Japan is one of the the largest economies on the planet. To be precise, it is the third-largest, behind only the United States and China. However, its current economy might be in a bit of a pickle, due to Shinzo Abe, the two-term Prime Minister of Japan, and his, until now, relatively successful economic program, dubbed “Abenomics”. This program, which was put forward by Abe during 2012, which was the general election for his second term, effectively stimulated the Japanese economy and drove up stock prices. However, there is one factor that could bring Abenomics down across the country. Here is some information on the weakness of Abenomics...

Three arrows of Abenomics

There are three distinct elements of Abenomics, which are often referred to as the “three arrows of Abenomics”. These arrows are a strong fiscal stimulus, monetary easing through a weak currency, and tax reforms. After the election of 2012 was concluded, the stimulus started with the 10.3 trillion yen stimulus bill, which jolted some of the economy and was able to get spending within the country to increase, again. As for structural reforms, Abe pushed for further trade agreements, such as Japanese involvement in the Trans-Pacific Partnership.

Dependent on inflation

By far, though, the largest and most important factor of Abenomics was centered around monetary easing. The Japanese government immediately set goals of a 2% annual inflation target through the process of quantitative easing. While this had an initial setback of driving up the price of imported goods, such as food, it was eventually offset by the rising exports that Japan was able to deliver with the growth of its industry. This made a relatively weak yen the centerpiece of the entire economic program. This worked incredibly well, for a time, as the Japanese stock market continued to climb. However, this type of system was far too dependent on the global market, as we are seeing now. As more currencies in the world continue to drop, we are seeing an increasing valuation on the yen, which is putting Japan’s economy into question. This is an issue we have seen occur in European economies, as well, as deflation hurts many manufacturing industries.

Stock market is dropping

Due to the deflation that is occurring with the yen, we are seeing capital start to move out of Japan, which is dragging down the stock market. This has caused the Japanese economy to contract for a shocking five quarters of the past twelve.