The third arrow for Japan
Prime Minister Shinzo Abe of Japan came into office in December 2012 promising a new economic policy consisting of “three arrows”: fiscal stimulus, dramatic monetary expansion and structural reform. The first two are well underway and have produced modest but real progress: deflation has ended, and the ratio between job openings and job seekers is at its highest since 1992. Still, none of it can be sustained unless Mr. Abe fires a successful “third arrow” — structural reform — aimed not only at ending two decades of stagnation but also raising the economy’s long-term growth potential.
This was never going to be easy in a tightly regulated, interest-group-dominated country that ranks 28th among the 31 highest-income countries for ease of starting a new business. Consider just one area: business taxation. Japan ranks 31st — last — among its high-income peers in terms of the time and cost associated with paying taxes and government fees, according to a new paper by economists Takeo Hoshi of Stanford and Jamal Ibrahim Haidar of the Paris School of Economics. The average Japanese firm makes 14 separate tax payments per year; those payments consume 49.7 percent of profits and 330 hours for paperwork.
Last year, Abe produced only relatively tentative and vague reform plans — possibly because he needed to consolidate his political support in elections. Markets gave his proposals a thumbs down, as did we. Now he has unveiled a more detailed and much more convincing program that starts with a plan for reducing the crippling corporate tax burden, from a top rate of more than 35 percent to the high 20s, starting next year. In addition, the plan calls for more transparent governance of public companies, more productive use of $1.2 trillion locked up in risk-averse government pension funds and deregulation of Japan’s notoriously inefficient agricultural sector. Also significant is Abe’s proposal of measures such as expanded admission of foreign child care workers to facilitate women’s participation in aging Japan’s shrinking labor force.
Overall, it’s the credible outline that Japan’s investors, as well as its strategic partners — including the United States — have been hoping for. The challenge, as always, is implementation, which will be resisted by the usual interest groups that benefit from the status quo. Yet Abe’s latest plan reflects a growing sense in Japan that this may be the country’s last chance to heal its many long-standing economic ills. In part, that sense of urgency is because of Japan’s fear of a rising China. Also, though, it represents the impact of negotiations for a Trans-Pacific Partnership trade agreement with the United States and 10 other nations. The prospect of that deal has given Japan’s reformers powerful arguments for improving their country’s competitivenes. That is all the more reason for the Obama administration to continue pressing for a successful conclusion to the TPP talks as soon as possible.
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