Abenomics, Part Three

On June 5, Prime Minister Shinzo Abe of Japan delivered a speech outlining the latest in a series of initiatives underpinning his comprehensive economic policy, dubbed “Abenomics.” The government released a 90-page document outlining the so-called growth strategy, or “third arrow” of the policy, covering structural reform measures aimed at putting Japan on a sustainable growth path. (The first two arrows are aggressive monetary easing and additional fiscal stimulus.) The growth strategy kicked off in March with Abe’s announcement that Japan would enter the Trans-Pacific Partnership (TPP) trade negotiations as a potential engine for reform. The markets expressed disappointment with Abe’s speech as lacking in detail. Attention is now focused on whether the growth strategy will be fleshed out with more concrete measures following a parliamentary election next month that could provide a window of political stability in which to implement meaningful reform.

Q1: What are some of the key themes?

A1: The growth strategy seeks to increase Japan’s per capita income by ¥1.5 million (approximately $15, 000) over the next decade and lists an array of initiatives to realize that objective. The blueprint is divided into three sections covering private sector competitiveness, the labor market, and the promotion of new industries. Key themes include measures to increase capital investment, special economic zones, infrastructure, health care sector reform, female labor participation, and education. Energy features prominently with plans to liberalize the power supply market and reintroduce nuclear power in the energy mix once new safety regulations are in place. The plan also calls for increasing agricultural exports to ¥1 trillion ($10 billion) in 2020, the pursuit of free trade agreements, and seeks to place 70 percent of all trade under FTAs by 2018 (currently 19 percent). The Abe government received input from special advisory councils focused on industrial competitiveness and regulatory reform and more detailed initiatives are expected later this year.

Q2: How has the strategy been received thus far?

A2: The first two “arrows” of Abe’s strategy, fiscal stimulus focused on infrastructure spending and a package of monetary easing measures from the Bank of Japan to combat deflation, were introduced earlier this year and generated a positive reaction in the markets that increased expectations for growth in the short term. Those expectations were supported by news in May that the economy grew at an annualized rate of 3.5 percent in the first quarter. But the growth strategy/structural reform plan is generally considered the most important variable in determining the potential for Japan’s sustained economic revival. Specifically, observers are keenly watching the extent to which the government confronts issues such as deregulation, labor market flexibility, and tax reform (Japan has the second highest corporate tax rates in the world after the United States). The markets reacted coolly after Abe discussed the latest batch of initiatives on June 5 and shares fell 3.8 percent to a two-month low, prompting speculation that the novelty of Abenomics may have worn off. Critics lamented the dearth of details in the plan and called for more concrete near-term measures, but with an Upper House election looming in July there is a fair chance that detailed prescriptions won’t emerge until fall.

Q3: Can the government deliver?

A3: Abe was criticized for his inattention to economic matters during his previous term as prime minister in 2006-2007 and he rightly made Abenomics the centerpiece of his policy agenda given public frustration with political paralysis in recent years. His public approval rating is close to 70 percent and a majority of respondents in recent polls favor his economic agenda. Indications are his ruling Liberal Democratic Party (LDP) will fare well in the Upper House election with over 40 percent support compared to single digits for all other political parties. Securing a two-thirds majority in that chamber could yield a period of political stability with no elections required until 2016, and that could create room for Abe to flesh out and implement his strategy. But it remains to be seen whether Abe will choose to use any additional political capital gained in the election to undertake difficult economic reforms or spend it on other priorities such as revising the constitution. The book on Abenomics is only half written.

Matthew P. Goodman is the William E. Simon Chair in Political Economy at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Nicholas Szechenyi is a senior fellow and deputy director of the CSIS Japan Chair.

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