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Japanese Economy Update

Waiting Eagerly for the Growth Strategy

  Senior Research Fellow


This is the start of a new monthly column named “Japanese Economy Update”. I hope to provide foreign watchers with a view of the Japanese economy focusing on its structural and global aspect. The first issue will take up the “third arrow” of the Abenomics.

Importance of the Third Arrow Expected in mid-June

Of the three arrows promised by the Abenomics, two have already left the bow and is flying toward the target of overcoming deflation. The third arrow, which is captioned the “growth strategy”, is expected to be announced by the Council for International Competitiveness in mid-June, just ahead of the Summit meeting at Lough Erne.

Growth strategy is critically important for the entire success of the Abenomics. It is not because the first two have only short-term effects, and that they need to be complemented by a third which has more medium- to long-term effect. Rather, it is because the growth strategy should aim in addressing the deep-rooted problems that have prevented sustained economic growth for the past 20 odd years, and without it the first two would not have sufficient impact even in the short-term.

Growth Strategy Should Aim to Redesign Japanese Economic System

Without doubt, there are certain conditions the growth strategy has to meet in order for it to play this important role. “Growth strategy” could potentially include many things. However, it should not end up making only requests to business or other players in the economy, or provide fiscal or financial assistance for some period of time to achieve certain objectives. Instead, it should consist mainly of structural policies that aims to redesign the Japanese economic system.

The Japanese economic system that worked well until 1980s, characterized by a labor market with life-time employment and seniority based wage payment, and a financial market with main-bank system, is now outdated. It has become inconsistent with the changes taking place in the underlying conditions; rapid aging and decline in population, severe global competition, and growing need to develop and adopt innovation.

Without redesigning the Japanese system, there would not be sufficient incentives for the agents to support economic growth in the longer term. Without it, the short-term macroeconomic policies implemented could only result in increasing low-paid non-regular workers, and in providing funds that would only be channeled to purchasing JGBs.

Vision of a New System Needs to Accompany

In redesigning an economic system, legislations and regulations need to be altered. In some cases, they may simply need to be abolished (i.e. deregulation). But in most cases, they need to be replaced by new ones that provide a different set of incentives. This being the case, redesigning of an economic system should be accompanied by a vision of the new economic system to be established. It would undoubtedly be an overwhelming task, but it is a task that cannot be detoured if the redesigning of the economic system is to be pursued seriously.

In this sense, the discussions on the future of the Japanese economic system that is taking place at an experts’ committee of the Council of Economic and Fiscal Policy (CEFP) is of vital importance. The discussion has only just started. It is too premature to assess the outcome of the discussion. Nevertheless, it should still be appraised for making an important step toward meeting the critical task.

Focus is on Their Consistency

What is important in mid-June announcement of the growth strategy is to see how this effort of creating a new vision of the future economic system has fed into the process of formulating the growth strategy. The success of the third arrow, and consequently that of the “three arrows”, depends critically on the consistency between the two.