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”.

Sport
The sun rises over St Andrews golf course, but will it be a new dawn for the Royal and Ancient Golf Club?
sportAnd it's Yes to women (at the R&A)
Arts and Entertainment
Friends is celebrating its 20th anniversary this year
tvSeries celebrates 20th anniversary
Sport
Yaya Touré (left) and Bayern Munich’s Spanish defender Juan Bernat
footballToure's lack of defensive work is big problem for City
Voices
voicesApple continually kill off smaller app developers, and that's no good for anyone
PROMOTED VIDEO
Arts and Entertainment
Liam Neeson said he wouldn't
tv

Liam Neeson's Downton dreams

Sport
Wembley Stadium
footballNews follows deal with Germany
Arts and Entertainment
A spell in the sun: Emma Stone and Colin Firth star in ‘Magic in the Moonlight’
filmReview: Magic In The Moonlight
News
ebooksAn unforgettable anthology of contemporary reportage
Sport
A 'Sir Alex Feguson' tattoo
football

Arts and Entertainment
Ben Whishaw is replacing Colin Firth as the voice of Paddington Bear
tv

Thriller is set in the secret world of British espionage

Life and Style
life

News
ScienceGallery: Otherwise known as 'the best damn photos of space you'll see till 2015'
Life and Style
fashion

Bomber jacket worn by Mary Berry sells out within an hour

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

SQL Developer - Watford/NW London - £320 - £330 p/d - 6 months

£320 - £330 per day: Ashdown Group: The Ashdown Group have been engaged by a l...

Head of Audit

To £75,000 + Pension + Benefits + Bonus: Saxton Leigh: My client is looking f...

Audit Manager Central Functions

To £85,000 + banking benefits: Saxton Leigh: You will be expected to carry out...

Credit Risk Audit Manager

Up to £90,000 + benefits: Saxton Leigh: Credit Risk Audit Manager required to ...

Day In a Page

Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments
These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

Widespread fear of Isis is producing strange bedfellows

Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
Topshop goes part Athena poster, part last spring Prada

Topshop goes part Athena poster, part last spring Prada

Shoppers don't come to Topshop for the unique
How to make a Lego masterpiece

How to make a Lego masterpiece

Toy breaks out of the nursery and heads for the gallery
Meet the ‘Endies’ – city dwellers who are too poor to have fun

Meet the ‘Endies’ – city dwellers who are too poor to have fun

Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

Ian Paisley’s decision to make peace with his IRA enemies

His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam
'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

Exclusive extract from Janis Winehouse's poignant new memoir
Is this the role to win Cumberbatch an Oscar?

Is this the role to win Cumberbatch an Oscar?

The Imitation Game, film review
England and Roy Hodgson take a joint step towards redemption in Basel

England and Hodgson take a joint step towards redemption

Welbeck double puts England on the road to Euro 2016
Relatives fight over Vivian Maier’s rare photos

Relatives fight over Vivian Maier’s rare photos

Pictures removed from public view as courts decide ownership
‘Fashion has to be fun. It’s a big business, not a cure for cancer’

‘Fashion has to be fun. It’s a big business, not a cure for cancer’

Donatella Versace at New York Fashion Week