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Japan tries a new strategy for growth

June 18, 2014 6:34 pm

Japan tries a new strategy for growth

Shinzo Abe’s fresh package is wide-ranging but still timid

When he won a second term as Japan’s prime minister 18 months ago, Shinzo Abe promised to fight the country’s economic malaise with “three arrows”.

In order to boost Japan’s growth rate and end a decade and a half of falling prices, he declared that the country needed an unprecedented monetary loosening, a hefty fiscal stimulus and a strong dose of structural economic reform.

The first two of these arrows have hit their targets, jolting the Japanese economy back into life. Thanks to a copious programme of quantitative and qualitative easing, core inflation in April was 1.5 per cent, putting the Bank of Japan on track to reach its 2 per cent inflation target next year. A sizeable fiscal stimulus, last year amounting to $110bn of extra spending, helped annual growth past 1.5 per cent.

By contrast, Mr Abe’s third arrow promising structural reforms has been stuck in the prime minister’s quiver. Last June, he unveiled a package of measures that failed to excite the Japanese public or international investors. His timidity was perhaps understandable, given that his Liberal Democratic party was on the verge of fighting an important parliamentary election. This week, however, he returned to the challenge – and there could be no political excuse for timidity.

Mr Abe’s new reform package certainly looks more comprehensive and detailed than the one introduced last year. Its proposals, covering 120 pages, touch upon many aspects of economic life.

The government plans to cut its corporate income tax rate of 35 per cent – the second-highest in the Organisation for Economic Co-operation and Development – to between 20 and 30 per cent over the next few years. It wants to boost localised pay bargaining, giving companies the right to negotiate pay and conditions directly with employees. It talks about boosting immigration to mitigate the effects of Japan’s shrinking workforce. It seeks to increase career opportunities for women, eliminating a spousal tax exemption that critics say discriminates against two-income families.

The reform programme seems noble in its scale and aspirations. But it is still too timid, too light on detail and fails to attack core problems in the economy. Mr Abe gives the impression of wanting to present as many ideas as possible in order to drown his critics in detail.

The planned cut in corporation tax may be designed to boost economic growth. But the problem with Japan’s corporations is that they hoard cash rather than invest. The government should be considering better targeted measures to boost company investment such as higher taxes on retained corporate earnings.

On immigration, Mr Abe’s proposal to bring more skilled workers into Japan is a step in the right direction. But the number of immigrants who are expected to be invited into the country is too low to mitigate the shrinkage of the labour market.

A proposal to weaken Japan’s powerful agricultural co-operatives, a highly conservative force in the farm sector, is well intentioned. The power of the Japanese agricultural lobby is far too great and has been a big obstacle to the US and Japan agreeing a trade deal. But the proposals seem too cautious to undermine the power of the big co-operatives.

Over the past 18 months, Mr Abe has won a reputation as an avid salesman for a much more assertive Japanese foreign policy. But when it comes to implementing the structural economic reforms that Japan needs, he still seems somewhat tentative and uncertain.

The Japanese prime minister has set out an ambitious agenda to restore his country’s economic fortunes. In the months ahead, he must demonstrate strong political will in order to push through the necessary steps for change.

 

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About bambooinnovator
KB Kee is the Managing Editor of the Moat Report Asia (www.moatreport.com), a research service focused exclusively on highlighting undervalued wide-moat businesses in Asia; subscribers from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing. KB has been rooted in the principles of value investing for over a decade as an analyst in Asian capital markets. He was head of research and fund manager at a Singapore-based value investment firm. As a member of the investment committee, he helped the firm’s Asia-focused equity funds significantly outperform the benchmark index. He was previously the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. KB has trained CEOs, entrepreneurs, CFOs, management executives in business strategy, value investing, macroeconomic and industry trends, and detecting accounting frauds in Singapore, HK and China. KB was a faculty (accounting) at SMU teaching accounting courses. KB is currently the Chief Investment Officer at an ASX-listed investment holdings company since September 2015, helping to manage the listed Asian equities investments in the Hidden Champions Fund. Disclaimer: This article is for discussion purposes only and does not constitute an offer, recommendation or solicitation to buy or sell any investments, securities, futures or options. All articles in the website reflect the personal opinions of the writer.

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