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SVKMS

Narsee Monjee Institute of Management StudiesAnil Surendra Modi

School Of Commerce

Project Report

Economics II (Macro)ABENOMICS

By:

Group 4

S No. Name Roll No.1 Archit Jain D012

2 Ashwin Gupta D013

3 Daksh Gupta D016

4 Kanishk Gupta D025

5 Raghav Mongia D038

6 Shreyansh Daruaka D052

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Table of Contents

Acknowledgement ................................................................................................ 3Bibliography .......................................................................................................... 4

Definition .............................................................................................................. 4

Shinzo Abe ............................................................................................................ 4

Economy Background ........................................................................................... 5

Gross Domestic Product (GDP) ...................................................................... 5

Exports ............................................................................................................ 5

Private Consumption ....................................................................................... 7

Consumer Price Index (CPI) ........................................................................... 7

Capital Expenditure ........................................................................................ 8

Aim of Abenomics ................................................................................................ 9

Moves in Abenomics .......................................................................................... 11

Monetary Policy ............................................................................................ 11

Fiscal Stimulus Policy .................................................................................. 11Structural Reforms ........................................................................................ 12

Results of Abenomics ......................................................................................... 13

Monetary Base .............................................................................................. 13

Depreciation of the currency......................................................................... 13

Consumer Price Index (CPI) ......................................................................... 14

Monthly Income ............................................................................................ 14

Foreign Trade ................................................................................................ 15

Market Liquidity ........................................................................................... 15

Structural Changes ........................................................................................ 15

Conclusion .......................................................................................................... 16

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ACKNOWLEDGEMENT

We would like to express a special thanks of gratitude to our teacher Dr Mona Bhalla who

gave us the golden opportunity to do this wonderful project, which also helped us in doing a

lot of Research and we came to know about many new things. We are really thankful to them.

Secondly, we would also like to thank our parents and friends who helped us a lot in finishingour project within the limited time frame. We are making this project not only for marks but

to also increase our knowledge.

THANKS AGAIN TO ALL WHO HELPED US

Archit Jain

Ashwin Gupta

Daksh Gupta

Kanishk Gupta

Raghav Mongia

Shreyansh Daruka

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BIBLIOGRAPHY

The data has been taken from various websites such as:

1. http://www.bbc.com2.

http://www.reuters.com3. http://www.about.com

4. http://www.qz.com5. http://www.globaltimes.cn6. Sonys Annual Report 2013

The Graphs have been taken from

1. http://images.google.com2. http://www.bbc.com3. http://www.qz.com

DEFINITIONAbenomics is the name given to a suite of measures introduced by Japanese prime minister

Shinzo Abe after his December 2012 re-election to the post he last held in 2007.

SHINZO ABE

Shinzo Abe is the Prime Minister of Japan serving since, December 2012. He is also the

President of the Liberal Democratic Party (LDP) which has run Japan 54 out of the last 58years. His grandfather, Kan Abe, and father, Shintaro Abe, were both politicians.

Image 1: Japanese Prime Minister Shinzo Abe

http://www.bbc.com/http://www.bbc.com/http://www.reuters.com/http://www.reuters.com/http://www.about.com/http://www.about.com/http://www.qz.com/http://www.qz.com/http://www.globaltimes.cn/http://www.globaltimes.cn/http://images.google.com/http://images.google.com/http://www.bbc.com/http://www.bbc.com/http://www.qz.com/http://www.qz.com/http://www.qz.com/http://www.bbc.com/http://images.google.com/http://www.globaltimes.cn/http://www.qz.com/http://www.about.com/http://www.reuters.com/http://www.bbc.com/

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Figure 2: Exports for Japan for the years 2011 & 2012

ECONOMY BACKGROUND

Shinzo Abe received an economy battered by grave economic problems, some of them

structural, including a large national debt, deflation, a low growth rate, and a loss of

competitiveness in several sectors.

Gross Domestic Product (GDP)

Figure 1 : Japan GDP Growth Rate

Japan's economy shrank in the September quarter 2012, adding to signs that the world's third-

largest economy is going into recession. The 0.9 percent fall in GDP growth rate was in line

with expectations, although a decline in capital expenditure was much steeper than forecast.

Exports

The country had been experiencing a decline in exports, which had been the economys

engine of growth since its industrialization in the late 19th century. Japan's exports fell 5.0

percent in July-September, the biggest slide since a 6.0 percent decline in April-June last

year. The reason given for the fall in exports was a row with China over sovereignty of someislands in the East China Sea sparked violent protests in China and the boycott of Japanese

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goods, which added to the slide in exports, particularly for automakers such as Nissan Motor

Co.

The Japanese companies such as Panasonic Corp and Sony Corp were already struggling to

compete with more nimble rivals, such as South Korea's Samsung Electronics and America's

Apple Inc, and with a steady rise in the yen, made the exports from Japan more expensive

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Private Consumption

Figure 3: Private Final Consumption Expenditure in Japan yearwise

Private consumption - which accounts for roughly 60 percent of the economy - fell 0.5

percent in the third quarter against a median forecast of a 0.6 percent drop mostly, due to

deflation

Consumer Price Index (CPI)

Figure 4: Inflation Rate of Japan

A consumer price index (CPI) measures changes in the price level of a market basket of

consumer goods and services purchased by households. Declining prices of goods and

services - deflation - discourages consumers from making purchases because they expect

prices to be lower in the future. It is a vicious cycle - as consumers delay purchases,

businesses see demand fall so they postpone investment. It has contributed to a stagnanteconomy in Japan.

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Capital Expenditure

Capital expenditure tumbled 3.2 percent, the fastest pace of decline since a 5.5 percent drop

in April-June 2009, as companies turned more pessimistic about earnings from domestic and

overseas markets. This is a graph which has been made from the figures given in Sony's

Annual Report in the past three years. As you can see, there had been a rise in the capital

expenditure from 2011 to 2012. But there was a reduction in capital pending by 36 percent in

the year to March 2013.

Figure 5: Sony's Capital Expenditure Year wise

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SAIM OF ABENOMICS

Abes plan was simple: Go back to export-driven growth by accelerating monetary printing,

which would depreciate the currency, which would in turn make Japanese exports cheaper.

Abes plan had another advantage:

The additional monetary printing would also increase domestic demand, which in turn would

increase domestic production.

Abenomics aim was to revive the sluggish economy with "three arrows": a massive fiscal

stimulus, more aggressive monetary easing from the Bank of Japan, and structural reforms to

boost Japan's competitiveness.

All thepolicies under the Abenomics aredivided into three segments:

Quantative Easing, Fiscal Stimulus and Structural Reform

Quantative Easing aims at moving the key economic levers such as lowering the long term

interest rates and depreciating the value of yen.

Image 2: Aim of Abenomics

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These economic lever will lead to an increase in the share prices which in turn will lead to

rise in Corporate Profits. The weaker yen will lead to increase in exports which will again

lead to a rise in the corporate profits. Higher corporate profits lead to increase in wages and

which would finally increase the private consumption. Increase in private consumption will

again lead to a rise in the corporate profits. Thus, forming a cycle.

All of which will lead to economic growth and inflation prompting the Japanese people to

spend and not withholding buying waiting for better prices.

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MOVES IN ABENOMICS

Monetary Policy

1)One of the first steps that Mr Abe took was to get Japan's central Bank, the Bank of Japan,to double its inflation target to 2%. He has even suggested that the bank print "unlimitedyen" to help achieve its inflation target.

a) Objective: Japan has been battling deflation for more than a decade. Falling pricesdepress spending as consumers and companies put off purchases in the hope of getting

a cheaper deal later on.

b) Risks Involved:Some analysts say that if the measures work and prices start to rise,then eventually interest rates will too. This would see the government's interest

payments go up substantially.

2)

The Bank of Japan unveiled a massive stimulus measure in an attempt to boost growthand meet its inflation target. Stimulus Measure means a package of economic measures

put together by the government to rouse some activities in a struggling economy

a) Objective: Policymakers hope that with more money sloshing about in the system,and with low borrowing costs, consumers and businesses will raise their spending,

triggering rising prices.

b) Risks Involved: In a worst-case scenario, the government may have to raise moremoney to meet those payments, triggering a vicious cycle of rising rates and

government austerity.

3) The central bank said it would increase its purchase of government bonds by 50 trillionyen ($500bn; 330bn) per year, the equivalent of about 10% of Japan's annual gross

domestic product (GDP).

a) Objective:The move has also resulted in the yen dipping nearly 25% against the USdollar since November, making Japanese goods cheaper to foreign buyers and

boosting profits of exporters. The hope is that as profits rise, firms will spend more on

their facilities and increase worker salaries.

b) Risks Involved: There's a flip side to the weak yen - cost hikes for imports, inparticular energy, which Japan is having to import more of after its nuclear reactorswere shut following the 2011 tsunami and earthquake.

Fiscal Stimulus Policy

An increase in public spending or a reduction in the level of taxation that might be performed

by a government in order to encourage and support economic growth

Abenomics revolves around boosting government spending to help spur growth. In just three

months, from January to April, Mr Abe said that his government would spend an extra

$114bn (75bn).

Objective: The stagnant growth in Japan's economy, coupled with years of deflation, hasresulted in companies and consumers holding back on spending, which perpetuates the weak

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growth. The idea is that as the government boosts its own spending, that will help spur a fresh

wave of economic growth. Policymakers are hoping that this will inspire confidence among

businesses and consumers, and trigger them to start spending as well.

Risks Involved:Critics say that Japan has been doing this for many years already and it has

not yielded the desired result. They warn that the increased spending will further undermineJapan's finances. Japan's public debt, which stands close to 240% of its GDP, is already the

highest among industrialised nations. The biggest fear is that if the increased spending fails to

trigger economic growth, Japan may find it even tougher to rein in its debt levels.

Structural Reforms

The "third arrow" in Mr Abe's grand plan is the structural reform of key sectors such as

agriculture, healthcare and energy. Though he has yet to detail his plans for many of these

sectors, his government has already taken some first steps. Earlier this year, Japan said that it

wanted to join the talks on the Trans-Pacific Partnership (TPP), a free trade agreement being

negotiated among 11 countries. The agreement aims to foster closer ties and boost tradebetween member countries.

Objective:

The TPP trade pact is expected to substantially reduce tariffs between member countries, and

even eliminate them in some cases, opening up trade in goods and services.

It is also expected to boost investment flows between the countries, further supporting their

economic growth.

The countries involved in the talks have a combined population of more than 650 million

people. A free trade agreement could turn this into a potential single market for many

businesses in Japan.

Risks Involved:

The biggest risk is to agriculture. If and when the TPP is agreed, it will substantially reduce

tariffs on farm products.

A concern is that this may lower the incomes of Japan's many ageing farmers, who would

then rely more on government support, adding to the burden on regional government

finances.

Others say falling food prices may reduce the cost of living, especially in urban areas,

meaning consumers have extra cash to spend. But some fear that it will widen the gap

between the rich and poor in Japan and create regional disparities

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RESULTS OF ABENOMICS

On the whole, Mr. Abe's policy has brought some gains, generating positive expectations for

market participants as shown by higher stock indexes in late 2013.

Monetary Base

Figure 6: Annual Growth of Monetary Base

The countrys central bank printed plenty of money by expanding credit, mainly to the

government. The 12-month rate of growth of the currency created by the central banks, the

monetary base, went up from 10% in December 2012 to 40% in August 2013

Depreciation of the currency

As expected, the rapid monetary creation led to an also rapid depreciation of the currency.

Figure 7: Dollar to Yen Exchange from Dec '12

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Consumer Price Index (CPI)

Figure 8: Consumer Price Index

Japans consumer price index, excluding volatile fresh food costs, increased by 1.3% in

December, notching a 0.4% gain for 2013. (Inflation of about 2%, is the goal.) That makes

last year the first time in five years that average annual prices of consumer goods have risen.

Monthly Income

According to data also released Jan. 31, average monthly income per household of workers

was up 0.3% nominally, but when inflation is taken into account, wages actually fell 1.7% in

2013 from the year before. As a result, average spending per household was also down 2.3%in real terms.

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Foreign Trade

Figure 9: Japan's Foreign Trade

A weaker yen led to more exports and an enlarged trade surplus. In reality though, what we

saw was the opposite - Exports were sluggish, which means that in 2013 the balance of trade

deficit grew despite the yen's lower exchange rate.

Market Liquidity

From April 2013, Japan's central bank has introduced several measures to ease market

liquidity, however the effects of these have been modest. Falling interest rates failed tostimulate corporate demand for capital as interest in ordering new equipment remained

muted. Limited new bank loans left Japan's cash stock almost unchanged after the central

bank's moves.

Structural Changes

The necessary Structural Changes implemented by Shinzo Abe will obviously take years to

get fully implemented.

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CONCLUSION

The measures taken by Shinzo Abe according to Abenomics is though, stabilizing but the

economy is hardly on a sustainable growth trajectory as seen from the following:

1. Private consumption, grew 0.1 percent in the September 13 quarter, slowing sharplyfrom 0.6 percent growth in the June 13 quarter2. Growth will quickly rebound as shoppers rush to spend before a national sales tax is

increased to 8 percent from 5 percent in April, economists say. But Abenomics is

struggling to gain traction on key areas that would indicate longer-lasting changes to

the economy,

3. Core machinery orders, a key predictor of spending on factories, equipment andsoftware, fell more than expected in September.

4. Japan's top banks said they logged strong July-September profit growth thanks toequity portfolios boosted by the stock surge, but other benefits of Abenomics have yet

to spread to their core lending business. Companies remain reluctant to invest andconsumer spending has lost steam.