Thursday, 20 June 2013

JAPAN: Abenomics & Reforms

The impact on Japan of the new economic policies advocated by Prime Minister Shinzo Abe since his election in December 2012 has been considerable. Confidence in the economy has returned, the stock market has soared and foreign companies are keen to invest in Japan since the advent of what has become known as ‘Abenomics’.

But observers say that the only way that the Keynesian-style stimulation policies of massive monetary easing and debt-fuelled projects will benefit the country in the long run is if the government undertakes substantial structural reforms.

Mr Abe has slowly begun to work on these reforms. There is broad consensus among business executives and economists over what Japan needs to do. Key imperatives include: deregulation; free trade and investment; 21st-century style education; and active global integration;  His boldest step so far has been Japan’s participation in the free trade agreement, the Trans-Pacific Partnership (TPP).

In mid-April 2013, Mr Abe went further and outlined three areas of structural reform: cultivating an internationally competitive healthcare sector with an emphasis on regenerative medicine; neutralising the impact of bad demographics by improving labour mobility and opening doors for everyone who wants to work, especially women; and creating special deregulated zones to attract talent and capital to three key cities, Tokyo, Osaka and Nagoya.

Japan spends about US$375 billion on healthcare each year. Medical services are almost entirely performed by domestic institutions, but cutting-edge medical devices and drugs are imported from the United States and Europe.

Japan’s trade deficit in the medical sector is about US$20 billion. Mr Abe wants to change that by helping Japanese pharmaceutical companies and medical device makers become more competitive and export-orientated. The key area is regenerative medicine based on induced pluripotent stem (iPS) cells, which can be re-engineered into other cell types. Japan is a global leader in regenerative research, but has been slow to capitalise on its advanced position.

Mr Abe has been extremely cautious about opening up the labour market. Lifetime employment for men at public institutions or major companies is a basic fabric of social life in Japan, so any change to the status quo is a thorny issue. But Mr Abe has promoted the idea of giving more opportunities to women in what has been dubbed ‘womenomics’.

Mr Abe has suggested extending maternity leave – now limited to 18 months – to three years. He has also asked business leaders to offer mothers more paid leave on a voluntary basis. The implementation of the proposed structural reforms depends mostly on two factors: the continuation of a feel-good economic environment domestically and geopolitical stability in East Asia.

The continuation of the feel-good factor in Japan depends on the belief of markets that Japan can manage its debt. If this belief diminishes and interest rates increase to the same level as in southern Europe in 2010-2011, the chances of reform are almost certainly over.

The second factor – on regional stability - is that although Japan has no control over North Korea, it can improve its relationships with regional key players such as China, South Korea and Russia.
Mr Abe’s record on foreign relations so far is mixed. He appears to be testing the water rather than executing a clear and far-sighted geopolitical strategy.

If Japan’s feel-good economic environment continues domestically and there is geopolitical stability in East Asia, Mr Abe has a chance to follow in former Prime Minister Junichiro Koizumi’s footsteps and establish a stable government with a strong economic agenda for four or more years.

By Guylain Gustave Moke
Political Analyst/Writer
Investigative Journalist
World Affairs Analyst

Photo-Credit: AP