It is no wonder that Japan is cautious about the promises of Abenomics.
At a retail level, ordinary people have held deflationary expectations for years, while at a professional level, fund managers and corporations have seen unstable governments come and go. While there is consensus on the direction that the government’s policies should take, there is doubt about its capacity to execute them, to stay united in leadership, to take on pressure groups and to stay the course beyond the initial monetary thrust.
The message seems to be: “I agree with what you are trying to do – in fact, I will vote for you – but I will not give you the benefit of the doubt until I see real progress on the structural front.”
As a result, neither fund managers nor manufacturers have carried out material adjustments to their asset allocations or hedge ratios. There have been modest deviations from certain benchmarks, but the benchmarks themselves have been left largely unchanged.
Having already embarked on unprecedented monetary easing, Japan must follow through with structural reforms. The consequences of inaction, otherwise, are too great.
Notwithstanding the possibility of infighting within the ruling party, there is now a critical mass of people in the executive branch, in the corporate sector and in academia who believe that their time has come, and that they will prevail in pushing through supply-side measures. This resolve will have been strengthened by last month’s Upper House elections.
What sort of measures could be adopted? Here is a laundry list of what might constitute progress “under the third arrow”:
- Labour reforms: Greater flexibility in making workforce reductions would help reverse deflation. When companies can’t let staff go, the only way to reduce costs is to depress compensation across the board.
- Women’s participation: Raising the participation rate of female workers to the OECD average would boost growth and output.
- Agricultural reforms, particularly those in line with the Trans Pacific Partnership (TPP).
- Healthcare reforms in line with global standards.
- Power/energy competitiveness, especially reactivating nuclear plants that were halted following the 2011 disaster and then replaced with natural gas and coal imports.
- “Silicon Valley-style” new enterprise. It was highlighted at a recent World Economic Forum event in Tokyo that the venture industry in Japan is worth US$ 1 billion versus US$ 20 billion in the United States.
- Incentivizing corporate capital expenditure and research and development via tax cuts or credits.
- Outward investment into Asia in the form of co-investment with the private sector.
- Reducing or ending support for so-called zombie companies.
The key to Prime Minister Abe’s “third arrow” was gaining a stable majority in the Upper House. His party now effectively controls all of the major committees in that chamber as well as their chairmanships. This, coupled with the LDP-led coalition majority in the Lower House, gives them an unchallenged hold over policy-making.
Japan is now poised to fire the third arrow.
Read more blogs on Abenomics.
Author: Lutfey Siddiqi is a Managing Director and Asia-Pacific Co-Head of Foreign Exchange at UBS Investment bank. He is a World Economic Forum Young Global Leader.
Image: A man is seen walking in a street in Tokyo REUTERS/Yuya Shino.