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Abe’s ‘third arrow’ misses the mark

Jumbled growth strategy missing critical reform details, experts say

by Reiji Yoshida

Staff Writer

Prime Minister Shinzo Abe might have avoided the nightmare he foresaw a year ago. But the market is reserving judgment on his growth strategy, questioning whether his deflation-fighting “Abenomics” policy will succeed in the long term after all.

Abe’s growth strategy is a plethora of deregulation steps and subsidies aimed at raising Japan’s economic growth potential, including a corporate tax cut, steps to help working women, the introduction of more foreign workers and the creation of a better business environment to attract foreign investors and entrepreneurs.

When he formally unveiled on Monday a draft of the revised version of his growth strategy — the so-called third arrow of his three economic weapons — the Nikkei stock average closed down ¥164.55, or 1.08 percent from the previous day.

Still, this week’s market reaction was better than in June last year, when Abe announced his first version. That day the Nikkei plummeted by ¥518.

But some experts say the third arrow is neither strong enough to create another short-term stock rally nor a solution to Japan’s long-term structural problems, in particular the rapidly shrinking population.

Hiroshi Watanabe, senior economist at SMBC Nikko Securities Inc., said the market had anticipated most of the proposals contained in the revamp and therefore there was no rally.

Watanabe rated the growth strategy as 70 to 80 out of 100, noting that Abe was proposing bold deregulation in agricultural, medical and labor markets — where politicians with vested interests have long blocked significant reforms.

But many of the key details remain unclear, in particular how to implement the reforms, prompting many market players to reserve judgment, he said.

“What counts most is whether they will be carried out or not,” he said.

For example, to carry out the corporate tax cut, the already debt-ridden government must find other huge financial resources to make up for the expected loss in income.

Abe will then need to fight a tough political battle toward the end of the year over how to finance the corporate tax cut, Watanabe said.

Investors and the public at large have placed great attention on the third arrow because the first and second arrows — namely the ultra-aggressive monetary easing by the Bank of Japan and the huge government spending centered on public works — are considered unsustainable over the middle to long term.

Many experts say Japan needs structural reforms to raise its growth potential, as well as rising wages, if Abenomics is to succeed. The government plans to finalize the draft on June 27.

But Takao Komine, professor of economics at Hosei University and former senior official at the now-defunct Economic Planning Agency, said Abe’s draft growth strategy is not worth its name.

He said the 92-page draft includes dozens of miscellaneous measures that look like a jumble of projects that bureaucrats can execute quickly, in particular those that can drive stock prices higher.

For example, Abe’s growth strategy included a proposal to change the investment portfolio of Japan’s Government Pension Investment Fund — the world’s largest institutional investor, with ¥128.6 trillion on its books — to allocate more investment to stocks to juice the Tokyo Stock Exchange.

Abe also pledged to cut the 35 percent corporate tax rate below 30 percent, to make Japanese cities more attractive to global companies, without explaining how he will do it.

The measures are all viewed as geared to those playing the stock market, rather than structural reforms that will improve Japan’s competitiveness, Komine said. “A growth strategy should be a long-term guiding principle for Japanese economic policies. But the strategy now looks like a list of action plans that bureaucrats can carry out right now.”

Soon after his inauguration in December 2012, Abe triggered a stock market rally by successfully getting the Bank of Japan to commit to a radical monetary easing policy that weakened the yen.

Senior officials at the prime minister’s office have worked hard since then to hammer out steps to prop up stock prices, apparently believing that to be the lifeline of the Abe administration.

Komine, echoing many other experts, believes that the aging and rapidly shrinking population is the gravest economic problem Japan faces and that he should immediately start addressing it.

Abe is now pledging to help working mothers and help families bear children to increase the low birth rate. But he stopped short of showing how those measures would be financed, although they would probably force the debt-ridden government to cut other social security budgets, such as those for the elderly, Komine said.

“No one wants to tackle such a difficult issue. But such a difficult issue is in fact the most important issue,” Komine said. “How to secure fiscal reconstruction has been left unclear.”

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