The re­newed prom­ise of Abe­nomics

Financial Mirror (Cyprus) - - FRONT PAGE -

Ja­pan’s Lib­eral Demo­cratic Party scored a de­ci­sive vic­tory in the De­cem­ber 14 par­lia­men­tary elec­tion, with Ja­panese vot­ers demon­strat­ing their over­whelm­ing ap­proval of Prime Min­is­ter Shinzo Abe’s macroe­co­nomic pol­icy agenda. Though voter turnout was rel­a­tively low, owing largely to the some­what tech­ni­cal na­ture of the is­sues, the elec­tion’s mes­sage was clear: most Ja­panese ab­hor the prospect of a re­turn to the grim eco­nomic tra­jec­tory that pre­vailed in Ja­pan be­fore “Abe­nomics.”

When the first “ar­row” of Abe­nomics – a fis­cal stim­u­lus pro­gramme – was launched nearly two years ago, as­set mar­kets’ im­me­di­ate re­sponse was pos­i­tive. The sec­ond ar­row of Abe­nomics – mon­e­tary eas­ing – in­ten­si­fied th­ese ef­fects.

In the last two years, Ja­pan’s stock mar­ket has almost dou­bled in value, in­creas­ing the wealth of Ja­panese con­sumers. More­over, the yen has fallen by nearly one-third against the US dol­lar, from around JPY 80 to nearly 120 per dol­lar, in­vig­o­rat­ing Ja­pan’s ex­port in­dus­tries.

Even more en­cour­ag­ing are de­vel­op­ments in the labour mar­ket, which, un­like those in as­set mar­kets, re­flect out­comes, not ex­pec­ta­tions. Here, too, the news is good. The labour mar­ket has tight­ened, with un­em­ploy­ment stand­ing at 3.5% and the job-to-ap­pli­cant ra­tio above par­ity.

To be sure, there have been some set­backs: Ja­pan’s GDP shrank in the sec­ond and third quarters of 2014. But the down­turn, which re­sulted from April’s con­sump­tion-tax hike – from 5% to 8% – can­not be blamed on Abe­nomics. In­deed, Abe was hon­or­ing a law en­acted by the pre­vi­ous gov­ern­ment, led by the Demo­cratic Party of Ja­pan.

The first two ar­rows of Abe­nomics were aimed at stim­u­lat­ing de­mand – and they were ex­tremely ef­fec­tive. The con­sump­tion-tax hike was needed to sus­tain them in flight. Un­for­tu­nately, the hike was too large to keep them aloft.

The good news is that the tax hike’s im­pact is tem­po­rary. Soon, it will be­gin to ta­per off, and in­dus­trial out­put will ap­proach full ca­pac­ity. When de­mand be­gins to ex­ceed sup­ply, de­mand-side stim­u­lus poli­cies will be­come in­creas­ingly in­ef­fec­tive, and it will be time to launch the third ar­row of Abe­nomics: growth-en­hanc­ing struc­tural re­forms.

Such re­forms are es­sen­tial to raise pro­duc­tiv­ity growth and im­prove the Ja­panese econ­omy’s com­pet­i­tive­ness. Four im­per­a­tives stand out.

The first task should be to elim­i­nate – or, at least, re­duce – the thicket of gov­ern­ment reg­u­la­tions that is sti­fling eco­nomic dy­namism. The cur­rent sys­tem is so con­vo­luted and com­plex that it took more than three decades to open a new med­i­cal school in Tokyo. Like­wise, flights to Haneda air­port, a con­ve­nient con­nec­tion to the Tokyo city area, have been ra­tioned. This is no for­mula for long-term eco­nomic suc­cess.

Fur­ther­more, Ja­pan’s gov­ern­ment should push to com­plete ne­go­ti­a­tions for the Trans-Pa­cific Part­ner­ship, which is cur­rently be­ing ne­go­ti­ated among 12 coun­tries, from Mex­ico to the United States to Viet­nam. The TPP would im­prove Ja­pan’s trade prospects con­sid­er­ably, in­clud­ing in sen­si­tive sec­tors like agri­cul­ture, where ex­ports of fast­mov­ing con­sumer goods like flow­ers and vegetables would ben­e­fit.

Ja­pan’s lead­ers must also work to ex­pand the work­force, which faces se­vere con­straints, owing largely to the coun­try’s rapidly ag­ing pop­u­la­tion. In the ab­sence of large-scale im­mi­gra­tion, to which Ja­panese re­main un­a­menable, one rel­a­tively sim­ple so­lu­tion would be to in­te­grate more women into the la­bor force. A 10% in­crease in Ja­pan’s fe­male labour­force par­tic­i­pa­tion rate – an en­tirely at­tain­able goal – would trans­late into an almost 5% gain in to­tal labour-force par­tic­i­pa­tion.

Fi­nally, Abe’s gov­ern­ment must re­duce the cor­po­rate-tax rate to align it more closely with in­ter­na­tional stan­dards. Amid in­creas­ingly in­tense in­ter­na­tional com­pe­ti­tion to at­tract for­eign in­vest­ment, re­duc­ing the cor­po­rate tax would ac­tu­ally in­crease Ja­pan’s tax rev­enues, by spurring com­pa­nies to invest their vast cash stock­piles in more pro­duc­tive ac­tiv­i­ties.

Now that Abe’s gov­ern­ment has a re­newed man­date from Ja­panese vot­ers, it must de­liver on its prom­ises – and that means de­ci­sive and com­pre­hen­sive i mple­men­ta­tion of struc­tural re­forms. Of course, this will re­quire some sac­ri­fices. In­deed, house­holds have al­ready en­dured some hard­ship, brought about by the con­sump­tion-tax hike.

The next step is for Abe’s gov­ern­ment to use its po­lit­i­cal cap­i­tal to over­come vested in­ter­ests, both in the bu­reau­cracy and the business com­mu­nity. This means com­pelling busi­nesses to give up some of the spe­cial tax ben­e­fits they now en­joy. For their part, politi­cians must par­tic­i­pate in the tax­payer iden­ti­fi­ca­tion sys­tem. And bu­reau­crats must forego some of the power that ex­ces­sive reg­u­la­tion af­fords them.

If all of th­ese groups join the Ja­panese pub­lic in ac­cept­ing rea­son­able sac­ri­fices, Abe’s gov­ern­ment can ful­fill its prom­ise and build a thriv­ing econ­omy. For the sake of all Ja­panese – not to men­tion a world econ­omy in need of a new source of dy­namism – that prom­ise de­serves to be met.

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