This document provides an overview of Abenomics, Japan's economic policy under Prime Minister Shinzo Abe. It discusses the three arrows of Abenomics: 1) aggressive monetary easing by the Bank of Japan, 2) flexible fiscal policy, and 3) a growth strategy to increase private investment. The document analyzes the effects of Abenomics so far, including yen depreciation and declining unemployment. It also examines the future prospects of Abenomics, particularly whether its goals of 2% inflation and higher growth can be achieved through continued monetary easing, fiscal stimulus, and regulatory reforms.

1. ABENOMICS:
FNCE102
The Savior of Japan?
Group 3 | G10
Archit Ajit Sharma
Cheryl Yuen Su Min
Ly Phuong Dung (Jenny)
Sneha Sultania
Tran Thi Nhat Tra

2. AGENDA
Introduction Abenomics Current
Effects
Quantitative
Easing by
BOJ
Future of
Abenomics Conclusion

3. Future of
Abenomics
Quantitative
Introduction Current Effects Easing by BOJ
Abenomics Conclusion
INTRODUCTION

4. Abenomics Conclusion
Japan’s Timeline
Future of
Abenomics
Quantitative
Introduction Current Effects Easing by BOJ
End of World
War II
1945
1950
Amazing
economic
growth in Japan
1990
2011
The Great East
Japan
Earthquake
Introduction of
Abenomics
2010 2012
Lost Two
Decades
1980

5. Video

6. Future of
Abenomics
Quantitative
Introduction Current Effects Easing by BOJ
Abenomics Conclusion
Reasons for Japan’s Recession
v Deflation has been the root of
Japan’s economic and social
problems

7. Future of
Abenomics
Quantitative
Introduction Current Effects Easing by BOJ
Abenomics Conclusion
Japan’s Demographics
v Due to habitual savings
v Japan’s aging population
v Elderly has the tendency to save, this aging population would
mean greater savings

8. Abenomics Conclusion
Japan’s Debt
Future of
Abenomics
Quantitative
Introduction Current Effects Easing by BOJ
v Weakens their economy, as it
encourages consumers to
postpone their spending
v Causes corporations to expect
little market growth, and
constrain the investment in
employment and capital stock
v Companies cut cost due,
leading to wage cut
v Corporate earnings fell,
causing interest rate to fall to
low levels

9. Abenomics Conclusion
Japan’s Stocks
Future of
Abenomics
Quantitative
Introduction Current Effects Easing by BOJ

10. Future of
Abenomics
Quantitative
Introduction Abenomics Conclusion
Current Effects Easing by BOJ
ABENOMICS

11. Introduction Abenomics
Japan’s
Revitalization
Monetary
Easing
Fiscal
Stimulus
Growth
Strategy
Conclusion
Future of
Abenomics
Quantitative
Current Effects Easing by BOJ
The Three Arrows
v Sustainable economic growth led by private demand
v Nominal GDP growth of around 3 per cent
v Real GDP growth of around 2 per cent

12. Introduction Abenomics
Conclusion
First Arrow - Monetary Easing
TARGETS – Joint Statement by BOJ & Government of
Japan
v To achieve price stability target of 2 per cent with a
time horizon of around 2 years
v To increase the real interest rates
Future of
Abenomics
Quantitative
Current Effects Easing by BOJ

13. Future of
Abenomics
Introduction Abenomics
Conclusion
BOJ Targets
Positive cycle
between
economic activity
and financial
markets
Rise in inflation
expectations
End of
Japan’s 15
year
deflation!
Quantitative
Current Effects Easing by BOJ

14. Future of
Abenomics
Introduction Abenomics Conclusion
Joint Statement of Bank Of Japan and
Government of Japan – TOOLS
Quantitative
Measures
Qualitative
Measures
Quantitative
Current Effects Easing by BOJ

15. Future of
Abenomics
Introduction Abenomics Conclusion
First Arrow: Quantitative Monetary Easing
Adoption of monetary
base control
Increase in JGB
purchases
Increase in J- REIT
purchases and ETFs
• Main operating
target for money
market operations is
changed from
uncollateralized
overnight call rate to
the monetary base.
• The monetary base
will increase at an
annual pace of
about 60 – 70 trillion
yen.
138 trillion
yen
200 trillion
yen (2013P)
270 trillion
yen (2014E)
• Further decline in
interest rates across
the yield curve.
• Purchase JGBs so
that their amount
outstanding will
increase at an
annual pace of
about 50 trillion yen
• Monthly flow of JGB
purchases is
expected to
become 7+ trillion
yen on a gross basis.
• Open-ended asset
purchases
• To lower risk premium
of asset prices, BOJ
will Purchase ETFs to
increase the amount
outstanding at a
pace of 1 trillion yen.
• (J-REITS) - its amount
outstanding will
increase at an
annual pace 30
billion yen.
Quantitative
Current Effects Easing by BOJ

16. Future of
Abenomics
Introduction Abenomics Conclusion
First Arrow: Quantitative Monetary Easing
Adoption of monetary
base control
Increase in JGB
purchases
Increase in J- REIT
purchases and ETFs
• Main operating
target for money
market operations is
changed from
uncollateralized
overnight call rate to
the monetary base.
• The monetary base
will increase at an
annual pace of
about 60 – 70 trillion
yen.
138 trillion
yen
200 trillion
yen (2013P)
270 trillion
yen (2014E)
• Further decline in
interest rates across
the yield curve.
• Purchase JGBs so
that their amount
outstanding will
increase at an
annual pace of
about 50 trillion yen
• Monthly flow of JGB
purchases is
expected to
become 7+ trillion
yen on a gross basis.
• Open-ended asset
purchases
• To lower risk premium
of asset prices, BOJ
will Purchase ETFs to
increase the amount
outstanding at a
pace of 1 trillion yen.
• (J-REITS) - its amount
outstanding will
increase at an
annual pace 30
billion yen.
Quantitative
Current Effects Easing by BOJ

17. Future of
Abenomics
Introduction Abenomics Conclusion
First Arrow: Quantitative Monetary Easing
Adoption of monetary
base control
Increase in JGB
purchases
Increase in J- REIT
purchases and ETFs
• Main operating
target for money
market operations is
changed from
uncollateralized
overnight call rate to
the monetary base.
• The monetary base
will increase at an
annual pace of
about 60 – 70 trillion
yen.
138 trillion
yen
200 trillion
yen (2013P)
270 trillion
yen (2014E)
• Further decline in
interest rates across
the yield curve.
• Purchase JGBs so
that their amount
outstanding will
increase at an
annual pace of
about 50 trillion yen
• Monthly flow of JGB
purchases is
expected to
become 7+ trillion
yen on a gross basis.
• Open-ended asset
purchases
• To lower risk premium
of asset prices, BOJ
will Purchase ETFs to
increase the amount
outstanding at a
pace of 1 trillion yen.
• (J-REITS) - its amount
outstanding will
increase at an
annual pace 30
billion yen.
Quantitative
Current Effects Easing by BOJ

18. Future of
Abenomics
Quantitative
Introduction Abenomics Conclusion
Current Effects Easing by BOJ
First Arrow: Qualitative Monetary Easing
Enhanced dialogue with market participants
v Exchange views pertaining to
money market operations and
market transactions more generally

19. Introduction Abenomics Conclusion
• Creation of vicious cycle
• Avoid recession
• Pave way for Growth Strategy
Economic
Revitalization
Fiscal
Consolidation
Economic
Growth
Future of
Abenomics
Quantitative
Current Effects Easing by BOJ
Second Arrow-Fiscal Stimulus

20. Introduction Abenomics Conclusion
Types of Fiscal
Stimulus
Short
term
Government
Consumption
Public Works
Investment
Medium
Term
Improving
Primary Balance
of General
Account
• Boost total
spending to 25
trillion yen
• Infuse 3.8 trillion yen
on post-quake
reconstruction
• Contribution to the
state pensions of
2.8 trillion yen
• Total amount of
supplementary
budget – 13.1
trillion yen
• 5.3 trillion yen as a
part of the 2013
budget - indicates
the change in
fiscal tightening in
the recent years.
By 17 trillion yen
of the national
and local
governments in
FY2014 and
FY2015.
• The utmost
effort must be
exerted both
on the
expenditure
and revenue
sides.
Future of
Abenomics
Quantitative
Current Effects Easing by BOJ
FY 2013 FY 2014 FY 2015
Targets for
the primary
balance of
the General
Account
A deficit of 23
trillion yen
A deficit of
around 19
trillion yen
A deficit of
around 15
trillion yen

21. Future of
Abenomics
Quantitative
Introduction Abenomics Conclusion
Current Effects Easing by BOJ
Third Arrow-Strategy for Growth
v Post-quake reconstruction and disaster prevention
v Creation of wealth though growth
v Ensuring a sense of security in daily life

22. Future of
Abenomics
Quantitative
Introduction Abenomics Conclusion
Current Effects Easing by BOJ

23. Future of
Abenomics
Quantitative
Introduction Current Effects Conclusion
Abenomics Easing by BOJ
CURRENT EFFECTS
OF ABENOMICS

24. Future of
Abenomics
Quantitative
Introduction Current Effects Conclusion
Abenomics Easing by BOJ
Devaluation of Yen

25. Future of
Abenomics
Quantitative
Introduction Current Effects Conclusion
Abenomics Easing by BOJ
Diffusion Index

26. Future of
Abenomics
Quantitative
Introduction Current Effects Conclusion
Abenomics Easing by BOJ
Decrease in Unemployment

27. Future of
Abenomics
Quantitative
Introduction Current Effects Conclusion
Abenomics Easing by BOJ
Effect on Stock Index

28. Future of
Abenomics
Quantitative
Introduction Current Effects Conclusion
Abenomics Easing by BOJ
Effects on the World Economy
According to Jerry Schiff, the IMF's mission chief for
Japan, “A Japanese revival would be a significant
benefit to the world economy at a time when there
are not a lot of other drivers of global growth”

29. Future of
Abenomics
Quantitative
Introduction Current Effects Conclusion
Abenomics Easing by BOJ
Effects of the World Economy
Currency War

30. Quantitative
Introduction Easing by BOJ Conclusion
QUANTITATIVE EASING
OF BOJ
Future of
Abenomics
Abenomics Current Effects

31. Quantitative
Future of
Abenomics
Introduction Easing by BOJ Conclusion
v BOJ is the first central
bank to implement QE to
fight domestic inflation
v It aimed to boost the
CAB in excess of the
required reserve
v BOJ explicitly claimed to
maintain the programme
until Japan is out of
deflation
Abenomics Current Effects

32. Quantitative
Future of
Abenomics
Introduction Easing by BOJ Conclusion
Abenomics Current Effects
Monetary Policy Target

33. Quantitative
Future of
Abenomics
Introduction Abenomics Current Effects
Easing by BOJ Conclusion
Instruments

34. Quantitative
Future of
Abenomics
Introduction Easing by BOJ Conclusion
Abenomics Current Effects
Commitment Horizon
v The BOJ publicly committed to keep QE until the
core CPI either reached zero or rose in the y-o-y
basis for several months.
v In March 2001, Japan’s core CPI had been
positive for 3 consecutive months, signaling a
sustained recovery and prompting the BOJ policy
makers to stop the QE.

35. Quantitative
Future of
Abenomics
Introduction Easing by BOJ Conclusion
Abenomics Current Effects
Success of Quantitative Easing
v QE revived the Japanese economy
v The core consumer prices were rising steadily
during the last 3 months of implementation of
the policy.

36. Future of
Abenomics
Introduction Easing by BOJ Conclusion
Abenomics Current Effects
Success of Quantitative Easing
3 Successes of QE
Quantitative
1. Stabilize the banking system, improve liquidity and
boost lending between banks and from banks to
households

37. Quantitative
Future of
Abenomics
Introduction Easing by BOJ Conclusion
Abenomics Current Effects
Success of Quantitative Easing
2. Decrease the long term interest rates to a certain extent

38. Quantitative
Future of
Abenomics
Introduction Easing by BOJ Conclusion
Abenomics Current Effects
Success of Quantitative Easing
3. BOJ’s explicit pre-commitment to end the
QE only when the y-o-y changes in the CPI
turned positive in a stable manner increased
market confidence

39. Quantitative
Future of
Abenomics
Introduction Abenomics Current Effects
Easing by BOJ Conclusion
QE vs Abenomics
Similarities Differences
Both involve the increase in
excess reserves of financial
institution
The third arrow of Abenomics,
which aims at revitalizing
industries creating markets for
selected sectors within the
promise of future growth and
expanding global outreach
BOJ policy makers and Shinzo
Abe publicly confirmed the
commitment of their policies
and thereby improved the
market expectation
Abenomics is more
comprehensive and thus, will
revive the Japanese economy
more than QE did

40. Future of
Abenomics
Introduction Abenomics Current Effects
Easing by BOJ Conclusion
Differences
Quantitative
QE vs Abenomics
v The third arrow of Abenomics, which aims at
revitalizing industries, creating markets for
selected sectors with the promise of future
growth, and expanding global outreach.
v Abenomics is more comprehensive and thus, will
revive the Japanese economy more than QE
did

41. Future of
Quantitative
Easing by BOJ
Introduction Abenomics Current Effects
Abenomics Conclusion
FUTURE OF
ABENOMICS

42. GOALS
Potential Growth
Rate of nearly 2%
CPI Inflation Rate
of 2% in 2 years
Quantitative
Easing by BOJ
OUTCOMES
Success
Partial
Success Failure
✔
✔
✖
✖
✔✖
✔✖
Future of
Introduction Abenomics Current Effects
Abenomics Conclusion

43. Quantitative
Easing by BOJ
Introduction Abenomics Current Effects
Abenomics Conclusion
3 Arrows
Future of
Monetary Easing Fiscal Policy Growth Strategy

44. Quantitative
Easing by BOJ
Introduction Abenomics Current Effects
Abenomics Conclusion
Monetary Easing
Future of
1. Correct the strong Yen
2. Instill expectations of inflation
3. Reduce real interest rate

45. Quantitative
Easing by BOJ
Introduction Abenomics Current Effects
Abenomics Conclusion
Monetary Easing
Future of
1. Correct the strong Yen
The Yen has been depreciating, but it
does not seem to have significant
impact on Japan’s export and trade
balance.
v Automobile makers are not willing to
bring their manufacturing operations
back to Japan
v There are other factors such as global
demand and global economic cycle
that affect the level of exports
v Weaker Yen harms import sector

46. Quantitative
Easing by BOJ
Introduction Abenomics Current Effects
Abenomics Conclusion
Monetary Easing
Future of
2. Instill expectations of inflation
Targeted CPI inflation rate of 2% and the
increase in consumptions may not be likely
to be achieved.
v In May 2013, y-o-y growth of Tokyo’s CPI was
only 0.1%
à prices are likely to increase moderately
à 1% would be an appropriate inflation rate
for the next few periods
à Fall short of BOJ’s target of 2%
v The wealth effect is unlikely lead to sustainable
gains in broader consumption
v Companies refuse to raise wages
à Consumers do not expect the prices will rise.

47. Quantitative
Easing by BOJ
Introduction Abenomics Current Effects
Abenomics Conclusion
Monetary Easing
Future of
3. Reduce real interest rate
Real interest rate is decreasing.
But could it be sustained at expectedly
low level?
v Sep 2013, core CPI > 10-year bond yield
à RIR turned negative à GOOD NEWS!
v Problems?
à Keep purchasing a large quantity of
bonds to keep the nominal rates low à
increase level of debt!
à Slow-growth in inflation level (1%)

48. Quantitative
Easing by BOJ
Introduction Abenomics Current Effects
Abenomics Conclusion
3 Arrows
Future of
Monetary Easing Fiscal Policy Growth Strategy

49. Quantitative
Easing by BOJ
Fiscal Policy
1. With high debt,
Japan’s credit ratings
would fall
2. Consumption tax hike
will offset the effects of
stimulus package
v Aug 19, Moody’s issued a warning:
“A tipping point for creditworthiness
would eventually loom if growth
remains elusive and the
government’s debt and refinancing
needs remain at very high level”
v High debt might “backfire” the
plan.
v Tax rate = 8% in FY14 and 10% in
FY15.
v Offer stimulus package of 5 trillion yen
to minimize the drag on the
economic growth
à Interrupt the ongoing recovering
process.
Future of
Introduction Abenomics Current Effects
Abenomics Conclusion

50. Quantitative
Easing by BOJ
Introduction Abenomics Current Effects
Abenomics Conclusion
3 Arrows
Future of
Monetary Easing Fiscal Policy Growth Strategy

51. Future of
Quantitative
Easing by BOJ
Introduction Abenomics Conclusion
Growth Strategy
Abenomics Current Effects
v The most important yet politically challenging arrow!
v Government commitment is the key determinant.

52. Quantitative
Easing by BOJ
Introduction Conclusion Future of
Abenomics
Abenomics Current Effects
v Japan is on the verge of an incredible transformation.
v The process will definitely take time.
v PARTIAL SUCCESS!
v Growth rate and inflation rate of 1%
v Potential problems deterring the transformation process
such as low potential growth in exports, low expectation of
rising price, high debt, consumption tax hike.

53. Introduction Conclusion Future of
Abenomics
Quantitative
Easing by BOJ
Abenomics Current Effects
Recent News
5th Nov 2013: Bloomberg
Progress on the
growth strategy has
been slow
Economist at Meiji Yasuda Life
Insurance Co
1. Slowing Growth
v The Topix fell less than 0.1% that day, a
third day of decline
2. Wages fall
v Regular wages fell for a 16th month
straight in September
v Abe comes up short when it comes to
measures to spur business investment.
v The scale and speed of efforts to
remove international trade barriers,
lower corporate taxes and deregulate
are inadequate

54. Introduction Conclusion Future of
Abenomics
Quantitative
Easing by BOJ
Abenomics Current Effects
Recent News
5th Nov 2013: Bloomberg
3. Monetary Base
v Forecast that monetary base will
increase to 270 trillion by end 2014
v However, the median1.9% price view is
too optimistic and urged central bank
to more clearly reflect downside risks
4. Another Arrow
v Need to fire another arrow aimed at
devaluing the yen if Abe administration
is unwilling to risk a sharp economic
slowdown.

55. Introduction Conclusion Future of
Abenomics
Quantitative
Easing by BOJ
Abenomics Current Effects
Recent News
10th Nov 2013: The Wall Street Journal
v Negative 1.1% of
merchandize export from
June-Sept 2013
v Seems that Abenomics is
faltering
v Possible reasons:
à The negative impact
from the slowdown in
emerging markets
à Jump in consumer
spending is wearing off

56. Introduction Conclusion Future of
Abenomics
Quantitative
Easing by BOJ
Abenomics Current Effects
Recent News
11th Nov 2013 : Quartz
v Japan’s BOP looks
decent
v Its CA Surplus in Sept
rose to ¥587billion

57. Introduction Conclusion Future of
Abenomics
Quantitative
Easing by BOJ
Abenomics Current Effects
Recent News
11th Nov 2013 : Quartz
v Unadjusted numbers
show that Japan’s CA
is in deficit
v The third time when
the unadjusted BOP
went into deficit

58. Introduction Conclusion Future of
Abenomics
Quantitative
Easing by BOJ
Abenomics Current Effects
Recent News
10th Nov 2013: The Wall Street Journal
v Foreign investors are pouring billions of dollars into Japanese
stocks
v In Oct, Abe also overcame opposition to increase
consumption tax to help ease the nation’s debt burden
v A steady yen is a
further plus for
foreign investors
v Renewed focus on
Japan has drawn
new investors

59. Q & A