Satyajit Das: Shinzo Abe’s ‘three arrows’ will fall short of the target once again

Economics View: Many ‘reforms’ are vague... the ideas are old and have been tried before, unsuccessfully

Activity is easily mistaken for achievement. The frantic exertions of the government of Shinzo Abe, who took office as prime minister for the second time in December last year, has prompted optimism, notably among foreign observers, that Japan can achieve a reversal of its economic drift. Recent growth figures are cited as “proof” of the success of policies  which have just been announced but which were not in place during the relevant period.

Under Mr Abe, Japan has initiated an ambitious “three arrows” economic recovery plan, christened “Abe-nomics”.

The first arrow is a ¥10.3trn (£67bn) fiscal stimulus programme to increase public spending. The second is a further easing of monetary policy to boost demand, investment and inflation to 2 per cent. The third is structural reforms, to raise incomes and improve Japan’s industrial competitiveness and productivity. Japan’s total factor productivity in the manufacturing, non-manufacturing and agricultural sectors is the same as in 1991.

The programme is designed to increase growth, income, spending and inflation, as well as reduce the value of the yen to boost Japan’s exports. The hope is that it creates a self-sustaining cycle of rising prices, rising wages and increasing economic activity.

The policies have all been tried before, with limited success.

The government’s spending programme follows 15 stimulus packages between 1990 and 2008. Based on previous experience, it may provide a short-lived boost to economic activity but it will not create a sustainable recovery in demand.

Investment will be mainly in non-tradable, non-competitive sectors such as public infrastructure and construction, which frequently adds to over-capacity and earns poor returns.

Japan has maintained a zero interest rate policy for more than 15 years and implemented several rounds of quantitative easing. The new plan will assist the Japanese government to finance its spending. It may also help devalue the yen and pump up asset prices. But given that short-term rates were near zero and 10-year rates around 0.50 per cent before the announcement of the plan, the effect of monetary initiatives on economic activity is likely to be less significant.

Structural reform requires deregulation of inefficient sectors of the economy, opening them up to domestic and foreign competition. Reform is needed of taxation, trade policy, labour markets, environmental laws, energy policy, healthcare and services, as well as population and immigration. But many “reforms” are vague statements of objectives. Many of the ideas are old and have been tried before, unsuccessfully. The required changes are also politically and culturally difficult.

Reform of agriculture would require reducing or eliminating agricultural subsidies and tariffs as well as anti-import restrictions on rice and dairy products. It would require changes in land laws that limit the size of farm plots. But attempts at serious reform put the government in conflict with its own supporters and financiers, such as the farm lobby.

The chances of Mr Abe’s programme succeeding are limited. The failure of the charismatic and popular former PM Junichiro Koizumi’s ambitious policies in the early 2000s shows the difficulty of implementing even modest reform in Japan. To paraphrase baseball coach Yogi Berra, the current government’s programmes may be a case of déjà vu, once again.

Commentators, especially foreigners, have praised the initiatives. The Japanese stock market has risen around 70 per cent since late 2012, with foreign buying a significant factor. The yen fell against the US dollar from around ¥80 to ¥100, a decline of around 25 per cent. Japan government bond (JGB) interest rates fell initially, anticipating Bank of Japan buying.

But in May 2013, its financial market began to experience increased volatility. The stock market fell by more than 15 per cent, with daily price moves of 3 to 7 per cent. JGB interest rates increased sharply, from around 0.50 per cent to 0.90 per cent. The yen remained weak. Financial market volatility was sharply higher.

The reversals reflect closer scrutiny of the programme’s inherent contradictions.

The Bloomberg columnist William Pesek summed up the increasing doubt: “This faith that Japan is just one huge spending package away from bliss is becoming more detrimental with each passing year and credit downgrade. Abe-nomics really is more religion than reality.”

Satyajit Das is a former banker and the author of “Extreme Money” and “Traders, Guns & Money”.

Start your day with The Independent, sign up for daily news emails
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Claims Administrator

£16000 - £18500 per annum: Recruitment Genius: This is an excellent opportunit...

Recruitment Genius: Senior SEO Executive

£24000 - £28000 per annum: Recruitment Genius: A Senior SEO Executive is requi...

Recruitment Genius: Online Customer Service Administrator

£16000 - £18000 per annum: Recruitment Genius: An Online customer Service Admi...

Recruitment Genius: Digital Marketing Executive

£18000 - £22000 per annum: Recruitment Genius: This global, industry leading, ...

Day In a Page

Fishing for votes with Nigel Farage: The Ukip leader shows how he can work an audience as he casts his line to the disaffected of Grimsby

Fishing is on Nigel Farage's mind

Ukip leader casts a line to the disaffected
Who is bombing whom in the Middle East? It's amazing they don't all hit each other

Who is bombing whom in the Middle East?

Robert Fisk untangles the countries and factions
China's influence on fashion: At the top of the game both creatively and commercially

China's influence on fashion

At the top of the game both creatively and commercially
Lord O’Donnell: Former cabinet secretary on the election and life away from the levers of power

The man known as GOD has a reputation for getting the job done

Lord O'Donnell's three principles of rule
Rainbow shades: It's all bright on the night

Rainbow shades

It's all bright on the night
'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

Bread from heaven

Dutch survivors thank RAF for World War II drop that saved millions
Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

How 'the Axe' helped Labour

UK will be 'run for the wealthy and powerful' if Tories retain power
Rare and exclusive video shows the horrific price paid by activists for challenging the rule of jihadist extremists in Syria

The price to be paid for challenging the rule of extremists

A revolution now 'consuming its own children'
Welcome to the world of Megagames

Welcome to the world of Megagames

300 players take part in Watch the Skies! board game in London
'Nymphomaniac' actress reveals what it was really like to star in one of the most explicit films ever

Charlotte Gainsbourg on 'Nymphomaniac'

Starring in one of the most explicit films ever
Robert Fisk in Abu Dhabi: The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers

Robert Fisk in Abu Dhabi

The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers
Vince Cable interview: Charging fees for employment tribunals was 'a very bad move'

Vince Cable exclusive interview

Charging fees for employment tribunals was 'a very bad move'
Iwan Rheon interview: Game of Thrones star returns to his Welsh roots to record debut album

Iwan Rheon is returning to his Welsh roots

Rheon is best known for his role as the Bastard of Bolton. It's gruelling playing a sadistic torturer, he tells Craig McLean, but it hasn't stopped him recording an album of Welsh psychedelia
Morne Hardenberg interview: Cameraman for BBC's upcoming show Shark on filming the ocean's most dangerous predator

It's time for my close-up

Meet the man who films great whites for a living
Increasing numbers of homeless people in America keep their mobile phones on the streets

Homeless people keep mobile phones

A homeless person with a smartphone is a common sight in the US. And that's creating a network where the 'hobo' community can share information - and fight stigma - like never before