Prime Minister Shinzo Abe’s three arrows require strong leadership and a road map with some near-term milestones: high-level meetings with China to de-escalate tensions; serious commitments in the upcoming Trans-Pacific Partnership (TPP) negotiating rounds; and follow-through on a credible growth strategy.
The clock is ticking. If Abe is serious about restoring Japanese economic growth to an upward path he faces some daunting challenges. Monetary policy has provided short-term stimulus. But can fiscal policy that combines higher taxes with more spending do the same? Much depends on the third arrow structural reforms where there has been much talk but little action.
Part of the answer some argue lies in Abe’s strong and determined leadership and a receptive public. But, looking more closely, the economic goal is twinned with the political aim to return Japan to its Tier 1 status with a more independent foreign policy. All this with the world’s most rapidly aging population. Can both goals be achieved or are they interdependent? Looked at one way, a nationalistic political agenda will undermine chances of restoring economic growth. Looked at another way, the economic agenda can be seen as a cover for political goals. More likely the truth lies somewhere in between.
The third arrow structural reforms are essential to economic success. Troubling is the fact that we have been here before. In 1986 former Bank of Japan governor Haruo Maekawa recommended structural changes to reduce dependence on external demand. Agricultural liberalisation and land use were high on his list; stiff political resistance meant the report was dead on arrival.
Thirty years later, these two items appear on a much longer list that includes sensitive labour market reforms to head off skilled labour shortages: relaxing immigration restrictions, increasing female labour force participation and raising the retirement age — as well as easing restrictions on hiring and firing. Only firm leadership will shift the social consensus around existing policies and institutions. What is required is a change in the “state of mind”. This will be difficult unless Abe is very serious.
Trade liberalisation is an excellent way to bring about these changes, by blaming the “foreigners who made us do it”, a well-known Japanese tactic to overcome domestic resistance to reform. Japan joined the TPP for this purpose. Yet the recent Japan-Australia Economic Partnership Agreement excluded rice, wheat and dairy products, and Japan is pushing for similar restrictions in the TPP. That Abe made no concessions during President Barack Obama’s visit can be partly explained by the lack of fast-track approval authority from US lawmakers. One might be forgiven for concluding that agricultural reforms will result from the aging population (and the Grim Reaper) rather than from trade liberalisation. Is Abe serious?
Abe’s political agenda to reposition Japan internationally reflects a nationalist agenda that is popular at home but very worrying to its neighbours. Yet success of Abe economics depends on deep economic linkages in Asia — with China now accounting for a fifth of both exports and imports and South Korea its third-largest export market. One-third of Japan’s FDI is in Asia, much of it connecting the production networks that crisscross the region.
The political agenda provides a built-in contradiction. It could backfire if tensions with neighbours sap the necessary will and attention needed to accomplish the challenging economic agendas at home. And it could take on more prominence to compensate for weak economic reforms. This becomes a real possibility if preliminary reports of the much-awaited growth strategy to be released in June are correct; suggesting Abe is, like others before him, unwilling or unable to take on the political opposition to economic restructuring.
Wendy Dobson, author and former associate deputy minister of finance in Canada, currently chairs the Pacific Trade and Development research network. Her latest book is Partners and Rivals: The Uneasy Future of China’s Relationship with the United States
