Resignation may be the end for Abenomics 

Covid has erased all the gains made under Shinzo Abe's three-pronged approach to fixing the Japanese economy

Shinzo Abe
Shinzo Abe, Japan's longest-serving prime minister, resigned for health reasons on Friday

Tokyo stocks fell on Friday on reports that Japan’s longest-serving prime minister Shinzo Abe would be resigning for health reasons after almost eight years in office.

Confirming those reports, the 65-year-old said he did not want to make any missteps in important policy decisions amid the coronavirus crisis. 

Having rallied this week to levels not seen since the Nineties, almost $50bn was wiped off the value of the Nikkei as investors worried about who will take over and potentially make changes to “Abenomics”, his strategy to revive the economy first launched in 2013.

But what was Abenomics? The idea was to shoot "three arrows" - monetary easing, fiscal spending and structural reform - at the heart of the world’s third-largest economy, which had been plagued by 20 years of deflation and cursed with a rapidly ageing population.

Monetary easing

When Abe returned to power after a disastrous first term between 2006 and 2007, he cut a deal with the Bank of Japan to unleash monetary easing, with the goal of reducing the cost of borrowing, stimulating business activity and personal consumption, and pushing inflation up to a 2pc target.

The policy helped to strengthen the competitiveness of Japanese exporters by weakening the yen but the inflation target has remained stubbornly out of reach.

Japan even suffered deflation from 2015 to 2016, which returned this year with the pandemic.

Government spending

The Abe government also pumped hundreds of billions of dollars into modernising Japan’s infrastructure, partly in preparation for the Olympic Games Tokyo was meant to host this year.

However, the investment could not stop the economy derailing several times: GDP contracted between 2014 and 2015 before recovering, and Japan sank into recession again this year even before Covid hit.

With an ageing population more inclined to save than spend, consumption has remained stubbornly low and spending was hit further by two consumption tax hikes in 2014 and again last year.

Economists had warned both times that the increases would send the economy into reverse but the government pushed ahead, spurred to tackle the world's highest debt-to-GDP ratio.

Structural reform

Another key target was Japan's labour market: since the Second World War, workers had come to expect lifelong employment and extensive benefits. But attempts to overturn the creaking model and promote greater flexibility have moved slowly.

Bright spots have included a rising number of women and older people in the workforce, as well as some loosening of the country's strict immigration policy that may help tackle chronic labour shortages.

"Structural reform, or the third arrow, has been the declaring failure of Abenomics," says Samuel Tombs at Pantheon Macroeconomics. "Even the government's signature immigration reform last year was much ado about nothing, in practice."

Where next?

The pandemic has wiped out any of Abenomics’ gains, so Abe’s successor will be left with a heap of unfinished business. 

Takeshi Minami at the Norinchukin Research Institute says: "The focus at the moment will be on the coronavirus recovery and controlling the infection, regardless of who will be the next prime minister. There has been talk that Abenomics has been having a harmful impact, so I think the focal point will be on suggestions how to make changes to it."