Abe’s bulls­eye

Financial Mirror (Cyprus) - - FRONT PAGE -

Ja­panese Prime Min­is­ter Shinzo Abe has un­veiled his long-awaited growth strat­egy – the so-called “third ar­row” of what has come to be known as “Abe­nomics.” A pre­lim­i­nary ver­sion of the plan, an­nounced to Ja­pan’s Diet last year, was met with dis­ap­point­ment in in­ter­na­tional fi­nan­cial mar­kets, which had ex­pected a bolder ap­proach. The new ver­sion is far more ro­bust – and has re­ceived a far more pos­i­tive global re­sponse.

Over the last 18 months, the first and sec­ond ar­rows of Abe­nomics – con­sist­ing of ex­pan­sion­ary mon­e­tary and fis­cal poli­cies – have achieved con­sid­er­able suc­cess in spurring Ja­pan’s eco­nomic re­newal. For starters, they have fu­eled price growth, with the GDP price de­fla­tor de­clin­ing from 3% to nearly zero.

More­over, the ra­tio of job open­ings to ap­pli­cants, which fell to 0.4 un­der Ja­pan’s last govern­ment, led by the Demo­cratic Party of Ja­pan, is now ap­proach­ing 1.1. In­deed, Ja­pan is be­gin­ning to show signs of a la­bor short­age.

But the lim­its of Abe­nomics’ first two ar­rows will soon be reached. With em­ploy­ment ris­ing as Ja­pan’s econ­omy moves to­ward re­al­is­ing po­ten­tial out­put, mon­e­tary stim­u­lus will cre­ate in­fla­tion­ary pres­sures and pub­lic ex­pen­di­ture will yield sharply di­min­ish­ing re­turns. At that point, sig­nif­i­cant growth can be achieved only by in­creas­ing the econ­omy’s real pro­duc­tive ca­pac­ity. That is what Abe’s new growth strat­egy aims to achieve.

At the strat­egy’s core is the re­moval of ob­sta­cles to growth for businesses, par­tic­u­larly the elim­i­na­tion or eas­ing of reg­u­la­tory bar­ri­ers. Dereg­u­la­tion prom­ises to bol­ster the abil­ity of Ja­pan’s pri­vate sec­tor, which al­ready excels in high-tech­nol­ogy in­dus­tries, to in­no­vate and com­pete glob­ally. While some of­fi­cials, who may ben­e­fit from busi­ness reg­u­la­tions, may re­sist this ini­tia­tive, its eco­nomic ben­e­fits, to­gether with Abe’s de­ter­mi­na­tion, are com­pelling. At the same time, Ja­pan will un­dergo sweep­ing labour-mar­ket re­forms, open des­ig­nated in­dus­tries to for­eign work­ers, and cre­ate “spe­cial eco­nomic zones” within which of­fi­cials will have the author­ity that they need to re­duce red tape in ar­eas like agri­cul­tural land man­age­ment. If con­cluded, the Trans-Pa­cific Part­ner­ship – a megare­gional 12-coun­try free-trade agree­ment – will pro­vide an additional boost to Ja­pan’s econ­omy.

Per­haps the most promis­ing re­form is cor­po­rate-tax re­duc­tion, which will help Ja­pan boost both for­eign and do­mes­tic in­vest­ment. By spurring in­creased busi­ness ac­tiv­ity, it will ac­tu­ally in­crease Ja­pan’s cor­po­rate-tax rev­enue.

By global stan­dards, Ja­pan’s cur­rent cor­po­rate-tax rate of 35% is quite high. In­deed, while it re­mains lower than in some US states (Cal­i­for­nia’s rate, for ex­am­ple, stands at 40%), it ex­ceeds the rates ap­plied in Ger­many (25%), China (24%), South Korea (24%), the United King­dom (24%), and Sin­ga­pore (17%).

A quar­ter-century ago, the UK and Ger­many had higher cor­po­rate-tax rates than Ja­pan. But they have since recog­nised the value of re­duced rates. The UK prac­ti­cally waged a tax war against other coun­tries to at­tract in­vest­ment. Both coun­tries’ ex­pe­ri­ences have demon­strated that sub­stan­tial re­duc­tions over a short pe­riod are far more ef­fec­tive than a grad­ual, drawn-out process. For­tu­nately, Abe plans to fol­low suit.

The im­pact of this ap­proach may be even more pro­nounced in Ja­pan, where only a small share of firms cur­rently pay cor­po­rate tax. One rea­son for this is the con­trac­tionary mon­e­tary pol­icy pur­sued by for­mer Bank of Ja­pan Gover­nor Masaaki Shi­rakawa, which pre­vented the econ­omy from reach­ing its growth po­ten­tial for more than 15 years, un­til Haruhiko Kuroda took over the po­si­tion.

Ja­pan’s so-called “spe­cial mea­sures for cor­po­rate tax” – ad hoc pro­vi­sions that re­duce or waive cer­tain taxes for firms at par­tic­u­lar times – have also con­trib­uted to sus­tain­ing the econ­omy’s out­put gap. These mea­sures not only dis­tort re­source al­lo­ca­tion; they also of­ten lead to col­lu­sion be­tween businesses and govern­ment of­fi­cials seek­ing op­por­tu­ni­ties to en­ter the pri­vate sec­tor upon re­tire­ment. Elim­i­nat­ing them would go a long way to­ward in­creas­ing cor­po­rate-tax rev­enue, with­out sti­fling growth.

Abe’s growth strat­egy has the po­ten­tial to bring mas­sive ben­e­fits to Ja­pan. But it will also de­mand sac­ri­fices. Con­sump­tion-tax hikes will be borne by con­sumers; the TPP will cre­ate new chal­lenges for farm­ers; and dereg­u­la­tion will run counter to some bu­reau­crats’ in­ter­ests. In this con­text, it is rea­son­able to ex­pect businesses to re­lin­quish some of their tax ex­emp­tions.

The Abe govern­ment has pre­sented a set of for­ward-look­ing re­forms – and ap­pears de­ter­mined to fol­low through on im­ple­ment­ing them, even if do­ing so means con­fronting those with a vested in­ter­est in their fail­ure. If the third ar­row suc­ceeds in sus­tain­ing Ja­pan’s eco­nomic re­vival, there will no longer be any room to doubt the mer­its of Abe­nomics.

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