Japan’s massive stimulus package will fail without structural reform
The key is Shnizo Abe’s so-called “third arrow” – freeing up an inflexible labour market, dismantling over regulation of business and raising female participation in the workforce
The latest stimulus package for the Japanese economy exceeds expectations. It remains to be seen whether it achieves Prime Minister Shinzo Abe’s goal of increasing what he calls the country’s “escape velocity” from the drag of deflation. The total of 28 trillion yen (HK$2 trillion), compared with initial estimates of 20 trillion yen, is nearly 6 per cent the size of Japan’s economy, the world’s third largest.
Apart from fiscal measures such as government spending of 13 trillion yen, much of it on infrastructure, it is boosted by initiatives to encourage corporate spending like loan guarantees which take longer to achieve the aim of increasing demand and inflationary expectations.
After growing at an annualised pace of 4.5 per cent in the first quarter according to revised figures, Japan’s economy shrank by 1.6 per cent in the second quarter, due to weaker exports to China and the US and poor consumer spending influenced by bad weather. This shows how easily an economy with an ageing, shrinking workforce and low growth expectations is easily pushed off course.
Abe’s political stocks remain healthy after recent election successes, but Abenomics, as his economic policies are called, have had limited impact on incomes, spending and investment, key drivers of growth. It is doubtful the latest package will do much to reverse a deflationary spiral because, in the absence of productive investment opportunities, economists expect much of the money will be saved.
It is clear the success of Abenomics depends on the government firing all its ammunition. The key remains the so-called “third arrow” – structural reforms such as freeing up an inflexible labour market, dismantling over regulation of business and continuing to raise female participation in the workforce. Without the political courage to undertake such reforms, no amount of stimulus and monetary easing may snap fundamental restraints on Japan’s economy.