The economic program of Prime Minister Shinzo Abe to revitalize a Japanese economy that has been dormant for a quarter century has three main points, or “arrows”:
–increased deficit spending by a national government already very deeply in debt,
–loose money policy to weaken the currency, making Japanese industry more competitive while supporting the dismantling of a raft of protective practices that have debilitated a once-powerful industrial base, and
–the corporate overhaul itself–the elimination of a nexus of laws and policies that have perpetuated now-outmoded industrial practices from the 1960s-1980s, and which have also made it virtually impossible to replace the incompetent top managements that have run many Japanese companies into the ground.
Arrows #1 and #2 have been fired successfully.
To my mind, however, Abenomics has always been about the government’s ability to fire arrow #3.
That’s not going so well. More than that, almost thirty years of watching the Japanese economy and Japanese politics have made me skeptical that meaningful structural change is possible. The forces of the status quo are just too strong. That’s also despite the will of Japanese citizens that such reform take place. (In many ways, too, I see Japan today as like the Ghost of Christmas Future for the US.)
the Kuroda message
Late last week, an interesting thing happened in Tokyo. In an interview with the Wall Street Journal, Haruhiko Kuroda, a career politician who is currently the head of the Bank of Japan (the equivalent of the Fed in the US), urged Mr. Abe to get going on structural reform. “Implementation is key,” he’s quoted by the WSJ as saying, “and implementation should be swift…The major work to be done is by the government and the private sector.” Bad things will happen to the economy otherwise.
Mr. Kuroda’s bluntness contrasts sharply with the wishy-washy statements en Bernanke has made before the US Congress about the need for supportive fiscal policy–none of which has been forthcoming–to aid the recovery in the US.
Of course, the stakes are much higher in Japan, where currency depreciation has caused a loss so far of about a quarter of the nation’s wealth, and a corresponding reduction in living standards for average citizens. This enormous cost can only be justified if it results in structural reform. But so far just about nothing has happened.
what needs to be done
Yes, Mr. Abe pointed out to the Journal in a response to Mr. Kuroda that electricity prices have come down and that protection of domestic rice farmers has been reduced a bit.
On the other hand, all the legislation enacted in the 1990s to prevent foreign companies from having any influence in the running of Japanese firms (takeovers of any size are virtually impossible) is still on the books. Shareholder activists, foreign or domestic, are as unwelcome as ever. Major Japanese investment institutions, presumably with government “guidance,” continue to take a hands-off attitude toward the companies whose stock they hold. And companies themselves, other than perhaps the autos, seem to be in no rush to modernize the industrial practices that have caused so much economic hardship since the 1990s.
And, as Mr. Kuroda observes, time is running out for Japan. The kind of positive jolt that deficit spending/currency devaluation/uslta-loose money give to an economy only lasts for a few years. Without other changes, an economy gradually settles back into its former lower-growth state, only with higher inflation. In other words, the economy in question is worse off than it was before.
For the sake of Japanese citizens, I hope Mr. Abe starts working on arrow #3 before it’s too late. Unfortunately, almost thirty years of watching Japan tells me he’ll end up posturing a lot but doing nothing. The only chance I see for a better outcome is if other politicians follow Mr. Kuroda’s lead and begin to speak out. Unless/until this happens, I think the Tokyo market will continue to be an unpleasant place to be.