Abenomics describes the plans of Japanese Prime Minister Shinzo Abe to revive growth in the world’s third largest economy, which is struggling to find traction under the impact of a strong yen and stubborn deflation.
Shinzo Abe must show strong leadership to realise ambitious plans
The "third arrow" of Japanese Prime Minister Shinzo Abe's package of reforms to steer his country back to strong economic growth is ambitious in scale and vision. What he unveiled last week was also short on detail; most uncertain is how the measures are going to be implemented. Numerous challenges lie ahead, among them political and business opposition and the world's most rapidly ageing population. As important, foreign policy plays a crucial role: success depends on deep economic linkages with the rest of Asia.
Abe's deflation-fighting strategy, dubbed Abenomics, is a three-pronged approach to create lasting growth through monetary, fiscal and structural policies. The first two stages involved massive monetary easing and generous public works spending, pushing the economy from two decades of downturn to growth that the World Bank forecasts will hit 1.3 per cent this year. But such measures are not sustainable over the long term, making the latest stage - involving a corporate tax cut from 36 to below 30 per cent, stronger support for working women, bringing in overseas workers and creating a better business environment for foreign investors - important.
China accounts for a fifth of Japan's imports and exports and South Korea is its third-largest export market. But trade is threatened by tension caused by territorial disputes and Abe's nationalist agenda. Coupled with his economic reforms has been a desire to rewrite the section of the pacifist constitution that prevents Japan from being able to do more than defend itself in a conflict. Fortunately for Japanese, he has given priority to the economy and anti-war elements of parliament have demanded a watering down of the shift away from pacifism.
Uppermost among domestic concerns is the rapidly ageing - and shrinking - population. Abe's proposals to prod more women into the workforce through tax breaks and encourage couples to have more children are necessary for growth, but success cannot be guaranteed. Nor has enough importance been attached to plans to establish special economic zones. There has also been a noticeable reluctance to discuss foreign migrants, a solution turned to by other fast-ageing economies.
Japan has a record of not following through with ambitious plans. Vested interests make attaining Abe's vision especially daunting. Only with strong leadership does he have a chance, but that also has to be tempered with a less confrontational approach towards China and South Korea.