January 21, 2018

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What is Abenomics?

Abenomics is an economic policy proposed and implemented by the Abe administration. Abenomics is comprised of three policies known as the three arrows in Japan. The first arrow is monetary easing, the second arrow is fiscal stimulus and the third arrow is growth strategy (structural reform). The TPP can be included in the third arrow. They are known as “the three arrows” after a famous parable by the 16th century feudal lord Motonari Mori. The parable says that one arrow by itself can easily be snapped in half but a bunch of three arrows together will be unbreakable. The idea with Abenomics is the same. Just as a single arrow can be easily snapped, implementing only one of the three policies will not have a large effect on the economy. However, together the three can be very powerful.

Some critics of the Abe administration have suggested that there is a fourth arrow: increasing the assertiveness of Japanese defense policy. Abe changed the interpretation of Article 9 so that the Self Defense Forces can exercise the right to collective self-defense. Another example of the fourth arrow is Abe’s loosening of the restrictions on exporting Japanese armaments.

Monetary Easing is the first arrow of Abenomics. Ijigen kinyukanwa is the name of monetary policy announced by the current head of the Bank of Japan, Haruhiko Kuroda on April 3 and 4, 2013. The Bank of Japan is a central bank. Ijigen kinyukanwa is also called Kuroda Bazooka.

In Japanese “Ijigen” means “another dimension” and “kinyukanwa” means monetary easing. So, a direct translation would be “another dimension of monetary easing”. However, in English this sounds like something from science fiction, like you are doing monetary easing from a spaceship in Star Trek. Better translations would be “unconventional monetary easing”, “non-traditional monetary easing” or “extraordinary monetary easing”.

What Kuroda has tried achieving in his unconventional monetary easing was to double the size of the monetary base to 270 trillion yen.

The inflation target is 2%. Kuroda wants to achieve this in two years. He said this in 2013, now it is already 2014. An important aspect of Abenomics is to end the deflation that continued for more than 20 years before the beginning of Abenomics. Kuroda states that this phenomenon is only experienced in Japan. Due in part to deflation, Japanese economy has been in a slump.  It is very important to increase inflation.

Why is the Bank of Japan using unconventional monetary policy?

Normally the central bank affects a country’s economy by changing the interest rate. In recession the conventional policy response is to lower interest rates. In the 1990s Japan gradually lowered interest rates and right now the interest rate is around zero. Therefore, the Bank of Japan can no longer cut the interest rate. Instead, it has to use unconventional monetary policy. Instead of lowering interest rates, the Bank of Japan increases the amount of money circulating in the Japanese market by buying bonds from financial institutions. This means financial institutions have more money (they are more liquid) which they can use for lending, increasing the amount of money circulating in the economy.

This monetary policy has been effective at fighting deflation. However, critics have suggested that it damages the credibility of Japanese bonds and puts too great a burden on the Bank of Japan. Another criticism is that, by buying large amounts of bonds, the Bank of Japan is practically funding the entire government budget deficit.

How is non-conventional monetary easing different from an ordinary monetary easing?

Before implementation of non-conventional , the Bank of Japan did not buy bonds with long maturities and the Bank of Japan purchased only bonds with maturity shorter than three years. But, after non-conventional monetary easing, the Bank of Japan has been buying long term bonds such as bonds with 10 year and 20 year maturities. (The “maturity” of a bond is the duration of the bond.)

Moreover, there was a rule that states that “the amount of bonds that Bank of Japan has must not surpass the balance of banknotes.” But, this rule has been completely ignored after the implementation of non-conventional.

How much did the monetary base increase due to ijigen kanwa?

In 2011 and 2013 before April when ijigen kanwa started, the monetary base was increasing a little by little,  but after April 2013, when ijigen kanwa started, the monetary base suddenly started increasing rapidly. The amount of monetary base in March, 2014 is 54.8% larger compared to the last year.

What does it mean to increase the monetary base?

The Bank of Japan pays money to private banks by buying bonds from private banks. And the money that the private banks receive from the Bank of Japan when they sell their bonds (the money) will be deposited to the accounts that the private banks have at the Bank of Japan. In this way, the money in the accounts at the Bank of Japan increases. When around the time extraordinary monetary easing has just started, the total amount of money in the account of the Bank of Japan was only 50 trillion yen. But, recently, the total amount has surpassed 130 trillion yen.

What is the monetary base ?

According to the definition of the Nikkei Shimbun, the monetary base is the total amount of money that the Bank of Japan provides to private banks. It is deposited in the accounts at the Bank of Japan.  It is the sum of cash and balance at current accounts that the private banks have at the Bank of Japan.

There would be no interest on this money.  Because private banks don’t like that, they would rather use the money to lend it to individuals and firms with interest in order to make a profit. Therefore, if the Bank of Japan increases the monetary base, it will lead to an increase in money lending, and it will stimulate the economy.

When the Great Earthquake of Eastern Japan took place in March, 2011, the Bank of Japan provided lots of funding to support the Japanese economy and this led the monetary base to expand.

(Sources: 1. Nikkei Biz Academy April 30, 2014. 2. Nikkei Shimbun May 2, 2013 )

The second arrow of Abenomics is active fiscal policy. This means using government spending aggressively to stimulate the economy. During a recession, the government substantially increases spending on public projects and alleviates the recession. If firms that engage in public projects make high profits by doing so, there will be more employment, salaries will increase and this will lead consumer spending to increase. In addition, if infrastructure is improved by these public projects, the improvements to infrastructure can also stimulate the economy. For example, if improvements to the transportation system make it easier to get to a local sightseeing spot then more tourists will visit the area and this will energise the local economy. In terms of taxes, Abenomics aims to energise the economy by reducing corporation tax for firms that increase employment, raise wages or invest in plants and equipment.

( Source:Koichi Hamada. Japan which is created by Abenomics and TPP.  Kodansha: 2013)  

The third arrow of Abenomics is a strategy for growth (structural reform).  More precisely, it aims to promote private investment by creating an environment where it is easy for capital to flow through the private sector, be invested in firms and grow. Basically, it means encouraging people to invest dormant capital and kick starting the domestic market. In addition, the growth strategy aims to shift human resources, skills and funds to more productive sectors in order to increase the sales per person. The increased profits that arise because of this will then trickle down to households and raise their income. Increased income will then lead to higher consumption. The key to make this positive cycle happen is structural reform. It is important to drastically reform sectors such as Medical Services, Energy and Infrastructure since private investment in these sectors is tightly restricted by regulation. Many policies like womanomics and TPP are part of the growth strategy. But, of the three arrows, the third arrow is considered the least successful. For example, TPP has yet to be concluded even though Japan has participated in many negotiations, and media reported numerous times that it is very close to finalization.

The Parable
The term  “Three Arrows” is derived from the parable of Motonari Mori.
Motonari Mori, born in 1497, was a feudal lord in the western part of Hiroshima prefecture, Japan.  Before the country was united by Ieyasu Tokugawa in 1603, Japan was divided into many regions, each ruled by a feudal lord. It was a period of great instability. Mori had three sons. Although they did not get along, Mori desperately wanted them to cooperate for the well-being and security of his household and lands.

According to the Parable, Mori summoned his sons and showed them three arrows.

First he showed them how one arrow would break easily in his hands.

However, when he held three arrows together he could not break them.

He preached to his sons that if they worked individually, they would be as weak as a single arrow, however, if they stood together, the three of them would be unbreakable.

Their father hoped that they would understand that by working together they would succeed, where if they failed to cooperate, they would surely fall. According to the parable, Motonari called his sons to his deathbed at the moment before his passing, and told the story as his last will and testament. But in reality, it could not have happened as Motonari died in 1571 at the age of 74, 8 years after the death of his eldest son in 1563. As such, it remains a fictional, if useful, story.

The historical basis for Motonari’s parable can be traced to a document known as the “Sanshikyokunjo,” which has been designated as an important piece of the national cultural heritage of Japan. However, the parable of the “Three Arrows” is not described within the document.

Sanshi means three children. Kyokun means lesson. Jo means a document.

Sanshikyokunjo can be translated as “A Lesson for The Three Sons.”

The Letter was written in the hopes that his three sons could cooperate after Motonari abdicated in favor of his eldest son, Takamoto Mori, in 1557.

By that time, the second son, Motoharu had already been adopted by the Yoshikawa Clan, and Mori’s third son had been adopted by the Kobayakawa Clan. This document became the central doctrine of the Mori family. The Sanshikyokunjo consists of 14 articles, most of which detail Mori’s attempt to unify his sons.

For example, the second article states that “Though Motoharu and Takakage married into other families’, they should not be estranged from their own family, they should remember where they came from. They should never forget the Mori Clan.

Article 3 states, ”the relationship between the three sons should not be estranged even for a second. If such a situation were to arise, the Mori Clan would fall, as the Moris had won many battles, and were hated by their rivals.

Article 4 states, “Motoharu and Takakage can manage their households as long as the Mori Clan retains its power and position. Motoharu and Takakage might think that they can rule their fiefdoms on their own, but without the backing of the Mori Clan, their households would collapse around them.”

Article 5 states, “Takamoto must keep the peace by having the heart of a parent, by remaining calm, even when Motoharu and Takakage disagree. It is expected and required that Takakage and Motoharu obey their eldest brother, Motoharu, as he is the head of the family.”

The articles sound repetitive,  but according to historians, Motonari wrote in repetition as a way to show the importance of family unity in the face of his sons’ dislike of one another.

While Motoharu and Takakage excelled at martial arts and strategy, Takamoto was studious and reserved to the point of meekness. Takamoto even went so far as to briefly withdraw from his position, but then quickly resumed his place as the head of the family.

The story of “Three Arrows” first appeared after the end of Edo period. The Japanese people consider it to be an important parable, to the point that it is even used in  elementary school textbooks to teach students lessons in morality.

It is believed that the parable of the three arrows takes the overall message of the 14 articles of the Sanshikyokunjo and distills it down into a story that is easy to understand and remember.

(Source: http://okada-akira.jp/history/vol05.html)


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