How will the shift from Abenomics to Suganomics impact Japan’s economy?

Tokyo at night - Samuel Barbosa da Cunha

How will the shift from Abenomics to Suganomics impact Japan’s economy?

Following Shinzo Abe’s retirement in August 2020, a long period of ‘Abenomics’ in Japan came to an end. And while the new Prime Minister Yoshihide Suga inherited a stable economy from his predecessor, maintaining economic growth is now a test for his administration’s economic policies, dubbed ‘Suganomics’.

Among all of the challenges that COVID-19 brings, Suga must find a way to revitalise Japan’s economy. This is the key to pushing Japan to the next level in terms of development and investment opportunities.

Abenomics leaves a relatively strong foundation for Prime Minister Suga

Suga has made it clear that boosting the Japanese economy is at the heart of his policies while he’s Prime Minister. He has said that fighting the pandemic and ensuring the domestic economy can return to normal growth as quickly as possible is his goal.

Now the pandemic is in its second year, Japan must contend with its impact not only on jobs and the market, but the Summer Olympics. This should have been the 2020 Tokyo Olympics, of course, but with the advent of the pandemic last March the decision was taken to postpone until 2021.

At the time of writing, there has been much speculation in the media about whether a decision has been taken by the Japanese Government concerning the Olympics. A report in the Times on 21 January 2021 quoted an unnamed source from Japan’s Government as saying that privately the games have been all but cancelled. However, the Japanese Government swiftly rebutted this, saying that it was “categorically untrue”.

According to the Washington Post on 22 January 2021, Prime Minister Suga told his Parliament that: “I am determined to realise a safe and secure Tokyo Games as proof that mankind will have overcome the virus.” However, Japan must vaccinate 127 million citizens and the programme is not even due to start until the end of February. Along with the new Brazil and UK variants of COVID-19, just how much of a gamble would this be?

Japan has so far spent around $25 billion on the Games, and should they be cancelled completely it will be difficult for the country to get a return of any kind. Whether Suga can wrestle the virus under control in time for the Olympics to start in July 2021 remains to be seen. It’s inescapable that his economic policies will be judged partly on this.

Suganomics will focus on economic growth and digitisation

Away from the Olympics, Suga’s Government must also safeguard the domestic economy and ensure there is social stability and secure employment. And so, the main thrust of Suganomics will be to increase market confidence, with targets to maintain economic growth, ensure income growth and expand employment.

Since Suga took office in September 2020, digital and green policies have become the backbone of Suganomics. The green aspect of these plans is inherited from previous administrations, but Suga has put the spotlight on them as central to the country’s future success.

To highlight this, the Prime Minister announced a carbon neutralisation goal of 2050. The country will also promote fast development of renewables, particularly wind and hydrogen energy. Economic green development will in the short-term focus on creating favourable conditions to restart nuclear energy.

Digitisation is the innovative part of the Suga administration’s plans. The Government is planning to establish a specific agency to lead the digital transformation of Japan. A digital economy will govern all economic policies, including construction and industrial planning. In other words, the future of the Japanese economy will be digital.

A look back at Abenomics and the legacy of Suga’s predecessor

Former Prime Minister Shinzo Abe was the longest running political leader in Japan’s history. He served first from 2006 to 2007 and again from 2012 to 2020. When he stepped down in August 2020 due to ill health, there were concerns about the impact on the country’s economy.

Abe is primarily recognised for his focus on the economy, with his policies called ‘Abenomics’. His strategies focused on fiscal stimulus, structural reform and monetary easing and are considered to have been successful and beneficial for Japan’s economy.

He was particularly successful in encouraging both domestic and foreign investors to by into Japan’s stock market. Abe also led reforms across the board and revitalised the corporate world in Japan. While Japan’s economy undoubtedly realised gains during Abe’s tenure, it is still considered a relative bargain for global investors.

Just after he landed his second term as Prime Minister of Japan in December 2012, Abe began the new year with a declaration of his intent to escape deflation and revive the economy. He did this by introducing a three-pronged economic policy, which became known as Abenomics:

  1. Monetary expansion aiming at achieving 2% inflation.
  2. Flexible fiscal policy for short-term economic stimulus in a bid to achieve a budget surplus.
  3. Growth strategy focusing on private sector investment and structural reform in order to ensure long-term economic growth.

Abenomics boosted the economy in a number of ways, and foreign investors are still buying Japanese equities. Valuations remain relatively stable even in the face of COVID-19. Furthermore, unemployment plunged by 50% during Abe’s second term as Prime Minister, reaching 2.2% in December 2019 (from 4.3% in December 2012).

Japan continues to be attractive to domestic and foreign investors

The future of Japan’s economy builds on the success of Abenomics, but the new Prime Minister is facing enormous challenges from the pandemic. But Japan is weathering COVID-19 far better than many other countries, assisted in many ways by the strong legacy left by Abenomics.

For 2021, Japan’s economy is forecast to continue growing above trend. This will be driven by exports as they recover and, of course, the vaccine distribution. Fiscal spending will support shares, ensuring that investors are looked after. The broad outlook for the Japanese economy is low inflation and strong growth, which is positive for Japanese equities.

Thanks to Japan’s largely successful containment of the virus, its economy as a whole in 2020 outperforms the Eurozone and the UK. A steady growth will continue and should be boosted by the rollout of the vaccine in Japan, leading to a stronger second half of 2021. Overall, economists predict that Japan’s economy will grow by 2.9% in 2021, which is well above global trends.