Since the bursting of Japan’s bubble economy in the early 1990s, the country faced pronounced problems of flagging growth and deflation. Japan had initially employed demand-side policies (monetary and fiscal policy) to shore up growth before turning towards supply-side policies later. However, “Abenomics” (named after then Japanese PM Shinzo Abe) in 2012 was the first attempt by the Japanese government to employ both demand-side policies and supply-side policies in tandem in an expansionary manner.

The driving factors behind persistent stagnation were hard to diagnose. The government was not sure if this was fueled by demand-side problems (i.e. consumers not demanding as much resulting in weak aggregate demand) or supply-side problems (i.e. low productive capacity, inefficiency of firms and industry). Demand-side policies under “Abenomics” were intended to stimulate aggregate demand in the short-term while the supply-side policies were aimed at improving the productive potential of the economy to achieve higher long-term growth.

The first 3 years of fiscal policy under “Abenomics” was to be expansionary (stimulation of aggregate demand), after which a switch to fiscal consolidation was planned. Fiscal consolidation was prompted by concerns over the fiscal sustainability of the Japanese government and a perceived need to rein in budget deficits. With an ageing society, Japan’s working-age population has been falling. This has had the effect of reducing tax revenues even as the government hands out more in pensions to an increasing number of elderly. Hence, anticipated shortfalls in government revenue prompted the switch to fiscal consolidation (after the first 3 years of stimulus).

However, this was not without potential complications. At the time “Abenomics” was unveiled in 2012, the Japanese economy was already characterized by stagnation. Raising taxes as part of fiscal consolidation can dissuade consumers from spending. This can pull down aggregate demand and thus growth. A weaker economy would also a face a problem of lower tax revenues. This series of events would, in turn, necessitate further stimulus to uplift the economy.

Despite this potential complication, moves toward long-term fiscal consolidation went ahead such as an increase in the sales tax to 8% in 2014. To preempt potential recessionary effects of this tax hike, the Abe government provided additional stimulus for the 2014 financial year.

Meanwhile, a steady increase in the ratio of effective job offers to applicants suggests a more buoyant economy ensued with an improving employment picture. This arguably created a better groundwork to pursue fiscal consolidation.

It is generally argued that the most effective aspect of “Abenomics” was monetary policy. In the years after the crashing of the asset bubble in the early 1990s, Japan had shifted towards ultra-low interest rates, zero interest rates and even quantitative easing (the purchase of longer-term securities by a central bank to increase money supply and encourage lending and investment). Yet the scale of QE was not increased significantly in Japan in response to 2007-08 global financial crisis, unlike in other advanced economies. However, from 2012 onwards, monetary policy became more assertive as part of “Abenomics”. Under a new Bank of Japan (BOJ) governor, Japan adopted QQE (Quantitative and Qualitative Easing) and adopted a firm inflation of target of 2% – which was pursued with diligent expansion of the money supply.

      As part of QQE, the BOJ ramped up purchases of long-term securities ranging from government bonds to stock indexes. This rapid expansion in money supply induced a considerable Yen depreciation (roughly 20% in a nine-month period). With imports now more expensive in terms of Yen, Japan essentially began to import inflation. The depreciation of the Yen also fueled inflationary expectations in Japan, which prompts consumers to spend sooner rather than later (when a similar amount of currency can purchase less). This has the effect of raising consumption and thus aggregate demand.

      Furthermore, with Japanese exports now cheaper in terms of foreign currency (following the yen depreciation) and thus more competitive, Japanese companies were induced to step up their exports. Increased revenues from exports could then be reinvested in Japanese economy, also raising aggregate demand.

      Ultimately, this monetary policy aspect of “Abenomics” proved very effective in ending Japanese deflation. However, the 2% inflation target has yet to be reached prompting other initiatives (e.g. price-level targeting).

In addition to demand-side policies, structural reforms were attempted as part of “Abenomics”. These included changes in corporate governance, the introduction of more flexible labor practices, efforts to stimulate innovation, corporate tax reform as well as a slew of market-oriented policies.

Attempts to increase female labor force participation were particularly successful. Day care provision was stepped up in Japan to reduce the burden on working mothers while the government encouraged more flexibility in working hours. Yet while Japan’s female labor force participation rate improved, most of the jobs generated for women as a result of “Abenomics” have been temporary jobs notably.

Japan’s entry into the Trans-Pacific Partnership (TPP) – originally supposed to include the US – also compels it to undertake deregulation in certain industries and sectors and adopt anti-monopoly laws which have the effect of increasing competition.

In the short-term, market -oriented policies can cause firms to lose out to more efficient competitors, hurting their revenues. If these firms shut down and job losses ensue, spending in the economy can be affected in turn, exacerbating problems on the demand-side.

In the longer-term, greater competition can be beneficial in that it compels firms and industries to become more efficient, improving the productive potential of the economy. However, this takes time to achieve. Joining the TPP represented an attempt by the Japanese government to import deregulation essentially.

Elsewhere, the Abe government embarked on the most significant changes in agricultural policy seen in Japan for decades. Agricultural productivity in Japan is notoriously low compared to that in other high-income countries and Abe’s policies were meant to improve this.

However, unlike monetary policy and fiscal policy whose impact on economy activity is more straightforward to measure, the impact of supply-side policies is harder to gauge and cannot be easily quantified. These policies also have a much longer gestation period whereas the impact of fiscal policy, in particular, can be seen relatively quickly after implementation (short effect time lag). Monetary policy can also be implemented fast through an overnight decision by a central bank (short action time lag).