Structural reforms are the third arrow in
Abe’s aggressive economic plan –
Abenomics – and probably the most difficult to
deliver. The policies are designed to raise incomes by 3% a
year and per capita income by 40% to about $60,000 over 10
The problem is that while fiscal stimulus and quantitative
easing merely require a parliamentary majority and a
cooperative Bank of Japan (BoJ), economic reforms and
deregulation entail taking on powerful vested interests and
transforming entrenched cultural values.
Abe has sketched a broad reform package, from promoting
trade and investment, switching subsidies away from job
protection to job creation in growth sectors and boosting the
number of skilled foreign workers, to getting more women into
The challenge has defeated many before, most recently former
prime minister Yoshihiko Noda, who partnered with the BoJ in an
effort to develop key growth sectors. Junichiro Koizumi
prioritized structural reform during his 2001 to 2006
administration, most notably privatizing Japan Post, then the
country’s largest employer – only for the
process to be shelved in 2010.
Their efforts – even within their limited scope
– delivered few results. Abe has revealed little
detail and done even less... so far.
The market has reacted negatively as doubts over his resolve
to push through difficult reforms creep in. The Nikkei was down
almost 20% in recent trade after surging more than 70% since
Abe’s election victory in December on hopes his
policies would boost growth and corporate profits.
Given the inevitable pain involved in implementing his
reforms, Abe is sensibly holding out for a mandate he hopes to
win in elections for the upper house of the National Diet in
July. Victory could buy his Liberal Democratic Party (LDP) up
to three more years to get as much of the reform programme
through as possible.
Capital Economics’ chief global economist
Julian Jessop says while many of the reforms have been on the
policy agenda for years, Abe has the best opportunity for
success in a generation.
This time around there is a recognition that they
can’t go on as they have been and the appetite for
reform is much stronger than it has been in the past, he says.
So far, the country is behind the LDP with a pretty convincing
election win in December. They’ll get a convincing
win in the upper house as well, and consumer and business
confidence are all pretty strong.
What’s fundamentally different is a fourth
arrow of Abenomics, which is a coordination of the first three
monetary easing and reform]. This time they are more
serious and they’re going to try them all at the
same time, one helping another.
Jessop says probably the biggest test of the
government’s mettle will be whether it pushes
through two planned hikes in the consumption tax –
from 5% to 8% in April and then from 8% to 10% in 2015.
If they’re willing to press ahead with this
hard decision, it would make me that much more hopeful about
some of the other reforms, he says.
The consumption tax represents a fiscal tightening that
flies in the face of stimulus. However, it is seen as critical
to achieving fiscal sustainability, with tax revenues under
pressure from the shrinking of the labour force and an
ever-growing population of retirees. Japan’s VAT
is one of the lowest of any developed economy.
One area where Abe is pressing ahead is trade –
joining negotiations for the Trans-Pacific Partnership, a
proposed free-trade area of 12 Asian and Americas economies.
Membership could reinvigorate Japan’s
uncompetitive agricultural sector, according to researchers at
the University of Auckland.
Reform efforts are likely to get a boost from figures
showing that the economy grew at a quicker pace in the first
quarter than originally thought. Revised government numbers
show GDP growth of 4.1%, up from 3.5%.
Companies across all sectors plan to boost investment by
more than 7% in the fiscal year on a sharp rise in business
sentiment in the second quarter at firms capitalized at ¥1
billion ($10.4 million) or more, according to a finance
Even if many of the reforms are implemented, there is one
few believe is possible for any government: immigration.
Japan’s demographics are a ticking fiscal time
bomb, which the UN says it needs to address by increasing
annual immigration from about 50,000 to 650,000.
Immigrants comprise just 2% of the population. Japan has
successfully absorbed some 600,000 Chinese migrants in recent
years, 100,000 of whom have become citizens. But mass
immigration is a non-starter given Japan’s
homogeneity and strong cultural biases.
I don’t think we’re going to get
anything on immigration, but many of these reforms are going to
be difficult because of the strong influence special interest
groups exert over the political elite, says Michael Taylor,
director of research at Lombard Street Research.
There’s going to be lots of squealing from
powerful groups such as the agricultural lobby who want to keep
their huge food import tariffs. The labour market is also going
to be tough because there are all these temporary workers and
permanent salarymen who are underemployed and a drag on
The service sector especially has very poor productivity
levels. There are some major obstacles to be overcome.
He adds: There’ll be some modest reforms but
we have to wait to see how far they’ll go. The
effort will be helped by the benefits Abenomics is already
producing – on wages, for example, summer bonuses this
year will be higher than a year ago. Toyota, Honda and others
have agreed significantly bigger bonuses.
Firms are going to increase investment and others, such as
Toyota, that were going to relocate production overseas are now
Taylor, counter-intuitively and perhaps optimistically,
concludes that the expectations of a revival plan could fall
victim to its own success. There is a significant risk of the
impetus for difficult reforms fizzling out if the economy
improves dramatically in the next two or three years, he
That is perhaps a more optimistic assessment of
Abenomics’ cyclical prospects for success.
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