Abenomics picks up speed: The battle for Japan

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THE arrest on May 17th of a Japanese pop star, Aska, for possessing drugs would normally have attracted little attention. Yet the tentacles of the affair reach further. Aska is an acquaintance of Yasuyuki Nambu, founder of Pasona, a temporary-staffing agency. Following the arrest a tabloid newspaper splashed stories about sumptuous parties thrown by Mr Nambu in an impeccably appointed guesthouse in the capital. Besides Aska, revellers included glamorous hostesses and senior politicians from the government of Shinzo Abe, Japan’s prime minister. One was the labour minister, Yasuhisa Tamura.

Odd as it seems, the scandal is a sign that Mr Abe’s strategy to shake up Japan is at last having an impact: those opposed to his reforms are worried enough to want to try to damage their proponents. The labour market is one of the main battlefields; muckraking journalism, one of the weapons, complain Mr Abe’s advisers.

His opponents are right to fret. This week the government approved a blueprint for structural reforms. After countless false dawns, Japan may at last have the combination of political circumstance and economic exigency to make reform inevitable and, in Mr Abe, a leader with the nous to bring it about. In 2013 he launched a bold, three-part plan to pull the country from its long economic stagnation. Borrowing from a folk tale, he dubbed his changes the “three arrows”. The first was a jolt of fiscal stimulus for the economy, the second an unprecedented monetary boost through massive quantitative easing. The third is a set of radical structural reforms aimed at boosting the economy’s long-run rate of growth.

The most recent Japanese prime minister to dare attempt far-reaching changes was, in 2001-06, Junichiro Koizumi, Mr Abe’s mentor. Now, like him, Mr Abe faces a wall of resistance. Labour unions, farmers, doctors, giant corporations and their supporters among politicians and bureaucrats are uniting in opposition to change.

The third arrow is the most important, but the hardest to shoot. Fears had grown over whether Mr Abe would even try. Yet Japan’s deep-seated problems—a rapidly shrinking population, a risk-averse corporate sector, a dangerously high level of national debt (240% of GDP) that might one day provoke a crisis, and an inflexible labour market—are only worsening.

The first two stages of Mr Abe’s grand design were swiftly achieved. His fiscal stimulus of ¥10.3 trillion came a month after his return to power in December 2012. Haruhiko Kuroda, installed three months later as governor of the Bank of Japan (BoJ), promptly launched a massive round of quantitative easing to drag the economy from its long deflationary vortex. The BoJ is in sight of its goal of generating core inflation of 2% by the spring of 2015; it has now risen to around 1.25%. For a time some even argued that “Kurodanomics” was enough by itself to restore vigour to the economy.

The last arrow in the quiver

The first master plan for structural reform, unveiled last June, was a disappointment. Just before an election for the upper house of parliament in July, Mr Abe played safe. His Liberal Democratic Party (LDP) and its coalition partner, New Komeito, won a majority in both houses of parliament. Shunning the chance to be radical, the LDP slumped into lazy complacency, loth to irk powerful vested-interest groups. Disillusion with Abenomics set in. The main stockmarket index, the world’s best-performing in 2013, has fallen (see chart).

Reformists around Mr Abe harbour two nagging doubts about him. One is that he might be diverted by the nationalist agenda that marred his first, abortive stint as prime minister in 2006-07. In December he visited the Yasukuni shrine in Tokyo, where high-ranking war criminals are among the war dead honoured. For Japan’s neighbours the shrine has come to symbolise an unrepentant militarism.

The second fear is that Mr Abe simply lacks the gumption to push through sweeping changes. His advisers admit he may lack the zeal for economic reform that he has for the issues of security and constitutional change. But he now seems ready for the battle. His government’s growth strategy has swollen into a 249-item monster of mind-numbing bureaucratese. Some are merely bids for fat budget allocations for boondoggles. Yet many of the measures are aimed at the most vital parts of Japan’s economy and society.

Mr Abe’s high approval ratings are tied to the stockmarket, so he first paid attention to its investors. He promised to cut Japan’s corporate-tax rate from its current level of around 35%, first to 29% and then lower—a symbolic step long demanded by Japan Inc. He also wants to push the ultraconservative Government Pension Investment Fund (GPIF), the world’s deepest pot of savings, into taking greater risks to boost returns. The GPIF’s leadership has accused the government of cynically using it to lift the stockmarket.

Anti-reformers argued for stopping there, doing little to disrupt ordinary Japanese lives. Instead, the government is starting to tackle the so-called “bedrock” regulations holding back three important parts of the economy: farming; medical services; and the labour market. When Mr Koizumi tried to break through these rules, by, for example, allowing manufacturers to hire temporary workers from firms such as Pasona, it provoked a public backlash.

A controversial proposal of recent weeks, known as the “white-collar exemption”, seeks to tackle Japan’s culture of inhumanely long working hours and low productivity, particularly in services. Highly paid professionals, as elsewhere, will no longer earn “overtime” pay. Mr Abe wants workers paid for work, not hours. But labour unions have misrepresented the measure as a ruse to cut pay for the rank-and-file. “Salarymen” are shown on television furiously opposing it, even though the exemption will not touch most of them. Yet the plan is to go much further in labour-market reform and give firms the right to fire workers. Sacking permanent employees, still the majority of the labour force, is in effect impossible today. Unpopular as it would be, this reform would have the biggest economic impact of any.

Watchdog-whistle politics

A duel over Japan’s poor corporate governance offers further evidence that Mr Abe is making changes that count. Early this year the government quietly introduced guidelines obliging institutional investors to monitor companies more effectively. In May Yasuhisa Shiozaki, the LDP’s most ardent economic reformist, outlined plans for an accompanying corporate-governance code. Future whistle-blowers would fare better than did Michael Woodford, a former president of Olympus, who was sacked in 2011 when he discovered vast fraud at the firm. And independent directors would become near-mandatory.

The proportion of Japan Inc owned by foreigners is rising sharply (see chart), helping the reforms along. But Keidanren, Japan’s main business lobby, a generous donor to the LDP, detests the changes. Yet they would help usher in something like shareholder capitalism to Japan. The allocation of capital would improve, away from dying, zombie businesses towards innovative, growing ones.

Despite his past image as a social conservative intent on maintaining Japan’s traditional gender roles, Mr Abe’s government is to allow foreign workers to care for children and the elderly in a series of “special economic zones”, and so help women climb the career ladder. This has elicited the usual xenophobia, including from the labour minister. Mr Tamura suggested that foreign influences might damage the development of Japanese youngsters. The LDP may also change the tax system to stop penalising working wives. Millions of couples who benefit from the current system will be up in arms.

Mr Abe also seems willing to take on powerful vested interests in farming and in health care. Supporters see as among his boldest moves an attempt to overhaul Japan Agriculture (JA), a network of agricultural co-operatives that is one of the LDP’s most powerful political supporters. In health care, the government will allow patients to combine private medical care with publicly covered medicine in many more cases, rather than forcing them to forfeit their public coverage when opting for advanced treatments. That should boost advanced health care and lay the ground for increased medical tourism.

Mr Abe has also identified a number of special economic zones to experiment with the most ambitious reforms. When ministers and their bureaucrats resist making changes nationwide, Mr Abe threatens to enact them still more radically in the zones, which include Tokyo and Osaka.

“If all these measures do not represent meaningful reform, then there is no meaningful reform,” declares Koichi Akaishi, an official at the Cabinet Office. But in truth they are only a beginning. The third arrow as yet does not attack the labour market with sufficient vigour and is unlikely to carry a strong enough boost to the supply side to restore vim to Japan’s economy. Growth in GDP has leapt over the past year, and in the first quarter of 2014, the economy notched up an impressive spurt of an annualised 6.7%, but that was partly a result of a rush to buy before the rise in April in consumption tax from 5% to 8%. The tax rise is expected to exert a powerful drag on growth for the full year. The BoJ may yet unleash a second round of monetary easing later in 2014 in order to reach its 2% inflation target.

Agreement on another pillar of Mr Abe’s revival plan, the Trans-Pacific Partnership (TPP), an ambitious regional free-trade agreement, would provide a further big jolt to his plans for reform. Mr Abe’s bravery in joining the talks over the fierce opposition of JA and its LDP supporters fostered optimism about Abenomics. But talks drag on, and agreement looks distant.

Scatterguns v snipers

Some argue that Mr Abe would be better off aiming at fewer targets. Rather than go some of the way on a wide array of measures, they say, he should concentrate on a few and go the full distance. Gerald Curtis of Columbia University argues a better strategy would have been to have chosen five or so “do or die” reforms and concentrate political capital on them.

Mr Akaishi in the Cabinet Office counters that “if you want to change the economic and social structure of the country, you have to tackle far more, and in detail.” Without tighter corporate governance, for example, Mr Abe’s tax cut for businesses could allow Japanese corporations to sit on ever-larger hoards of retained earnings, rather than put the money to work. Increased labour-market flexibility demands higher levels of job creation through easing barriers for entrepreneurs. So Mr Abe has a plan to boost business creation by, for example, legalising the crowdfunding of Japanese start-ups.

Jesper Koll, of J.P. Morgan in Tokyo, compares Mr Abe’s tactics to a venture capitalist’s investments; some will fall flat, but with so many, some are bound to work. And the pressures for reform are only mounting. The country’s demographic headwind, for example, blows ever harder.

Hundreds of towns and villages are threatened with depopulation. A typical one is Yabu, an agricultural settlement of some 26,000 inhabitants set in the mountains of deepest rural Hyogo prefecture. The town is shutting down schools as its population of young people shrinks rapidly. Elderly tillers farm the land, with the average landowner in his mid-70s and usually no children ready to take on the task. Farming is on its deathbed. Abandoned, weed-filled fields are spreading along the mountainsides. In response, Yabu’s mayor, Sakae Hirose, last year applied for the city to become one of Mr Abe’s special economic zones. He will override local agricultural committees to allow companies to buy farmland for the first time. He says local powers-that-be are resisting his attempted reforms “severely”.

But young people have much to gain from Abenomics. Workers used to be protected by an expensive system of lifetime employment. But firms place new entrants on short-term, ill-paid contracts. Nearly two-fifths of the workforce now falls into this “irregular” category (see chart).

For Soichiro Takashima, the young mayor of Fukuoka, a city on the southern island of Kyushu, it is the poor prospects of Japan’s youth that Mr Abe’s reforms must improve. His generation has never seen an increase in salary, he says. And yet, he explains, it “wants to dream and succeed like our counterparts elsewhere in Asia”.

Mr Takashima’s plan for Fukuoka, another of the new special economic zones, was to allow firms to fire employees with ease in their first five years in business. He backed down after strong opposition from locals and from the labour ministry in Tokyo. For now Fukuoka will open centres to advise firms about their rights to make lay-offs. Yet Mr Abe is intent on backing reforming mayors such as Mr Hirose and Mr Takashima. He has pledged to extend reforms in the zones within two years.

The list of all Japan still needs to do after years of political paralysis and inaction is daunting. Failure is still a possibility. The BoJ is only a little over halfway towards meeting its inflation target, and it will have to do without the help it got from the yen’s depreciation last year. Households are squeezed by rising food prices and falling real incomes; people could still become fed up with Abenomics.

In for the long haul

Yet other factors support Mr Abe and his efforts at reform. Unemployment is at a low, the financial sector is healthy and corporate earnings are improving, providing a cushion for potentially painful changes. And Mr Abe has time. The opposition is in disarray. The Democratic Party of Japan, elected in 2009 on hopes of fresh thinking in politics, changed next to nothing while it was in power. It is still traumatised by its trouncing in 2012. There is no need in any case for Mr Abe to face voters before 2016. The pace of reform may look slow, says Michael Cucek, author of a wry blog on Japanese politics, but Mr Abe will be determined and unwavering.

The government has started to discuss the likelihood of his staying in power even until 2018. After that, the LDP’s rules would oblige him to step down as the party’s leader. Returned from the political dead, Mr Abe has already surprised with his born-again determination to press for far-reaching reforms. There is a good chance that he will stick to his arrows and, against all the odds, change Japan.

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