From Prof Danny Leipziger.

Sir, In his article “It is the first arrow of Abenomics that matters” (Comment, November 14), David Pilling attempts unsuccessfully to argue that super-aggressive monetary policy is the single most important aspect of prime minister Shinzo Abe’s economic revitalisation programme for Japan. While he is correct that reversing deflation and restoring positive momentum to the economy can be aided in the short run by massive expansion, he is wrong to dismiss the second and third arrows of Abenomics: fiscal policy and structural reforms.

The quick dismissal of fiscal policy (“We’ll pass over the second arrow . . .”) is hardly credible when analysing Japan’s economic programme since it has been excessive savings and poor domestic demand that has, in the past, forced government spending upwards and raised Japan’s debt to gross domestic product ratio to a staggering 240 per cent. Will consumers continue to spend when consumption taxes are raised? Unlikely. Or will companies invest more? Questionable. The major driver of growth, then, relies on exports, driven by a massive depreciation of the yen that is both worrying to competitors such as Korea and likely to be unsustainable. Similar to their counterparts in the US, Japanese policy makers haven’t solved the problem of providing short-term stimulus and longer-term fiscal retrenchment. Without a fiscal solution, however, the programme will falter.

On structural reforms, the third arrow, Mr Pilling acknowledges all that is wrong in labour markets, corporate governance, and an absence of competition; however, he seems to believe that these challenges are untouchable in Japan and yet that Abenomics will do considerable good. An alternative view is that it will provide a flash in the pan, that it will ultimately raise interest rates and make debt service more unmanageable, and that growth will not be lifted on a sustainable basis. That second view, which I believe is more likely to prevail, is supported by the fact that regulations stifle new ventures and that old practices retard new sources of growth.

Finally, it is the issue of demographics that will halt Japanese growth as its labour force is declining and its dependency ratio rising. With low fertility and low female labour-force participation and with immigration being an anathema, it is hard to see the light at the end of the tunnel. However bold the Bank of Japan may be in its first arrow, Japanese households and companies, which matter for the second and third arrows, will unfortunately prove to be the dominant forces determining Japan’s future.

Danny Leipziger, Department of International Business, George Washington University Managing Director

The Growth Dialogue Washington, DC, US

Letter in response to this article:

Shoot three arrows – as long as monetary policy is the first / From Mr Erik Tollefson

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