SVKMS

Narsee Monjee Institute of Management Studies

Anil 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

Table of Contents
Acknowledgement ................................................................................................ 3 Bibliography.......................................................................................................... 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 .................................................................................. 11 Structural 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 finishing our 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. 2. 3. 4. 5. 6. http://www.bbc.com http://www.reuters.com http://www.about.com http://www.qz.com http://www.globaltimes.cn Sonys Annual Report 2013

The Graphs have been taken from 1. http://images.google.com 2. http://www.bbc.com 3. http://www.qz.com

DEFINITION
Abenomics 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.

Image 1: Japanese Prime Minister Shinzo Abe

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 58 years. His grandfather, Kan Abe, and father, Shintaro Abe, were both politicians.

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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 thirdlargest 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

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

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 some islands 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 stagnant economy in Japan.
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Figure 5: Sony's Capital Expenditure Year wise

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.

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Image 2: Aim of Abenomics

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 the policies under the Abenomics are divided 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.

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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 "unlimited yen" to help achieve its inflation target. a) Objective: Japan has been battling deflation for more than a decade. Falling prices depress 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 growth and 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 more money 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 trillion yen ($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 US dollar 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, in particular energy, which Japan is having to import more of after its nuclear reactors were 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, has resulted 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 undermine Japan'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 trade between 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 to stimulate 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 sharply from 0.6 percent growth in the June 13 quarter 2. 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 and software, fell more than expected in September. 4. Japan's top banks said they logged strong July-September profit growth thanks to equity 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 and consumer spending has lost steam.

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