Current Situation and Challenges of Abenomics --- The Third Arrow is the Key---
February 12, 2014
Mr. Toshihiro Nagahama
Chief Economist, Economic Research Department,
Dai-Ichi-Life Research Institute Inc.
Since Prime Minister Abe came into office at the end of 2012, he has provided strong leadership to advance the so-called Abenomics economic policies jointly with the Bank of Japan. Abenomics aims to revive the Japanese economy with three arrows of “aggressive easing of monetary policy,” “flexible fiscal policy” and “growth strategy aimed at boosting private investment.” Prompt implementation of these policies has received favorable responses that are reflected in stock prices.
My speech today will evaluate Abenomics at present and propose some policies that need enhanced implementation.
The first arrow of monetary easing received high acclaim, as it rectified the yen appreciation and low stock prices that had once reached extraordinary levels. The Bank of Japan vowed to raise the monetary base to 270 trillion yen by the end of 2014 and to achieve 2% inflation in two years. Similar aggressive measures were taken in the US after the bankruptcy of Lehman Brothers and have continued over 5 years. I believe monetary easing policies in Japan must also be extended beyond 2015 to overcome the damage of deflation.
The second arrow, “flexible fiscal policy,” received a certain evaluation. We had the 4th straight quarter of positive economic growth up to July-September 2013, thanks to the recovery in both private and public demands. I personally think some points must be deducted as these pump-priming measures were made possible by issuing 5 trillion yen of Japanese government bonds.
The third arrow of “growth strategy” remains insufficient. We have to take greater strides and implement pro-business measures that are essential for economic growth. Let me enumerate the “six-fold agonies” that have inflicted pain on Japanese industry, and highlight possible solutions that are crucial to promote the growth strategy.
The first agony, excessive yen appreciation, is being solved by the first arrow of Abenomics.
The second agony is our heavy corporate tax rate by international standards. Our effective corporate tax rate exceeds 35% and therefore, we must gradually reduce it to match the international standard of around 25%. Foreign investors pay particular attention to whether the government will broaden the taxation base to make up for the reduction in the overall tax revenues and how it could impact on the growth strategy.
The third agony is delay in our talks over economic partnerships. Japan has the smallest number of Economic Partnership Agreements (EPAs) concluded among the major powers. The Abe administration decided to embark on TPP negotiations, which has facilitated parallel negotiations on Free Trade Agreement among Japan, China and South Korea, RCEP (Regional Comprehensive Economic Partnership) and EPA with EU countries. We must take swift actions to reach agreements.
Restrictive employment rules are our fourth agony. Foreign investors seek clarification of rules on dismissal for full-time workers. They point out that “easing of labor regulations best exemplifies structural reform in Japan. Declining birth rate and aging population is the largest issue in the Japanese economy.” A rigid labor market is detrimental to attracting superior human resources, as growth areas change quickly in an increasingly globalizing economy. The latest economic performance results of major industrial countries clearly indicate that countries with greater labor market liquidity are doing better than counties with less liquidity, like the US, UK, Japan and Italy. Countries with active labor market policies, including Denmark and Holland, have larger proportions of labor-related government expenditures in relation to GDP. In other words, countries with loose dismissal regulations have improved their business climate to encourage job relocation of people thrown out of work, including extensive vocational trainings.
I personally believe Japan should loosen regulations on accepting foreign laborers to support infrastructure development required to host the 2020 Olympics in Tokyo, to reconstruct areas damaged by the Great East Japan Earthquake as well as to replace decrepit infrastructure in local areas. The number of construction workers has decreased by 1.2 million in 10 years, and therefore, we must welcome foreign workers with various backgrounds, not limited to highly-skilled foreign workers stipulated by the current policy.
Our fifth agony is strict environmental restrictions.
And lastly, the high energy costs, especially electricity charges, are our sixth agony. The energy policy set out in the growth strategy announced last June stated that nuclear power generation had the lowest cost and thus, reactors currently shut down should be allowed to restart once their safety was confirmed. Liquefied natural gas has become the largest substitute for nuclear energy after the Great East Japan Earthquake, yet Japan has to pay higher procurement costs than other counties, called the “Japan premium,” that is a heavy burden on our economy. We must reinforce our negotiation power to reduce the price and rebalance the global market by tapping other energy resources like the shale gas. We can also learn from Germany that has decided to gradually phase out of nuclear energy and switch to coal fired power generation. Japan has the world’s most advanced technology of coal fired power generation, and its infrastructure exports will make a great contribution to the growth strategy.
To wrap up, there remains much to be done to achieve the third arrow of Abenomics policies. We have a big chance to accelerate the growth strategy, thanks to the most politically stable environment secured in our country. We hope to further enhance Abenomics policies that are critical for the future of the Japanese economy.