Stop Treating Yesterday’s Illness: Why Abenomics-Style Stimulus Misses Today’s Japan

Stagflation: Abenomics won’t work
Targeted relief; skills first
Credible consolidation; productivity growth

Alarming data, not just rhetoric, backs Japan’s stagflation. In October 2025, headline inflation reached about 3% year-on-year, with core inflation slightly higher. Real wages fell again by 0.7%, the tenth straight monthly decline. Debt nears 230% of GDP, the highest among advanced economies. Ten-year government bond yields have risen to 1.9%, the highest since 2007. Unlike 2013, Japan’s now-mature economy faces tight labor markets, persistent inflation, and increasing funding costs. Abenomics targeted deflation, but today’s challenge is inflation erosion plus weak growth. Repeating old policies—debt-funded cash handouts and broad subsidies—may reduce incentives, lift yields, and strain future budgets for education and skills. The facts demand targeted relief now, productivity reforms soon, and credible fiscal consolidation—not blanket stimulus.

Japan stagflation presents a new challenge

The urge to revive the Abenomics strategy is strong, as it effectively addressed deflation. However, Japan's stagflation is a different issue. Prices are still rising by about 3%, real wages have been negative for most of 2025, and consumption decreased by 3% year-on-year in October. This combination of ongoing inflation, declining real incomes, and stagnant consumption does not respond well to broad cash distributions. The problem is not a classic demand shortfall; it is a squeeze on supply and costs in a slowly growing, aging economy. Applying broad subsidies can temporarily suppress headline inflation, but it also distorts price signals, sustains low-productivity practices, and risks maintaining core pressures. At the same time, increased bond issuance meets reduced domestic demand for long-term Japanese government bonds (JGBs), resulting in higher yields and reduced investment in education and care.

The interest rate situation adds to this urgency. The Bank of Japan has begun a gradual shift away from its ultra-easy monetary policy amid rising nominal wages and persistent inflation. Markets now expect further tightening if wage growth continues in 2026. Ten-year yields nearing 2% are significant given public debt close to 230% of GDP and rising interest costs of around 1–1.2% of GDP. Instituting a broad, debt-financed fiscal boost at this point risks creating a “policy-mix clash,” where fiscal policy pushes one way while monetary policy goes the other. This clash can increase term premiums, negate the stimulus, and undermine confidence in consolidation. In short, what was beneficial a decade ago could now backfire by increasing funding costs without addressing supply constraints.

Move away from the Abenomics instinct

Proposals labeled as “Sanaenomics” offer monetary ease, significant fiscal spending, and government-led investment in key sectors. The package approved in November—about ¥21.3 trillion, mainly financed by new bonds and paired with tax adjustments—aims to reduce energy costs, provide cash handouts, and support AI and semiconductor projects. In the short term, these energy subsidies might lower measured inflation by about 0.7 percentage points for a few months, and cash assistance could boost growth into early 2026. However, the strategy still relies on broad transfers and overall price suppression rather than closely aligning with productivity gains. It also coincides with the government easing its near-term primary-balance target and extending its fiscal timeline, even as yields are rising. Markets have taken note. Super-long yields have reached cycle highs, and investors are questioning how much more debt can be issued without leading to crowding out.

The underlying contradiction lies in political economy. A temporary decrease in the headline consumer price index (CPI) due to subsidies can occur alongside persistent core pressures if supply issues and labor shortages persist. Once subsidies are removed, prices will likely rise again, leaving households facing the same financial strain. The bond market remains aware of the existing debt and future issuance plans. Japan’s debt ratio, close to 230% of GDP, is manageable at very low interest rates but becomes less so as rates increase and the Bank of Japan’s influence diminishes. Each additional basis point increases the future burden on education budgets, research funding, and assistance for skill development, all of which are vital to Japan’s growth. Abenomics once relied on achieving “escape velocity” from deflation. Today’s focus should instead be on boosting productivity alongside credible consolidation before overwhelming the budget math.

A plan to tackle Japan's stagflation: targeted relief first, then consolidation

The better course involves three straightforward steps. First, safeguard real incomes by providing temporary, targeted relief for the bottom half of the income distribution and energy-intensive small and medium-sized enterprises (SMEs) that export or invest. Replace broad price suppression with capped, means-tested cash credits—designed to be straightforward, temporary, and easy to retract. Second, implement reforms within 12 months to increase productivity and labor supply: accelerate digital adoption in public services, streamline land-use and licensing, expand childcare and eldercare to free up labor, and open a modest immigration route for roles in shortage areas. Third, adopt a five-year expenditure-based consolidation rule, prioritizing investment in education, R&D, and care while phasing out low-impact transfers and corporate tax benefits. This sequence—immediate targeted relief, followed by capacity-raising reforms, and then phased fiscal consolidation—addresses Japan’s stagflation with clear steps.

This sequence aligns with the current economic situation. GDP shrank at a 2.3% annual rate in the third quarter as investment weakened and exports faltered. However, near-term economic activity can stabilize if policies support real incomes without igniting excessive demand. Independent forecasts indicate that the stimulus could enhance growth through 2026, even as energy subsidies temporarily lower headline inflation. That allows for necessary time, but it is not without cost. Without a commitment to reducing subsidies and to focusing on supply-side reforms, the positive effects will diminish while the costs increase. The bond market’s reaction to the package serves as a caution: the government must demonstrate how it will fund lasting initiatives that bolster the economy’s potential. Growth driven by a stronger supply side is the only sustainable growth amid Japan's stagflation.

What educators and administrators should do in response to Japan's stagflation

Education must play a central role in addressing supply challenges. Key actions for schools, universities, and training organizations include: emphasize industry-relevant credentials—such as mechatronics, advanced manufacturing, and green retrofit skills that meet business needs; create earn-and-learn apprenticeship pathways linked to local industries like energy-efficient housing or eldercare technology; use stackable micro-certificates that build into degrees, with funding tied to completion and employer adoption. Prioritize paid release time for instructors to develop curricula with businesses, and require transparent reporting on job placements and wage gains. These targeted measures will boost the labor supply where it is restricted, supporting economic stability and justifying the protection of education budgets.

Administrators should also expand reskilling for mid-career workers as a core strategy. Partner with businesses to offer 12–20 week boot camps in skills such as basic AI tools, robotics repair, and supply chain quality control. Link tuition support to successful course completion and subsequent wage gains. Increase access to childcare during class and shift hours to enable caregivers to participate. Supplement domestic training by providing a narrowly targeted immigration channel for key roles in short supply. The goal: quickly increase the supply of in-demand skills to support higher growth. This makes education policy a direct tool for economic recovery, with clear links to both growth and inflation moderation.

Addressing critiques and providing rebuttals

Critique one argues that “austerity now is the only way to maintain credibility.” This misunderstands the sequence of actions needed. With real wages negative and growth weak, abruptly tightening fiscal policy would deepen the contraction and create a deflation scare that the Bank of Japan would have to counter, disrupting the policy balance once again. The alternative is a transparent, legislated consolidation plan that begins with low-impact spending and phases in over five years, combined with immediate supply-side reforms. Markets respond to credible frameworks and composition, not just the size of the measures. Japan’s own Cabinet Office projections indicate that the primary balance will improve under reasonable growth if spending shifts toward productivity. The aim is not merely to achieve a surplus; it is to secure a lasting surplus through faster, broader growth.

Critique two claims that “broad stimulus is effective—ING and others see growth gains.” They are correct about the short term: the stimulus could boost growth and temporarily reduce headline inflation by subsidizing energy costs. The critical question is what happens next. If the package becomes a routine of recurring transfers, core pressures remain, and yields will continue to rise, diminishing the fiscal space needed for education and care. Alternatively, if we use this opportunity to promote productivity reforms and establish a medium-term consolidation plan, the short-term boost can become a pathway to sustainable growth. Even optimistic forecasts caution that concerns over JGBs will increase without credible fiscal strategies in place. The choice is not between stimulus and consolidation; it is between short-term stimulus and long-term productivity and credibility.

The critical number to focus on is not this month’s CPI; it is the 1.9% yield on 10-year JGBs, alongside debt at nearly 230% of GDP, while real wages continue to fall. These figures illustrate Japan's stagflation. They also reflect the budgetary challenges that will either support or hinder classrooms, laboratories, and training facilities vital for raising Japan’s growth potential. Reviving Abenomics-style stimulus addresses past issues: it confronts deflation with general demand, while today’s challenge lies in overcoming supply constraints and persistent inflation. The correct approach is evident. Provide targeted relief to those most affected. Use the next 12 months to enhance childcare services, broaden high-return training programs, and remove bottlenecks that drive costs high. Establish a five-year plan toward achieving a primary balance that protects education and R&D while phasing out low-yield transfers. If policy prioritizes growth through increased capacity rather than merely suppressing prices, the bond market will provide the time needed for wages to keep pace with inflation. This is how Japan's stagflation can be resolved, ensuring a sustainable budget for future generations.

The views expressed in this article are those of the author(s) and do not necessarily reflect the official position of the Swiss Institute of Artificial Intelligence (SIAI) or its affiliates.

References

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