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Abenomics and the Japanese Yen

Posted: Wednesday, September 9th, 2020

Estimated Reading Time: 2 minutes

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A couple of weeks ago, financial markets found out by the Japanese Prime Minister’s resignation announcement. Shinzo Abe, credited for “Abenomics,” a set of monetary and fiscal measures to sustain economic growth, announced it will step down due to health issues.

The markets reacted immediately by sending the Japanese Yen (JPY) higher across the board. The fear was (still is, to some extent) that the new Prime Minister will not continue the Abenomics measures that delivered great success for the Japanese economy.


Explaining Abenomics and its Impact on the Japanese Economy

Shinzo Abe took a second mandate as Japan’s Prime Minister in 2012, becoming the longest-serving Prime Minister in the history of Japan. He is credited with much of the changes in the economic and political landscape and Japan for more than a decade.

Moreover, Abe had a great quality. His decisions were tightly correlated with the Bank of Japan’s (BOJ) monetary policy, both having the same goal – economic growth in Japan.

Japan has long fought deflation. As such, the BOJ faced a hard time sending inflation to the 2% target. It faced periods with inflation below the zero level well before the Western world faced similar conditions. Hence, the innovation delivered by Abenomics served as a template for the Western world in both fiscal and monetary stimulus.

Abenomics Explained

Simply put, Abenomics consists of three areas, or “arrows”: fiscal stimulus, structural reforms, and monetary easing. Nowadays, when the world faces a pandemic, the three together do not represent something new.

Many countries delivered fiscal stimulus together with aggressive monetary easing to fight the economic recession created by the coronavirus pandemic. Even before the pandemic, Mario Draghi, the ECB’s President before Christine Lagarde took over, called for the need for structural reforms in the Euro area.

But Japan implemented Abenomics way earlier. In other words – what the world does now to fight the economic recession, Japan started a long time ago.

BOJ had a crucial role in Abenomics implementation. It delivered monetary easing in ways seen unacceptable in the Western world. Yet, nowadays, the optic changed.

For example, BOJ aggressively bought domestic ETFs (Exchange Trading Funds). Moreover, it holds JPY500 trillion worth of JGBs (Japanese Government Bonds) and is responsible for much of the JPY weakness from the 80 level to 125.

Abe’s resignation will not change anything for the JPY and the Japanese economy’s trajectory. Because his successor comes from the ruling party, the chances are that Abenomics principles will continue.

For now, the markets may relax. Stimulus out of Japan continues.

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