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June 6, 2013 5:25 pm

Abe’s ‘third arrow’ reforms leave investors hungry for detail

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Japanese PM says moves will increase GDP per person by 40% in 10 years
Japanese Prime Minister Shinzo Abe raises a fist as he makes a speech during the Liberal Democratic Party's annual convention at a hotel in Tokyo Sunday, March 17, 2013. The conservative LDP recaptured power after December Lower House election©AP

Running a business in Japan? Shinzo Abe, the prime minister, wants to get government out of your way, by allowing Tokyo and other big cities to free themselves from onerous regulations and remove funding barriers for entrepreneurs.

He also has some suggestions. He wants you to pay your workers more and invest in your facilities. There are tax breaks on the way to encourage the latter, as part of the much-touted “third arrow” of his Abenomics growth drive due to take its final form next week.

Or, if you manufacture things that the government thinks lots of people will buy in the future, like high-speed trains or “clean coal” power plants, how about expanding your exports? Mr Abe’s government will pitch to foreign customers for you, and might even pay you to hire more workers – though why you would need the extra incentive, if your business is such an up-and-comer, is a bit of a mystery.

Mr Abe has been giving the public peeks at his reform agenda since soon after he took office in December, in a months-long policy striptease. There are plenty of targets: doubling farm incomes, tourism and foreign direct investment; tripling exports of transport and power-generation equipment. There is also at least one unusually bold initiative, a bid to join the Trans-Pacific Partnership trade bloc.

But this week there were signs that investors are growing impatient for more detail, and worried that the forthcoming “national growth strategy” won’t provide enough of it. A few minutes into Mr Abe’s final pre-announcement speech about the reforms on Wednesday, in which the most tangible revelation was a proposal to legalise online sales of cough syrup and other non-prescription drugs, the Nikkei 225 began a 5 per cent plunge.

Japan took a shine to multiyear economic plans in the 1930s, when its military rulers adopted Soviet principles of central co-ordination to serve the country’s imperial enlargement. The habit stuck after the war. Since the mid-1950, there have been at least 17 multiyear economic plans, according to a count by Akihiko Suzuki, chief economist at MUFJ Research and Consulting, an arm of Japan’s biggest bank.

Japanese still talk wistfully of Hayato Ikeda’s 1961 promise to double household incomes by the end of that decade, a target met with room to spare. But things have rarely gone the planners’ way since. With the exception of the 1980s bubble years, actual growth has fallen short of targets since the 1973 oil shock.

Mr Abe says his measures will increase Japan’s GDP per person by 40 per cent in 10 years, a major ambition in the context of recent history. Even with a declining population, it would require that the economy expand by 3 per cent a year, more than triple the average rate of the past two decades.

Mr Abe’s prospects are meant to be better than those of those of his recent predecessors. Thanks in large part to the stock market boom unleashed by that other pillar of Abenomics, ultra-loose monetary policy, the premier’s approval ratings have been running at around 70 per cent.

If the Nikkei’s reversal of the last two weeks does not turn into a full-scale collapse, his Liberal Democratic party should easily take back the upper house of parliament in elections next month, consolidating its power. Mr Abe’s supporters like to point out that the next election after that is not for three more years, meaning the premier will have a free hand to enact politically difficult reforms.

To be sure, some of the weaknesses of Mr Abe’s “third arrow” have been chalked up to the need to win those elections, and thus may be temporary. He wants to make the labour market more flexible, but there is no plan to roll back abnormally strong job protection. Healthcare is tagged as a priority, but a doctor-supported quirk of Japan’s public insurance system, which denies compensation to patients if they choose even one treatment not covered by the system, is to remain in place.

Some detect contradictory impulses at work, however. For all the talk of deregulation, much of the specifics will be left to locally administered “special zones”. Meanwhile, there is lots of interventionist industrial policy – all those export programmes and subsidies for favoured industries – for those nostalgic for Mr Ikeda’s days.

Heizo Takenaka, a liberalising former economy minister, foresees a “strong battle” between reformists and special interest groups after the election. But he also sees philosophical contradictions. “The ideas are mixed at the moment.”

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