Can the magic of Abenomics succeed?

Prime Minister Shinzo Abe’s pro-growth economic policy, dubbed Abenomics, combines monetary policy and fiscal policy as well as growth reforms. It has attracted much attention worldwide because it combines short and mid to long term policies, and supply and demand programmes. The quest for growth is explained by its ballooning public debt and the increasing social cost of its fast population aging. Exiting deflation has been prioritized by Shinzo Abe to energize growth. Abenomics raises the central question of why the quest for growth in a context of shrinking population and a quite high standard of living? However, this eagerness for growth, which translates into higher fiscal revenues, is explained by its ballooning public debt, and the increasing social cost of its fast population aging. The Abe government has set the ambitious goal of an annual 2% real GDP growth rate. The first two arrows (expansionary monetary and fiscal policies) were successful in 2013. But, in the 2014 fiscal year, the coincidence of a VAT increase, a steep fall in energy prices and a smaller supplementary budget generally drove down the CPI index (excluding consumption tax) and led to zero growth of real GDP and, in the 2015 fiscal year, the developments of CPI and growth were disappointing. In order not to fall back into deflation, demand must be boosted. Shinzo Abe is betting on institutional and technological innovations to foster economic growth in the long run. Abenomics will work its magic if Shinzo Abe has sufficient time and sufficient political strength to fully implement his third policy arrow.