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The Third Arrow of Abenomics: What economic picture will it draw in the middle-term?

The seriousness of Abe cabinet on revitalising Japan’s growth potential should be reassessed, paying close attention to the “bureaucratic wording” used to dress up the strategy’s policy measures, and to other measures suggested by the premier following the election in July.

By: Date: August 25, 2014 Topic: Global Economics & Governance

See also blog post ‘Abenomics: Shinzo ready to re-launch 2nd and 3rd arrow after Japanese election?

The third arrow of Abenomics, a growth strategy, aims at revitalising industries, creating markets for selected sectors with the promise of future growth, and expanding global outreach.  Prime Minister Abe’s growth strategy, formulated in June, gave a timeline for implementing measures to realise these goals; many are expected to be on schedule.  This would remedy one of the weaknesses of Japan’s business environment – the ease of starting up.

Not all measures in the growth strategy have a clear direction, nor do they all contribute to economic growth.  Creating markets in Japan’s health-care and agricultural sectors are examples of this, though the premier has shown a strong will to deregulate these and may have a clearer vision of their impact.  Still, challenges remain for the private sector, in a rigid employment system and high taxes.  Attention should be paid to premier’s leadership in these fields, which has not been very clear.


The Prime Minister of Japan, Shinzo Abe, introduced “three arrows” for economic recovery and growth.  The first and second arrows were launched earlier this year, as monetary easing to fight deflation and flexible fiscal injections to support economy.  The third arrow, a growth strategy known as the “Japan Revitalisation Strategy”, was considered a disappointment by the business sector, judging by Nikkei225’s major plunge as the Prime Minister gradually announced its details in late May to middle June this year. As our former blog post highlighted, however, this plunge may not have resulted from a sceptical reception of the growth strategy, but from an undervalued yen.  Indeed, the index bounced back 20% over the following month, though this has not lead to a positive re-assessment of the third arrow. 

Much disappointment has been expressed regarding what the growth strategy did not include, but few discussions over the third arrow take an in-depth look at what it does include.  It could be worth bringing focus to the details of Abe’s growth strategy, in particular what it aims at, and what sectors it attempts to develop as promising industries. The seriousness of Abe cabinet on revitalising Japan’s growth potential should be reassessed, paying close attention to the “bureaucratic wording” used to dress up the strategy’s policy measures, and to other measures suggested by the premier following the election in July. 

Japan’s current business circumstances and the aims of the Strategy

One of main pillars of the premier’s growth strategy is to revitalise Japan’s private sectors by improving the business environment.  

How ‘bad’ is it now?  According to the World Bank’s “Doing Business 2013” report, Japan ranks 24th in overall business circumstances (ease of doing business: EoDB) among the 185 countries surveyed.  However, it ranks 5th among the G7 countries, falling behind the Asian NIEs (Singapore, Hong Kong and Korea).  As seen in Table 1, there are some specific issues (cells coloured in grey) that stand in the way of improving Japan’s business circumstances.  Of these issues, “starting a business” and “paying taxes” ranks below the top 100, while “dealing with construction permits” and “registering property” ranks below the top 50.  The countries whose ranking is within the top 10 overall, maintain a high ranking for all included categories (for example, Singapore does not rank below 50 in any category, compared to one for the US and Korea, and two for the UK).  This suggests Japan must tackle the issues mentioned above if it hoped to improve its rank (i.e. to improve Japan’s business circumstances).

Table 1: Ease of doing business ranking

(Note) Cells coloured in pale and dark grey indicate that the rankings of the category are below 50 and 100, respectively.

(Source) World Bank “Doing Business 2012”

Abe’s growth strategy aims to bring Japan into the top three among the G7 (but without a target year), by replacing old businesses, and passing regulatory and industrial reforms, but is short on measures to climb the “paying taxes” category (such as simplifying tax payment procedures and reducing corporate taxes). This explains at least part of the disappointment with Abe’s third arrow.

What will be delivered by Abe’s growth strategy?

What kind of structural changes will follow from Abe’s growth strategy?  Table 2 lists the number of policy measures in each category with a rough schedule of their implementation[1].

The growth strategy consists of three “plans”; Industry Revitalisation Plan, Strategic Market Creation Plan, and Strategy of Global Outreach.  As the Strategy of Global Outreach aims mainly to accelerate the negotiation of economic partnership agreements, it does not necessarily require new policy measures. Instead, it is time to have a detailed look at the first two plans. 

(1: Industry Revitalisation Plan)

The Industry Revitalisation Plan has six pillars.  Its basic principle is to [1] accelerate structural reforms first, and then build economic competitiveness by [2] reforming the employment system and reinforcing human resource capabilities and by [3] strengthening science, technology and innovation[2].  To realise this, it suggests that [4] establishing the world’s leading IT society, [5] strengthening the international competitiveness of Japanese megacities as business hubs, and [6] revitalising small and medium-sized enterprises (SMEs) through innovation will be of help.

Table 2: Number and timing of policy implementation of “Japan Revitalisation Strategy” (click to enlarge)

(Source) By the author 

The policy measures for [1] accelerating structural reforms have a clear direction and schedule of implementation, irrespective of the necessity for legislation.  This is because the Plan is formulated to restructure and reorganise the industries intensively in a short period of time.  In fact, the government will implement, or at least submit relevant bills on, all the policy measures in this category not later than the beginning of the next fiscal year in April.  In addition, for the policy measures in the category of [5] strengthen Japan’s international competitiveness as a business hub, the premier takes an initiative to utilise “National Strategic Special Zones” which are created ‘to serve as gateways for the execution of bold regulatory reforms and other measures as a new approach to realise Japan’s growth strategy’.  So the implementation of policy measures in this category will advance favourably.  Most of the policy measures in the categories of [4] IT society and [6] revitalise SMEs through innovation are financial and other assistance schemes for relevant industries and enterprises.  As measures which expand the budgets and powers of ministries could be implemented relatively smoothly, policy measures in this category are likely to advance at a high pace.

By contrast, the category of [2] reinforce human resource capability and reform the employment system includes two policy measures determined to “examine”; but not to be followed by clear initiatives.  These are “reviewing the worker dispatching system” and “reviewing evacuation standards for registered childcare facilities”.  The necessity of amending current legislation has been discussed for a long time, and the inclusion of these measures suggests Abe’s cabinet finally decided on a general direction for its policy.  However, the strategy uses phrases such as “to hold discussions” and “to advance the consideration” (both are translated from one Japanese word – “kentou-suru”)”.  This term in Japanese sometimes means that a government will consider the pros and cons of a policy change, but will take no policy action based on the results.  What’s more, for the amendment of the worker dispatching system, the strategy will attach more importance to the decision made by the Labour Policy Council than Abe’s initiative, and although many policy measures will be taken in this category, 24 measures (of 59) are about budget requests.  These policy directions could prove efficient, if new measures for employment stability and fluidity are implemented after the necessary budgetary treatment in the beginning of the next fiscal year.  However some of them (especially measures aimed at women, youth and elderly) are really surveys or research to “understand the potential problems” with the current system or with a future reform[3].

(2: Strategic Market Creation Plan)

The ‘Strategic Market Creation Plan’ singles out industrial sectors that could potentially obtain a significant market share in the world, but struggles to break into the market without the government’s initial support.  Health-care, energy, infrastructure, agriculture and tourism are the chosen industries to be supported under this Plan, and the government will take necessary actions to meet its target in 2020 or 2030.  The government’s seriousness for reforms should not be judged from the fact that few policy measures will be implemented in the immediate future, as most of them will require a long-term effort until the effects have taken place, or they are fully implemented.  Table 2 shows that no new policy actions will appear by the beginning of the next fiscal year.  However, some programmes for energy sector reform have already been decided, with a list of regulatory reforms to take place in a longer term.  Policy measures for infrastructure development are also expected to advance, although slowly, as these meet the needs from both the government and the private sectors.

On the other hand, policies for market creation in health-care, agriculture and tourism may have problems advancing.  More than half of the policy measures listed in the categories of health-care and tourism are about improvement or acceleration of existing policies, and, as the discussion in (1) above, quite a few policy measures state the government’s intention to examine the problems of current systems, despite having argued the necessity of amending these policies for a long period of time.  These include “consideration of a better system for the supportive contribution to medical insurance for the elderly aged 75 and over”, and “consideration of implementing a system which allows foreigners who meet certain conditions to stay for an extended period”.  For health-care industries to develop, it is important to introduce “more advanced medical care”.  The Plan has many policy measures to conduct empirical research and promote home-based R&D for advanced medical care, but lacks the promotional policies for expanding access by the national public and medical workers (especially for general practitioners) to develop the necessary skills to fully utilise it.

For agriculture, the Plan includes various new policy measures for facilitating innovation in the sector and for promoting export of agricultural products.  A scheme aiming at improving productivity such as “further liberalisation of corporate entry into agriculture” is stated with, again, the bureaucratic wording of “will examine it” (although it is included in the Plan).  For a problem which obstructs consolidation of farmland, widely regarded as one of the limitations to facilitate productivity in the agricultural sector, Abe’s plan gives no promotional policies but decides to maintain the current policy. 

Further measures for strengthening growth potential: Regulatory reform

Among the policy measures listed in the Abe cabinet’s growth strategy, those expanding the budget and power of the line ministries will advance quicker.  However, some of important deregulation requests from private sectors were not included in the growth strategy at all.

Requests for reforms from private sectors derive from the perception of “six-fold burden” arising after the Great East Japan Earthquake in March 2011.  Six problems were considered to have led to the difficult situation of the Japanese economy; appreciation of the yen, energy shortages, high corporate taxes, strict employment regulations, green-house gas regulations, and a delay in negotiations for free-trade agreements.  So far, the first arrow of Abenomics, monetary easing to exit deflation, has had the side-effect of depreciating the yen, while the Prime Minister Abe already decided on his reform package for the energy sector and for the “correction” of the previous government’s commitment to reduce Japan’s greenhouse gas emission by 25%.  Also, the government has started negotiations of an economic partnership agreement with the EU and 15 countries in Asia and the Pacific, as well as the TPP (trans-pacific partnership agreement).

Japan’s problems of starting business and paying taxes, highlighted in the EoDB ranking, these cannot be fully solved without structural reforms.  A survey of business managers, conducted by Nikkei Newspaper after the publication of Abe cabinet’s growth strategy in June, shows that, although 88% of respondents assess the growth strategy positively, 95.4% request reductions in corporate tax rates.  Other requests related to deregulation (not all of them are necessarily related to starting-up of business) include promotion of corporate enterprises’ entry into agriculture and health-care, expansion of immigration, and so forth.  Abe’s responses to the requests from the business sectors should be checked.  The focus here is on the treatment of corporate tax reductions and regulatory reforms. 

It was reported in middle August that the Prime Minister instructed the Ministers concerned on considering the reduction of corporate tax rates, although some Ministers denied it soon after the news.  In addition, the Prime Minister instructed the Council of Regulatory Reform to prioritise discussions on easing restrictions on consolidating farmlands (some deregulation has already been suggested by the Ministry of Agriculture, Forest and Fishery soon after this instruction) and lifting the ban on mixed medical treatment[4].  On the other hand, no further deregulation of employment market and of immigration beyond the growth strategy has been recommended or even brought up for discussion.

Regulatory reform is key for regaining the growth potential of the Japan’s economy and the menu for important deregulation is widely recognised, at least among policymakers and experts.  However, regulatory reforms were not always successful in the past.  Such experiences have introduced scepticism to embarking on new reforms.  Then, what would be obstacles for the regulatory reform?  A recent paper by Saito (2013) reviews past minutes of Diet proceedings, governmental organisations for regulatory reforms, Council for Economic and Fiscal Policy, etc., and summarises causes for reluctance to regulatory reform.  He identifies eight causes in politics, administration, business, and the national public as consumers.  He also focuses on two successful examples of regulatory reforms (liberalisation of aviation sectors and easing of the ban on selling medicines in a non-medical retailer) and analyses conditions leading to successful reform (summarised in Table 3).  Looking at the table below, it might be suggested that ministries’ awareness of the necessity of changing regulation leads to successful deregulation, if either the prime minister or relevant business sector’s request deregulation, coupled with public attention to the need for reform. 

Table 3: The causes affecting the success/failure in regulatory reform

Causes

Successful examples

Abe cabinets,

compared with

DPJ cabinets

Aviation

Medicines

 Politics

 

 

 

 

Lack of leadership of Prime Minister (incl. lack of power of regulatory reform organisation)

 

PM’s leadership,
organisation’s efforts

PM now puts the first priority to the reform

 

 

Too much regard to the groups supporting the leading party

 

 

 

 Administration

 

 

 

 

Distrust to private sectors (wise consumption, dealing with difficulties by themselves, etc.)

 

 

Growth strategy will support private sectors

 

Lack of incentives of amending the regulations (in regulatory ministries)

Existence of officers serious for the reform

Existence of officers serious for the reform

 

 Business sectors concerned

 

 

 

 

 

Activities to maintain vested interest

 

 

 

 

 

Mentality of avoiding competition or reform

Existence of companies thinking about new entry

 

 

 National Public / Consumers

 

 

 

 

 

Low concern to regulation and regulatory reform

Expansion of demand for aviation

 

More interest with the word “third arrow”

 

 

Lack of awareness of self-responsibility as consumers

 

 

 

(Source) By the author, partly based on the information from Saito (2013).

The current circumstances for regulatory reform are clearly different from those in DPJ (Democratic Party of Japan) cabinets.  It cannot be assessed yet whether there is any difference in business sectors’ behaviour to regulatory reform between current and previous governments, but the national publics’ awareness of the need for regulatory reform has become more significant, owing to Abe’s branding his reform as “the third arrow”.  The leadership shown by the premier on regulatory reform is convincing, judging from his public appearances and speeches, stating time and time again that regulatory reform is the top priority for him when advancing his growth strategy.  Although distrust of the private sector from bureaucrats will not change, the Industry Revitalisation Plan works around this by supporting private sectors’ voluntary actions towards innovation.

Conclusion

To realise a stronger growth potential of the Japanese economy, a good strategy and surefooted implementation is essential.  Revitalising Japan’s industries will start by shifting resources from old industries to new ones and fostering home-based innovation, but more labour market reforms might be inescapable.  Regarding market creation in his five prioritised sectors, Abe’s growth strategy may choose to leave some areas untouched, especially in health-care and agriculture, but the premier will take initiative for deregulation also in these sectors at a later stage.  The role of the government in market creation is smaller than it was under the previous growth strategy, formulated by the DPJ governments.  Once officers eager for reforms have room to express their thinking more freely, structural changes will occur more smoothly and these will gradually strengthen Japan’s potential for growth.


[1] Note that the counting is rather rough, because the author counted the number of the policy measures irrelevant of the type of the measures (e.g. the acceleration of a current policy measure and newly introducing a comprehensive policy programme are equally counted as one).

[2] In Japan, the government’s basic principle on fostering scientific and technological innovation is that the government should not take an initiative for innovation but support private sectors to raising innovation with proper allocation of budget.  Therefore, the growth strategy does not include any particular policy measures for raising country-level innovation.

[3]  Hoshi and Kashyap (2012: 9) also point out that, taking past regulatory reforms, many recommendations made by organisations for regulatory reforms are counted as deregulation when this is not really the case.  They take organisation’s recommendation to conduct a survey or research to understand the current problems with existing regulations as an example, and conclude that these studies often occur but do not reduce the regulation at all.  (http://www.nira.or.jp/pdf/1202english_report.pdf)

[4] The ban on a mixed medical treatment means that, if a person takes two or more medical treatments and one or more treatment of them are not covered by public health insurance, the person cannot use the public health insurance at all, even for a part of medical treatments which are otherwise covered by it.  Easing the ban will no doubt be beneficial for all the national public (because Japan has a universal-coverage health insurance scheme), but medical workers (general practitioners (GPs) who have little knowledge in advanced medical care in particular) are hesitant to easing it for fear that, according to Japanese Medical Association, they would lose their patients by other medical workers having knowledge in advanced medical treatment.  But this reasoning seems to state merely that these GPs would not like to make any effort to learn it for their patients.

Related post: Abenomics: Shinzo ready to re-launch 2nd and 3rd arrow after Japanese election?


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