Many economic site mention ‘Abenomics’ from time to time, and we have also discussed it in the past, most recently following July’s Japanese election. If you are unsure what this concept means or how it affects investors, here is a quick explanation of the unique economic policies which receive the name of Japan’s Prime Minister.

Let’s start with the basics: Abenomics is a combination of the words ‘Abe’ and ‘Economics’. The word refers to specific economic policies implemented by Japanese Prime Minister, Shinzō Abe. They were first introduced in December 2012, after Abe was elected to his second term as Prime Minister.

Abenomics has three major parts:

1. Fiscal stimulus
2. Monetary easing
3. Structural reforms.

The main purpose of the combined policies is to push the economy out of the recession which has been one of its greatest threats over the last two decades. Other motives are attempting to counterweighting China in the Asia-Pacific region and making Japan less reliant in the US for defense.

Part of the methods used to achieve the goals of Abenomics are negative interest rates, depreciating the yen, inflation targeting at a 2% annual rate, expansion of public spending and radical quantitative which has sometime been referred to as “radical”. The country has also begun exploring extensive structural reforms.

Abenomics succeeded – to an extent. The yen decreased, the TOPIX surged and unemployment rates decreased, but the impact on wages and hence consumers was less evident. Critics were also pointing out the possible devastating effects that the tax hike implemented by Abe’s administration could have on the Japanese economy. Some BoJ officials were among those who voiced concerns regarding this issue. Deflation could also decrease consumers’ spending, which has a strong impact on the economy. Additionally, Abe’s intention to increase government spending met with resistance from the Ministry of Finance which demanded implementation of austerity measures.

In the last quarter of 2015, Japan’s real GDP shrank by 1.4% (annual rate).

Why investors care

While it is unclear if Abe’s policies will achieve their goal – and to what extent – there is no doubt that many investors follow them carefully. Such policies can potentially impact the price of the yen, as well as on Japanese shares and indices, and their impact might not be restricted to Japan, but could ultimately affect global markets. Even announcement of such policies could be important. Want an example? Following the July’s elections, Abe announced that he will introduce additional fiscal stimulus and in response, Japanese shares surged.