politics

Analysts say Abe must follow through with structural reform

14 Comments
By Justin McCurry for EURObiZ Japan

Shinzo Abe made a striking claim in the weeks leading up to December’s snap election. There was, he said, “no alternative” to his stagnation-busting Abenomics cocktail of monetary easing, fiscal stimulus and structural reform.

It was no empty boast by Japan’s prime minister. Faced with a lackluster opposition, almost half of the country’s voters effectively downed their tools by staying away from polling stations. But those who did vote handed the prime minister an overwhelming mandate.

The lowest turnout since World War II took the sheen off the governing coalition’s landslide victory. Even so, it is hard to remember a time in recent years when a Japanese leader has secured such a strong endorsement for his plans to revitalise the country’s 500 trillion yen economy.

During his first two years in office, Abe had been credited with restoring confidence in Japan’s anemic economy after successive administrations had seemingly accepted the inevitability of decline — amid a shrinking workforce and the soaring costs of a growing elderly population.

The Nikkei share index — all too often an object of derision among those who remember its zenith during the bubble era (mid-1980s to early 1990s) — had gained roughly 70%; the yen sank against the dollar by about 30%, boosting overseas profits for long-suffering exporters in the auto and consumer electronics markets.

But now, analysts say, Abe must follow through with structural reform to keep alive any hope that consumers will return to spend their way out of stagnation.

The prime minister even faced down fiscal hawks in his own LDP party who believed he should be placing more emphasis on repairing Japan’s precarious public finances than on growth.

On the same day he called the snap poll, Abe said a second-stage rise (of 2%) in the consumption tax would be postponed for 18 months, until April 2017. A three-percentage-point rise in the same tax this past April was blamed for sending Japan back into recession in the third quarter of the year.

Instead, this year, there will be more stimulus in the form of a supplementary budget worth as much as ¥3 trillion, along with other measures designed to make Japan more appealing to investors — and to meet Abe’s inflation target of 2%.

For now, Japan is unlikely to make much of a dent in its public debt, which is currently 240% larger than the economy.

Robert Feldman, chief Japan economist at Morgan Stanley MUFG Securities in Tokyo, believes the election victory has given Abe’s policies “legitimacy, longevity and authority”, and secured him an uninterrupted run as prime minister until 2018. “Attention will likely now turn to implementation of Abenomics,” said Feldman, in a paper published just after the election.

“The short-term policy agenda focuses on budgets and the consumption tax, and may disappoint investors looking for growth policy. However, come spring, we expect the growth agenda to accelerate,” added Feldman.

There are potential bumps in the road, however. Abe wants to make it easier for companies to retain temporary workers for longer periods to lower costs yet maintain employment levels. But relaxing employment regulations looks unlikely while wages remain stagnant, particularly among the majority of Japanese workers employed by small and medium-sized firms. As it stands, Abe has secured agreement from major employers that they will “strive” to unshackle some of the $2 trillion they have in reserve and raise wages in 2015.

“The problem is that companies remain reluctant to further boost investment as long as the future course of policy-and-demand in Japan remains unclear,” said Martin Schulz, chief economist at the Fujitsu Research Institute in Tokyo.

“Cancelling the additional tax hike in such a situation might have been a necessary step to stabilise demand trends in the short run, but it won’t help to put more long-term policies on a sounder footing.”

The “shock” news in November that the growth juggernaut had momentarily derailed in the second and third quarters — sending Japan back into recession —was hardly surprising, given the timing of the consumption tax increase, added Schulz.

“Abenomics has already had some success in terms of agricultural reform, gradually changing the energy market, slowly capping healthcare costs, and shifting the country towards more liberal free trade agreements,” he said. “All this should bear some fruit over a horizon of about 10 years, but would be hard to measure as a success indicator on a year-to-year GDP basis.”

Abe is virtually assured of being re-elected LDP president this year, but he has no time to sit back and ponder his political longevity after almost a decade of revolving-door leadership.

Japan, and indeed the rest of the world, is waiting to see if he can deliver the third arrow (regulatory reform to boost competitiveness) of Abenomics. Hiring practices aside, that means increasing women’s participation in the workplace and joining various free trade deals, including the FTA/EPA with Europe and the Trans-Pacific Partnership.

“For the foreseeable future, I expect there will be little more than incremental change,” said Tobias Harris, a Japan analyst at Teneo Intelligence in Washington, D.C. “Nothing has really been outlined on the labour market front, and policies to empower women have a long way to go to full implementation.

Officials close to Abe believe he has been given carte blanche to proceed with his growth-oriented economic policy.

“The Japanese economy has a blank canvas for the next 27 months, until April 2017, during which there doesn’t need to be a debate over the desirability of the consumption tax hike,” said Tomohiko Taniguchi, a special adviser in the prime minister’s office.

Since taking office in December 2012, Abe has become the most peripatetic Japanese leader in recent memory, racking up 354,200 miles (570,030km) and more than 50 countries to deliver his “Japan is back” mantra everywhere from New York to New Delhi.

Now that he can claim a new mandate, might Abenomics still offer an alternative to austerity for policy makers in Europe and elsewhere?

“Without the election, brand Abenomics would have gotten rusty”, said Taniguchi. “I imagine that the investment community in the UK, Europe and the US is looking anew to see if Shinzo Abe will deliver.”

© Japan Today

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14 Comments
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The pension age needs to been raised as soon as possible as well.

0 ( +2 / -2 )

Let's hope he does 'follow through'.... it won't be his first time.

-2 ( +0 / -2 )

Good Article

0 ( +1 / -1 )

“For the foreseeable future, I expect there will be little more than incremental change,” said Tobias Harris, a Japan analyst at Teneo Intelligence in Washington, D.C. “Nothing has really been outlined on the labour market front, and policies to empower women have a long way to go to full implementation.

Spot on. And incremental change is not going to cut it.

-3 ( +1 / -4 )

Abe shirks every difficult decision in favour of the traditional LDP practice of spending money.

Today's paper mentioned his idea of abolishing overtime payments again. How that fits with his claims that higher wages are necessary is unclear. Expanding temporary employment will also do nothing to raise wages and demand will remain supressed.

7 ( +7 / -0 )

Martin Schulz, chief economist at the Fujitsu Research Institute in Tokyo, refers to Abenomics having some success in agricultural reform, gradually changing the energy market, slowly capping healthcare costs.... I am struggling to feel the effects, in fact it's like locating the 'holy grail' finding any reform or restructuring in the multitude of restrictive regulatory practices, in employment hiring process, tax reforms, or any government ministry's.

This farcical policy for empowerment of women in the work place seems self defeating, an employment policy agenda opening inclusion for all, would give more choice for families to plan there expenditure. Sensible achievable relaxation of employment regulations which balances job security with more flexible approach to bonus structures and overtime payments could provide a starting point.

Only this week the Agriculture lobby undermined Abe’s candidate for the governorship of Saga prefecture that subsequently was won by a rival backed by the agriculture sector, reveals the struggle ahead to restructure the industry.

1 ( +1 / -0 )

Market reforms usually don't work. The US kick started deregulation, etc. from the late 70s, based on unproven neo-classical economic theories. The growth of the middle class then stopped growing and American industries from autos to airlines went into stark decline, in terms of quality and competitiveness.

In Japan, the extensive labor market "reforms" have created an underclass of temporarily employed "working poor," whose shrinkened pocketbooks are at the true cause of Japan's economic problem, ie, insufficient demand.

-1 ( +2 / -3 )

"Structural reforms" is code by the investment and corporate class to mean more neo-liberal policies that shift wealth to the few and destroy the planet through debt financed over-consumption. Here is an article that shows just how flawed the model is.

http://www.commondreams.org/news/2015/01/16/was-easy-just-60-years-neoliberal-capitalism-has-nearly-broken-planet-earth

0 ( +2 / -2 )

The US kick started deregulation, etc. from the late 70s, based on unproven neo-classical economic theories. The growth of the middle class then stopped growing and American industries from autos to airlines went into stark decline, in terms of quality and competitiveness.

Jeff -- you sound like the guy from Harvard that Will ridicules in the bar in "Good Will Hunting". First, can you offer something original, rather than some nonsense you read some where and committed to memory? Two, what in the world does what you say have anything to do with the current situation in Japan? Japan of 2014 in no way resembles the U.S. of nearly 40 years ago. Japan has already lost competitiveness in industries like electronics due to its rigid structure. Jeez.

-4 ( +2 / -6 )

Japanese corporations have severely abused the law allowing the use of temporary workers. There are companies now that have over 80% temporary workers in the office. The Japanese government must impose reasonable restrictions on the number of temporary workers a company can use as a % of it's workforce.

To raise wages across the economy, employment laws should be created to allow for the free flow of labor and make lateral hiring more acceptable. Under the current system / culture, companies have little incentive to raise wages because they have no fear of losing experienced hires to competing companies. They know their employees have no opportunities to leave. Japanese companies currently do not have to compete to retain experienced people. Changing the law to allow lateral hiring would force competition and lead to higher wages overall as companies have to pay more to keep their best people.

3 ( +3 / -0 )

"First, can you offer something original, rather than some nonsense you read some where and committed to memory?"

You're hilarious. My degree is in economics, and today I get paid to write and comment on business and economics in Japan. If you had read that "nonsense" somewhere else, then I was probably the one who wrote it.

"Japan has already lost competitiveness in industries like electronics due to its rigid structure."

Wrong. When Japan's "rigid structure" was in place, its companies were stellar performers and its economy was the envy of the world.

The ushering in of "reforms" post bubble -- and then accelerated during the Koizumi years 2001 -- preceded the prolonged downturn, particularly in terms of private consumption. We've already HAD reform, including numerous revisions to the labor laws. To date, they have failed, apart from growing the corporations' profits and cash piles.

0 ( +2 / -2 )

I think Abe's government is putting up a good fight, actually declared a war, with JA Zenchu (the headquarter of Japan Agricultural Cooperatives). It's epochal.

0 ( +0 / -0 )

I think Abe's government is putting up a good fight, actually declared a war, with JA Zenchu (the headquarter of Japan Agricultural Cooperatives).

They've proposed changes to JA. Have any of those changes actually been implemented?

0 ( +0 / -0 )

It's not proposed changes to JA but legislation to be submitted to the Diet actually. The election victory has enabled Abe not only to face down fiscal hawks in his own LDP party who were lectured by the Finance Ministry on the necessity to raise the sales tax but also defy the JA's intimidation that they might not back up the LDP in the election unless he minds what they have to say. Abe seems serious about sending JA Zenchu to glory and will submit legislation on reforming the entity (to strip it of its power as headquarters to audit JA organs nationwide) during an ordinary Diet session beginning on Jan. 26.

0 ( +0 / -0 )

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