TOKYO–Three and a half years into Mr. Shinzo Abe’s reincarnation as Japan’s prime minister, the bloom appears to be mostly off his three-arrow set of economic policies eponymously dubbed “Abenomics.”
The first and most successful arrow, quantitative easing to achieve a 2% inflation target under a central bank governor handpicked by Prime Minister Abe, sent the yen tumbling at the beginning of his regime, boosting profits for Japanese exporters and raising corporate tax revenue to near-historic heights. But easy money has failed miserably in achieving its main purpose, forcing the Bank of Japan to repeatedly kick the inflation target down the road, while the yen has been creeping up again, threatening the corporate and fiscal gains.
Indeed, the February introduction of a negative interest rate on some of the surplus funds banks have parked in BOJ backfired, touching off a new round of a yen upsweep. The BOJ appears to be damned if it doesn’t too, as the yen jumped again when its policy board unexpectedly stood pat on April 22.
Meanwhile, possible direct currency intervention floated by an anxious Ministry of Finance got negative reviews from its overseas counterparts and has subsequently been deep-sixed by the US Treasury.
The second arrow, an expansive fiscal policy emphasizing spending plans to reinforce an aging infrastructure, has been less evident. And that may not really be a bad thing at all, since additional recovery spending related to the Great East Japan Earthquake has already kicked up labor and other construction costs.
Construction capacity will continue to be stretched with another albeit much smaller jolt of reconstruction from the Kumamoto earthquakes as well as the run-up to the 2020 Olympic and Paralympic Games in Tokyo. Loosening restrictions on foreign labor would ease the skilled labor shortage, but the Abe administration is reluctant to fiddle with immigration policy.
And that brings us to Abenomics’ third arrow, essentially a massive wave of structural reform that has so far materialized only in fits and starts. The efforts of the Abe administration has been particularly disappointing here in light of the fairly broad public consensus that only broad-based regulatory reform will produce the total factor productivity gains necessary to meet the economic and fiscal challenges of a rapidly aging society.
Take agriculture, where reform, particularly in rice farming, is long overdue. The restrictions on corporations that can own farmland make it difficult for them to be run as modern agribusinesses and the regulatory framework and the tax incentives that keep farmland in the hands of unproductive farmers sometimes in name only remain largely untouched.
Take healthcare, where the worldwide challenge of rising costs is compounded by the need to care for Japan’s rapidly aging population. Here, smaller clinics and their proprietors stand in the way of for-profit medical treatment and other reforms that may help control the growing deficit in the public healthcare system.
Labor policy is another area where most of the Abe administration’s initiatives are being kicked down the road or installed in limited form while leaving the broader limitations that maintain labor market rigidity intact.
Part of the problem lies in Mr. Abe himself. National security/foreign policy is his first love, not economics. He understands that a strong state requires a strong economy, but lacking the personal expertise or an economic czar that has his full confidence and backing, the policy agenda has tended to be a collage of what the ministries and agencies find acceptable.
LDP is the problem
But the real problem lies in his Liberal Democratic Party. The LDP has been in power for most of the six decades of its existence with only a couple of brief interruptions, an incredible run that has been possible only by successfully consolidating a wide range of voters into a bedrock constituency.
And with a national election every couple of years or so looming — half the Upper House stands for election every three years, while the more powerful Lower House has a four-year term often interrupted by a snap election — it takes powerful personal conviction and enormous political courage to challenge the vested interests that support the LDP — conviction and courage that seem to be in short supply as of now.
What could change this situation? Overall support for the Abe administration and Abenomics has shown a gradual but unmistakable decline over the timeline. If fear of a general malaise becomes strong enough to overcome the need to appease vested interests, that will go a long ways in pushing the LDP towards more meaningful reform.
But even that may not be enough, as the LDP may just replace Mr. Abe and ride the near-automatic boost in the polls to victory in a snap election. For real change, a credible alternative is required to challenge the LDP, a challenge that is unlikely to emerge from the July national elections.
Jun Okumura is currently a visiting scholar at the Meiji Institute for Global Affairs. He is a 30-year veteran of the Japanese civil service. During his career with the Ministry of Trade, Economy and Industry, he took part in several bilateral and multilateral negotiations, including UNCLOS II and and the Uruguay Round as the lead METI negotiator for trade in services. He headed METI’s Trade Finance Division during the Asian financial crisis. As president of JETRO New York, he worked with the Japanese consulate and business community to assist evacuated businesses and their employees in the aftermath of Sept. 11 2001.