The Japanese government published the “third arrow” of Abenomics—proposals for Japan’s economic reform and revitalization—on June 14 to unenthusiastic reviews. A closer look at the proposals’ rationale, however, reveals careful economic analysis behind the document. The problem is that it was designed with an economist’s vision, but shaped by a bureaucrat’s hand.
The third arrow complements the first two, which comprised vigorous monetary policy plus fiscal stimulus. It reflects the belief that the first two, alone, would not lift Japan permanently from its low-growth trajectory of the past twenty years.
Interlinked virtuous circles form the underlying rationale. Japanese households possess ¥1,600 trillion in financial assets while private nonfinancial corporations hold almost half that amount ($24 trillion, in total) invested in low-return instruments, producing little in the way of new ventures, higher productivity, advanced technology, income, or jobs.
The government’s plan is to direct the vast quantities of idle funds towards high-yielding investments. The first two arrows are essential to begin the process. As the stagnant economy starts to move again, the third arrow policies will promote replacement of old facilities and equipment and accelerate investment in growth sectors assisted by investment incentives, deregulation, and institutional reform. With greater labor mobility, corporate earnings will increase, which will deliver higher worker salaries and increased employment.
Many Opportunities for Reform
The three committees that helped produce this strategy had little difficulty in finding targets for reform. “The same issues have come up again and again,” said Yoshihiko Miyauchi, the chairman of financial services firm Orix Corp. “It's simple: everything we need to do and how to do it can be written up in a day. After that, it's a question of whether it gets done or not.”
The committees identified impediments to growth and productivity that have been discussed for years. They include low labor mobility, weak corporate governance, the tendency for the state to protect specific jobs and companies rather than promoting flexibility, relatively few women in the workforce, very low agricultural productivity, and too many restrictions and regulations in health services—the sector that is promising the greatest growth and innovation promise.
Ragbag of Partial Solutions
The strategy document proposes to make changes in all of these areas, and more. Its chief failing lies neither in its vision nor its rationale, but in the detailed implementation. Immediately after publication, participants in the advisory councils described the struggles between private sector advisors and bureaucrats eager to preserve the status quo.
For example, the plan declares, “The system of life-time employment, where young people graduate from school, find employment, and work for the same company until retirement is now a thing of the past.” It notes that this change requires a shift in policy: “The government will shift its employment policy in order to move labor from mature sectors to growth ones without creating unemployment.”
To accomplish this enormous transition to a new labor model, the government proposed only a minor adjustment: it will invite private recruiting and employment agencies into government labor offices to take advantage of the private sector’s expertise. This recommendation does little to change a century of practice and legal backing for the lifetime system. It says nothing about changing the labor law to allow dismissals.
Labor force flexibility is tied intimately to a central goal of fully utilizing the power of women. Increasing labor mobility, in general, would enable other measures promoting female labor force participation to achieve their full effect. Otherwise, women will still face fewer opportunities for jobs and promotions. The proposal does little other than “urge and support”: “support company initiatives that promote women’s active participation; urge companies to employ more women in managerial positions and as officers; support companies that promote women’s active participation; support the re-employment of women caring for their child.” One concrete plan is to eliminate childcare waiting lists, the bane of the working woman who often spends months hunting for a place to put her child during working hours.
The plan foresees agriculture revitalization arising from the consolidation of small, inefficient plots to be operated by larger entities, including corporations, which is currently forbidden. However, rather than direct corporate ownership, the proposal suggests land purchases and consolidation by “intermediary institutions,” presumably government-linked, that would then lease the land to “responsible entities” such as corporations or large-scale family farmers. Only after some years of observing corporate entry would direct ownership be considered. According to participants, the government’s pursuit of trade opening in the Trans Pacific Partnership negotiations is placing enough strain on LDP-agriculture relations for the moment.
Innovative Health Sector
With Japan’s ageing population, the proposals seize on the projected increase in health spending as an opportunity to raise health sciences to world class levels, develop innovative medical technologies, speed the approval process for new drugs and devices, and reduce costs while increasing consumer convenience by allowing the online sale of non-prescription drugs.
Online Drug Sales
This last item illustrates the problems faced by the strategic plan’s drafters. In 2006, the Diet revised the law on over-the-counter drugs, allowing convenience stores to sell nonprescription items. Although the law did not mention restrictions on online sales, the health ministry drafted an ordinance requiring face-to-face sales of all drugs, including aspirin, citing safety concerns. The Japanese Supreme Court overturned the ordinance in early 2013, saying that the face-to-face requirement was not included in the original law. Although the general online ban will end, twenty-five items remain exempt. The reason: as the Upper House election, expected to be held July 21, draws closer, lawmakers from the ruling Liberal Democratic Party have demanded more exceptions, partly because the nation’s 300,000 pharmacists have historically been a powerful vote-gathering tool for the LDP.
Management experts as well as economists had their hand in devising the document. The growth strategy sets forth key performance indicators to measure progress. Target review is at the center of implementation; feedback from experience will stimulate modifications, according to the blueprint.
Prime Minister Abe acknowledged the incompleteness of the plan and the necessity to return to it. “Continual action is the key,” he said in his June 5 speech. In fact, he used the word “action” twelve times in that speech. Explicit changes to law and regulation are scheduled for the fall when the Diet sessions resume and the elections are over.
Mr. Abe clearly recognizes the impediments to growth and productivity. Can his policies break free from bureaucratic and political shackles? “There is a split between pro-zombie and anti-zombie factions, between one set of politicians, bureaucrats, and businesses who want to preserve the current system of vested interests, and different set of politicians, bureaucrats, and businesses who want more open competition,” said Robert Feldman, chief economist at Morgan Stanley MUFG Securities in Tokyo. “I think the anti-zombie faction will win this time because the standard of living has been deteriorating and I think the public has caught on to this.”
Mr. Abe and his economic advisors are aware that deregulation and institutional reform will mean the death of companies and the destruction of jobs, but that expanding sectors and new ventures will create opportunities from which only a more mobile labor force can benefit. Japanese politicians and bureaucrats have been in the habit of protecting companies and jobs. Moving to a new strategy will require political guts as well as economic theory.
This coming autumn will give us a clearer picture of whether Mr. Abe is the man of action he purports to be.