Number Theory: The economic legacy left behind by Shinzo Abe

Shinzo Abe’s administration set itself a target of taking Japan’s nominal GDP to 600 trillion yen by 2020. This target has not materialised even in 2022, when Japan’s nominal GDP was 557 trillion yen.

Japan’s longest serving ex-Prime Minister Shinzo Abe, once described as “one of the world’s most recognisable statesmen” by the Financial Times, was gunned down on July 8 at the age of 67. While tributes poured in for Abe from Japan as well as other parts of the world, what exactly is the economic legacy of a man who gave his name to an economic policy approach? Here are four charts which try to answer this question.

In an attempt to boost Japan’s military presence, Abe wanted to bring out a domestic reform to move away from the six decades of state pacifism embedded in the Japanese constitution.(AP file photo)

“Abenomics” gave a small boost to the Japanese economy ...

The Japanese economy entered a prolonged recession from the 1990s, much before Abe took office. He had two terms as the prime minister, the first one from 2006 to 2007 and then from 2012 to 2020. When Abe came to power for the second term he unleashed an economic doctrine called “Abenomics” which included easy monetary and fiscal policy along with structural economic reforms. Abe’s second term in office was also the time when Japan was trying to rebuild its economy from the vestiges of the 2011 Tohoku earthquake and tsunami, which killed about 20,000 people, and led to the meltdown of the Fukushima nuclear reactors. (https://reut.rs/3zderZs)

His approach helped Japan to combat the immediate economic crisis, but growth rates remained lower than historical levels. Japan’s real GDP grew at a Compound Annual Growth Rate (CAGR) of 0.94% in Abe’s term – this includes 2012 to 2019 excluding the pandemic year - which is higher than the 0.16% growth between 2005 and 2012. However, GDP growth during Abe’s term was marginally lower than the five year CAGRs of 1.04% and 1.19% in the late 1990s and early 2000s, respectively, and far lower than 4-5% growth seen in the1980s.

... but fell short of its stated target

Shinzo Abe’s administration set itself a target of taking Japan’s nominal GDP to 600 trillion yen by 2020. This target has not materialised even in 2022, when Japan’s nominal GDP was 557 trillion yen. While the pandemic has clearly played a role, Japan’s economy had lost momentum by 2019 itself, when there was an annual contraction of 0.24% in real GDP. Abe’s decision to increase sales tax from 8% to 10% played a major role in this development. To be sure, economists had warned about such a possibility. For example, Nobel Laureate Joseph Stiglitz was against such a tax hike since it would curb consumer spending and advised Abe to impose carbon tax to meet the fiscal crunch in a 2017 article (https://bit.ly/3IOq7VG).

Abenomics also yielded mixed results in the labour market

One of the key structural reforms of Abenomics was a focus on increasing female employment ; there has been a significant progress on this front. Data from the World Bank shows that the female unemployment almost halved from 4.05% in 2012 to 2.17% in 2019. This is also the first time the female unemployment fell below 3% in two decades. This came even as female labour force participation rate shot up from 63.6% to 72.7% over the same period.

However, the policy to increase the birth rates -- another structural reform of Abenomics -- did little to help with the shortage of labour in Japan. In fact, the age dependency ratio, as share of the working population, was on a rise during Abe’s term from 59% in 2012 to 68% in 2019. A 2017 IMF article estimated that the aging population could drag down Japan’s average annual growth by 1% over the following three decades.

Abe’s military doctrine lacked popular approval

In an attempt to boost Japan’s military presence, Abe wanted to bring out a domestic reform to move away from the six decades of state pacifism embedded in the Japanese constitution. He reinterpreted the Article 9 of the constitution in 2014 – this clause renounces war and bans the maintenance of a standing military -- and sponsored a new security legislation in 2015. This move was controversial for the reason that many Japanese see this charter as responsible for the country’s post-war record of peace. Despite being a popular leader, Abe could not muster support for this reform. In fact, less than half the Japanese citizens (43%) indicated approval to revise the constitution in 2020, while slightly more than half favoured revision in 2012, as per a Japanese newspaper Asahi Shimbun’s poll.