The Journal The Authority on Global Business in Japan


December 2013

The ambition to redesign Japan’s economy is a host of small changes and decisions

By Jesper Koll

December marks the first anniversary of Prime Minister Shinzo Abe’s rule. Congratulations are in order.

The mood in Japan has changed for the better: growth is up; unemployment is down; deflation is ending; and the prime minister’s approval rating remains well above 60 percent, the envy of all global leaders.

Tokyo winning the bid to host the 2020 Olympic and Paralympic Games is, in many ways, a fitting summary of Abe’s achievements in his first year. Japan is back on the global stage. The country is again displaying ambition and professionalism, while voicing a simple goal: it wants to win.

However, it is to be expected that things will become more difficult. Invariably, in any parliamentary democracy, a leader’s novelty soon becomes routine, his ambitions become compromises, and his goals shift as unintended consequences of the initial actions begin to appear.

For example, Abe was very focused on ending deflation and his policy actions did force an impressive inflection away from deflation toward inflation. In particular, when Abe started his mission, consumer prices were falling at a rate of about 1 percent. Now they are rising at a rate of 1 percent. Goal achieved? Yes and no.

Unfortunately, the increase in prices is almost entirely due to cost-push factors, with the surge in energy prices and raw material costs accounting for more than 90 percent of the upturn in inflation. Thus, Abe’s policies so far have actually reduced people’s purchasing power, as prices are rising much faster than wages and employment.

However, there are some positive offsets. The rise in asset prices (real estate and stocks) is beginning to generate positive wealth effects, and the surge in corporate profits is poised to fuel rising bonus payments for Japan’s full-time employees.

Unfortunately, these positive offsets are now much more polarized and uneven. Today, almost 40 percent of Japan’s employees are part-time workers who are not eligible for bonus pay. Moreover, they typically have no access to mortgages and, thus, won’t benefit from rising home and real estate prices.

Make no mistake, I fully support and welcome Abe’s policy focus to end deflation. However, pursuing inflation for inflation’s sake is an extremely dangerous policy because it has the potential to further undermine Japan’s strongest assets: social harmony and relative equality.

The good news is that Abe is fully aware of this dangerous side effect. This is a key reason for his three arrows strategy. He aims to end deflation—with a flexible monetary and fiscal policy—and at the same time, work on deregulation and job creation. Through the breakdown of existing rules and obstacles he plans to empower more private-sector entrepreneurship. 

This, of course, is Abe’s third arrow. Unfortunately, it is a bad name and a bad symbol. Unlike arrow one (monetary policy) and arrow two (fiscal policy), arrow three cannot be shot at once, cannot hit a specific target immediately, and cannot generate an eye-catching headline on the front page of The Wall Street Journal or the Financial Times.

Abe’s ambition to redesign the rules and regulations of the national economy is a multitude of many small decisions, legislative changes, and alterations in administrative guidance and corporate governance. Thus, a more fitting description would be “1,000 needles.” This, I believe, is exactly what Abe will be focusing on next year.

Taken one by one, relentless little pricks and little attacks on pressure points in the system may not seem significant or radical. But taken together, they are poised to stimulate an effective systematic change.

For example, the rules and administrative guidelines for nursing homes and kindergartens are being changed, city by city. On its own, the cut in waiting lists may not seem impressive. But together, the pricks this needle-by-needle policy represents are likely to create over 30,000 jobs directly. In addition, it will free up mothers and families for more productive use of their time, be that leisure consumption or new employment.

Yes, Abe and his team deserve to be applauded for a very successful first year. It would be a mistake to take the lack of added big bang and headline-making initiatives as a fallback into complacency. Indeed, the prick-by-prick policy of 1,000 needles is only just beginning to work, one pressure point and one nerve center at a time. Ganbatte Abe.

Arrow three cannot be shot at once, cannot hit a specific target immediately, and cannot generate an eye-catching headline.






JesperDividerJesper Koll is a managing director and head of research at J.P. Morgan Securities LLC.