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Abe's three arrows: Can Abenomics make Japan's economy fly?

By Paula Newton, CNN
updated 9:42 PM EST, Tue December 10, 2013
STORY HIGHLIGHTS
  • Prime Minister Shinzo Abe's measures to jump-start Japan's economy are popularly known as 'Abenomics'
  • Abe vows to target the sluggish economy with 'three arrows'
  • The first arrow is easing monetary policy, the second is boosting fiscal stimulus
  • The third arrow, structural reform, is seen to be the most difficult

(CNN) -- After decades of economic stagnation bling is back in Japan. Many Japanese are loosening their purse strings and don't hesitate to splurge $10,000 or more on precious things like a gold and diamond ring.

Just 14 months ago, there was hardly anyone like Jesper Koll, the Japan director of research at JP Morgan and self-declared "Japan's last optimist."

"If you're bullish on Japan, it's kind of like somebody coming up to you and whispering in your ear, 'You know, Elvis Presley is still alive,'" he says.

What has turned Japan around? The answer lies in the country's Prime Minister Shinzo Abe and his bold measures to jump-start the economy, known as "Abenomics."

'Abenomics' fuels Japan's growth
We're not talking about small technological innovations, we're talking about a big economic reform
Hiromichi Shirakawa

Abe, who assumed office in December 2012, has vowed to revive the country's sluggish economy with "three arrows."

The first arrow is printing money and easing monetary policy to jolt consumer spending and weaken the yen, thus boosting exports.

The Bank of Japan, the country's central bank, said in April that it would boost the money supply, by 60 trillion yen to 70 trillion yen ($589 billion to $688 billion), in a bid to reach 2% inflation in two years.

The second arrow is spending money by revving up fiscal stimulus.

Abe announced ambitious spending packages this year: one that is worth 10.3 trillion yen ($101 billion) in January and another 5.5 trillion yen ($54 billion) that was unveiled on December 5.

See more: Better Japanese economy = shorter skirts

Abe's two arrows have proved an effective weapon. In October, inflation rate was recorded at 1.1%, while core consumer price index (CPI) rose 0.9% from a year earlier, a five-year high.

The world's third largest economy expanded in the first half of 2013 -- 4.3% annual growth rate in the January-March quarter and 3.8% in the April-June period. Although Japan's growth rate halved in the third quarter, it was still higher than expected.

But Abe's toughest battle yet is to deliver the third arrow: structural reform.

"We're not talking about small technological innovations, we're talking about a big economic reform," says Hiromichi Shirakawa, chief Japan economist at Credit Suisse.

See more: Japan's Abe makes economy top priority

Foreign investors have called for Japan to open up its many protected sectors; to loosen labor rules, to make it easier for companies to hire and fire workers; relaxing immigration rules -- but these have left many Japanese cautious.

And there is also concern about how Abenomics would affect wages.

"We only hear lots of slogans, but in reality, our salary and bonus hasn't gone up," says Tomohiko Kuramochi, an employee at the Japan Transport Institution.

But some are optimistic. As one Japanese consumer puts it: Abenomics has been like water on scorched earth and it may take some time to sink in.

Yenni Kwok contributed to this report

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