to solve the deflationary problem and actually reflects long-term structural problems in the Japanese economy. In the so-called "three arrows” of Abe’s economic policies, apart from the “two arrows” of monetary easing and fiscal stimulus, the "third arrow" of economic structural reform has always been a vague concept without an effective policy framework. As a result, Japan's economic structural problems have not been effectively resolved.
Although Kishida’s "new capitalism" policy is similar to Japan's previous Income Doubling Plan, researchers at ANBOUND believe that this does not mean Abenomics will be completely discarded. Instead, this signifies the response and adjustment to the new economic trend or even a further extension of Abenomics. In May 2022, Kishida gave a speech in the City of London, where for the first time he introduced in detail the meaning, intent, and four policy pillars of his "new capitalism": (1) investment in people, (2) investment in technological innovation, (3) venture capital, and (4) investment in green and digital (industry). As can be seen, these four pillars all contain the word "investment", attaching importance to the adjustment of economic structure and promoting economic growth. On July 10, Kishida said that he would intensify efforts to promote "new capitalism". In a sense, the "new capitalism" policy is more like the "third arrow" in Abenomics that has not been realized. Some of the crucial issues are that these investments in talents and technology are difficult to generate actual benefits in the short term, and long-term financial support is needed to achieve long-term economic growth. Hence, its policy basis is still based on Abenomics' monetary and fiscal expansions. This also means that the Bank of Japan (BOJ)'s loose monetary policy will continue.
With the current changes in the international economic situation and rising global inflation, the BOJ, like other major central banks, is also faced with a dilemma. Central banks, including the Federal Reserve, are encountering conflicting choices of high inflation and recession, while the BOJ needs to consider a range of effects after changing its easing policy. After the yen continued to depreciate, the inflation level in Japan has exceeded the 2% target continuously. Yet, if the easing policy advocated by Abenomics ends there, it will lead to an increase in the yield of Japanese government bonds and the shrinking of the Japanese stock market bubble, which would then be a major challenge for Kishida’s "new capitalism" policy. At the same time, with Japan as a whole facing an unprecedented level of leverage, it is not exactly optimistic that Japanese companies could afford the increase in interest rates. In addition, the BOJ has accumulated a large number of sovereign bonds and risk assets. Once the balance sheet is reduced and sold, it will intensify the sell-off in the capital market, thus causing capital market crises of stocks and debts. The impact of this on the economy would be lethal.
Although the depreciation of the yen is good for exports and will boost the Japanese economy, the situation now is vastly different from two decades ago. As the impact of the COVID-19 pandemic is still being felt, combined with the surge in commodity prices, and the Federal Reserve raising interest rates, the Japanese economy is facing enormous pressure from rising import costs. In recent months, Japan has experienced an extremely rare foreign trade deficit. If Japan continues its current easing policy and the yen continues to depreciate, it will further increase the cost of imported goods and raw materials and push up the country's inflation level. This, in turn, will exacerbate the shrinking of consumption and investment demand.
At present, it is very difficult for Japan to change the status quo simply by adjusting its own policies, as it needs to coordinate with the Fed's policy. Driven by the market’s expectations for the Fed to continue aggressive interest rate hikes this month, the U.S. dollar index continued to climb. On July 11, the U.S. dollar index rose sharply, rising above 108 during the session, hitting its highest level since 2002. The USD/JPY exchange rate has once again breached the 137 thresholds in June. Judging from the current situation, the monetary policy gap between the Fed and the BOJ may continue to widen. With the Fed starting to tighten its monetary policy, raise interest rates, and shrink its balance sheet at the same time, the continued implementation of loose money by the BOJ will push the yen to further depreciate. In addition, facing increasing pressure of capital outflow, the Japanese currency released through loose policy would flow overseas.
After the Fed's policy shift, the low inflation and low-interest rate environment faced by the world has undergone fundamental changes. This also means that Abenomics need to adjust to such a new environment. However, whether it is tightening or easing, the BOJ will still be unable to tackle the current dilemma effectively, which makes the structural reform of "new capitalism" lose its foundation. All in all, promoting the sustained growth of the Japanese economy will be a difficult problem for the Japanese government for a long time to come.
Final analysis conclusion:
Japan has now descended into the dilemma of maintaining economic recovery, as well as dealing with the pressure of continued depreciation of the yen. To get out of such a predicament, it would be insufficient for Japan to merely adjust its own policy. Rather, this would largely depend on the continuous changes in the Fed's monetary policy and global inflation pressure.
