After Abenomics, what next?

The plunge in Tokyo stocks on Friday afternoon came swift, a knee-jerk reaction to the news that soon, Japan's longest-serving leader will be gone. Prime Minister Shinzo Abe is stepping down due to worsening health, while the country is suffering one of its worst economic crises in decades.

Since taking office in 2012, Abe has worked to revive Japan's economy using three "arrows" – flexible fiscal mobilization, monetary measures, and structural reform. The policy, aptly dubbed Abenomics, has proven particularly effective on two fronts: stock prices, and the jobless rate. At the end of 2012, the Nikkei Average was hovering around the 10,000 yen mark. Now, after more than seven years of aggressive monetary easing and increased public spending, it's floating around 23,000 yen. The Nikkei's performance seems to belie the severe effects of the coronavirus pandemic.

Chart: The Nikkei Average

In late 2012, Japan's unemployment rate was above 4 percent. The latest figure – about 2.8 percent – is surprisingly low compared to other countries in these unprecedented times.

Indeed, a large part of Abe's relatively stable approval rating over the years can be attributed to the healthy jobs market, those buoyant stocks and also strong corporate earnings. In fact, the prime minister has steered Japan to its second-longest recovery period since World War Two.

Yet Abenomics isn't without its critics, who point to the nation's very real – and very large – debt problems. By the end of fiscal 2020, outstanding Japanese government bonds are expected to total about 964 trillion yen (about 9.1 trillion dollars). The figure compares to 705 trillion yen at the end of fiscal 2012. Calls for regulatory reforms have gone unfulfilled, and inflation has stubbornly stayed well below the 2 percent target.

Right now, Japan is reeling from its biggest contraction ever – an annualized fall of 27.8 percent in the April to June quarter. The pandemic has severely hurt exports and tourism. And even months before the virus took hold, consumer sentiment was down due to last October's consumption tax hike. Many experts say it will likely take more than two years to regain what's been lost.

Dynamic steps to turn Japan's economy around are desperately needed. But with government debt piling higher, and the central bank already buying up massive amounts of treasury bonds, there's very little room for maneuver.

Abe's arrows, after almost eight years, will soon no longer be in flight. What course his successor takes is anyone's guess. But considering Japan's economy right now, one thing's for sure: There is no silver bullet.