Needless to say, the biggest challenge for the government to be formed after Sunday’s general election is to put the Japanese economy on a growth path.

Many people repeat the mantra of pulling Japan “out of deflation and the strong yen,” but the first thing we need to do is examine why the Bank of Japan’s ultraeasy monetary policy — which has been in place for more than a decade — seems to have achieved little toward that goal.

To formulate growth policies, we have to have an accurate grasp of the condition of Japan’s economy with respect to the changing global environment — especially in Asia.

First of all, it needs to be recognized that both the Japanese and global economies are in a state of oversupply, except when it comes to energy resources.

The primary reason is that the industrialized economies have not sufficiently streamlined their production capacity, even after building manufacturing operations abroad to cut costs. In other words, they have not been able to change their industrial structure or create new sectors to deal with the hollowing out of old industries and the resulting loss of jobs. This condition of oversupply creates constant pressure to cut prices.

During the first decade of new century, policymakers misinterpreted this condition as a problem caused by shortage of demand and thereby drafted policies to expand public-sector demand. These failed to elicit growth and left the governments with huge amounts of debt.

Second, people tend to expect too much from — and rely excessively on — monetary policy once their country’s fiscal tools have been exhausted.

The symbolic example here is the zero-interest-rate policy, which some have even discussed revising to pull interest rates into negative territory, which effectively means paying banks to hold your money.

Lawmakers are meanwhile suggesting the option of revising the Bank of Japan Law to revoke its independence, with the government likely to apply more political pressure to force the provision of more liquidity. However, it must be noted that Japan’s liquidity relative to its gross domestic product is already three times greater than that of the United States and twice that of the European Union. Japan’s economic performance over the past decade thus proves that monetary policy has little effect on an oversupply condition.

Low interest rates do have the effect of easing the pain of structural adjustments, but they cannot drive structural reform. The reality is that easy monetary policy has delayed Japanese structural reform.

Lawmakers are in the habit of protecting sectors that need to be streamlined, delaying reform. But if reform is shelved for too long, a condition of oversupply will ultimately be corrected by market forces. That’s what happened to Greece.

Third, we have to look at another factor besides oversupply that is pushing down Japan’s relatively high prices: globalization.

Japanese prices are drawing closer to international levels as the globalization of its economy progresses. I realized this while traveling through Europe for nearly a month from October to November. Dinner with wine for a group of six to seven people rarely costs more than ?100 (about ¥11,000) in Europe. But that’s just enough to buy dinner for two in Tokyo.

Further deregulation is essential to reduce Japan’s prices, which remain high compared with its peers, and the issue of whether to join the talks on the Trans-Pacific Partnership agreement will provide a good opportunity to review this problem.

Fourth, we need to have a correct understanding of the effects of the strong yen. In a global state marked by oversupply, energy resources are the only commodities in short supply and thus becoming more expensive. Needless to say, resource-scarce Japan benefits a lot when its currency is strong.

Yen appreciation also hurts export-oriented industries. But you have to realize that when the yen drops against the dollar by ¥1, the energy expenses of Japan as a whole rise by about ¥270 billion, thereby increasing the burden on households and businesses.

The yen’s strength is not the sole reason behind Japan’s declining exports. Japanese companies are losing their competitive edge over South Korean and Chinese businesses in other aspects as well.

As long as Japan remains mired in a trade deficit, a strong yen will provide more benefits than drawbacks in macroeconomic terms. In spite of the deficit, Japan continues to post current account surpluses. And compared with the U.S. and European economies, Japan is still widely thought to be in better shape with no inflation and the yen is maintaining its perception as a safe-haven currency.

As Asian nations try to diversify their foreign-currency reserves, the underlying strength of the yen will likely persevere, albeit on a weaker note. We should realize that a strong yen brings more benefits to the Japanese economy and people — enough to outweigh any damage caused by falling exports.

It is clear that both the fiscal and monetary policies of Japan have already been taken to the limit. The only remaining option is to carry out the long-delayed structural reform of the economy — and the private sector holds the key.

The role of the public sector is to create an environment that does not hamper the activities of the private sector, and this will be the biggest challenge for the new government.

Teruhiko Mano is an international economic analyst.

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