If reform were easy, it would have been accomplished long
ago. The problem is that reforms aimed at promoting competition would
hurt many entrenched firms and their workers. Since a Japanese worker’s
current job at his current firm is his main social safety net, a desire
to avoid social dislocation is the main reason Japan protects moribund
firms. To ease the pain of reform, Tokyo should use fiscal and monetary
stimulus as an anesthesia.
In the past, Japan has enacted reforms that worked, such
as deregulating the financial market, forcing resistant banks to clean
up the massive nonperforming loans that were hamstringing economic
growth, ending laws that allowed small stores to block the entry of
larger ones into their neighborhoods, and giving new entrants in the
cell-phone business equal access to the mobile infrastructure of a
previously dominant monopoly. These reforms ushered in huge productivity
gains in retail and telecommunications (and for users of telecom),
while partially unlocking distribution channels for newcomers.
Nothing in Abe’s program, however, remotely resembles
those advances. His proposed agricultural reform, for example, would
merely replace a subsidy focused on production levels with one focused
on income, while giving no incentives for tiny inefficient farms to
consolidate or for agribusiness to expand sufficiently. His talk of
increasing career opportunities for women omits any mention of the main
obstacle: that most of them get taken off the promotion track once they
become pregnant. And while Abe has raised taxes on consumers, he is
talking about cutting taxes on corporations. His claim that this would
promote investment is false, as even the Ministry of Finance
acknowledges. Japan’s corporate giants already have far more cash than
they choose to invest at home. But a corporate tax cut might raise stock
prices and gain Abe more corporate support.
His plans for the electricity sector, meanwhile, would
ostensibly allow room for newcomers by separating generation from
transmission. In reality, the existing regional electric monopolies will
be allowed to form a holding company that controls both parts. He has
done nothing to force rectification in the nuclear utilities, some of
which falsified their safety records with the connivance of the
regulators in the lead-up to the 2011 Fukushima nuclear accident. As a
result, a justifiably distrustful population has so far blocked a
restart of the reactors that previously supplied a third of the
country’s electricity. The resulting electricity shortfall and higher
energy costs are propelling automakers and other efficient exporters to
shift even more of their capacity overseas. All told, the third arrow
has turned out to be nothing more than a bunch of nice-sounding goals
for growth, job creation, and investment -- without a plan for achieving
any of them.
The most obvious litmus test of the third arrow is Abe’s
handling of the negotiations for the Trans-Pacific Partnership. In
recent months, these talks have stalled largely because Abe’s team has
insisted on keeping tariffs and other barriers high in a few
agricultural sectors (such as beef, dairy, and pork) that employ less
than 100,000 households but where high prices boost Japan Agriculture’s
income. As of mid-May, an agreement had not been reached. Even if a deal
is eventually signed, Abe’s capitulation to small interest groups means
that it won’t be used as a catalyst for domestic reform, unlike the way
South Korea used its trade agreements with the United States and
Europe, and as reformist officials in the Ministry of Economy, Trade,
and Industry have urged Japan to do as well.
Abe certainly has the clout to take on these vested
interests: he still enjoys an approval rating around 60 percent, and his
party holds an overwhelming majority in parliament. Yet it seems
impossible to find a single case in which the prime minister has truly
challenged a powerful domestic constituency. Instead, he is wasting his
political capital on denying seven-decade-old war crimes and refusing
even to admit that Japan committed aggression, claiming Japanese
ownership of islets long controlled by South Korea, and trying to change
school textbooks to reflect these retrograde views. Even when Abe’s
ideas on security are sensible -- such as his proposals for Japan to
exercise a right to collective self-defense -- the need to overcome
resistance in pacifistic Japan diverts Abe’s energy. Inevitably, this
puts the third arrow on the back burner.
The sad fact is that Abe’s heart does not beat to the
rhythm of reform and revival. Instead, Abenomics is a means to an end:
to gain enough popular support to pursue the goals that really move him
-- security and history issues. But Abe can stay insulated from the
political consequences of his economic mismanagement for only so long.
Eighty percent of Japanese polled say that his policies have failed to
improve their lives at all. Abe remains popular because people still
expect Abenomics to start working. Sooner or later, however, its
failures will become impossible to ignore, and Abe will lose the
political power to make necessary reforms -- even if he somehow gained
the stomach for them.
Japan will eventually reform and revive. Its tragedy is
that it is filled with smart, ambitious, creative individuals who are
trapped in once vibrant but now ossified political and economic
institutions. The whole is so much less than the sum of its parts. The
country will revive when it finally undertakes the necessary
institutional overhaul. But that takes a visionary leader; Abe is not
that leader.
Richard Katz
