09 Jul 2016

Photo Credit: Dick Thomas Johnson on flickr.com

On February 22nd 2016, Prof Heizo Takenaka, Professor of Faculty of Policy Management and Director of the Global Security Research Institute at Keio University, presented a talk on the “Prospect for Japanese Economic Policy and its Implications on Asia” at the Lee Kuan Yew School of Public Policy, National University of Singapore.

Prof Takenaka commenced his talk by looking back at the Japanese economic policy. He defined the period starting from the burst of bubble economy in 1990 to present as a “mixed quarter [century]” rather than a “lost” since during the period there were some positive achievements.

Former-Prime Minister Junichiro Koizumi, who came to power in 2001, appointed Prof Takenaka as a key minister and supported his reform agenda, thus reviving the Japanese economy again. Yet, ever since Koizumi’s departure, the momentum behind economic reforms has stalled, largely due to frequent leadership changes.

Reflecting on recent developments, Prof Takenaka credited Abenomics, a set of economic programs implemented by Prime Minister Shinzo Abe, for its achievements. For instance, in the first stage of Abenomics between 2013 and 2015, Japan’s stock market index more than doubled, outperforming counterparts in the United States and Europe. Additional early achievements include full employment as well as 1.2% core inflation rate.

There is, however, a long way to go. In evaluating his “three arrows”, Prime Minister Abe gave himself a score of 67%. Prof Takenaka’s reading of the score is that the first arrow that aims at expanding money supply has been well done; the second arrow, which is to adopt flexible fiscal policy is halfway done; and the third arrow of deregulation and structural reform is still in progress.

In proceeding to the “second stage” of Abenomics, Japan needs to bolster fiscal consolidation and further strengthen the growth strategy. Additionally, Japan has to reform the current pension system because the current starting age for receiving pensions is 65, which is too early given Japan’s average life expectancy of 83. Equally important is reforming the existing medical care system that allows aged people to pay only 10% of their medical costs, which encourages them consume healthcare even if they don’t have any serious health problems.

The effects of these growth strategies on the economy could only be viewed in the long term. That being said, Prof Takenaka was of the opinion that Japan’s corporate tax rate was too high and needed to be reduced. Additionally, Special Economic Zones (SEZ) would be necessary to promote deregulation in some business sectors. Taking the agricultural sector as an example, Japan could enhance its competitiveness in the global market by inviting corporate participation. Prof. Takenaka believes the SEZs do make a difference as they now cover a large part of Japan, equivalent to 60% of Japan’s GDP.

In focusing on policy measures, another useful policy tool is the concession of public infrastructure operation rights to private companies, as the Sendai and Kansai airports represent two successful examples of this policy. Separately, Japan should open up and relax its immigration policy given its shrinking population. Although the Japanese population has demonstrated resistance to immigration for criminal-related and other concerns, it should be overcome by establishing an adequate framework and rules.

During the “first stage” of Abenomics, neighbouring South Korea and China criticised Japan’s expansionary monetary policy for inducing “cheap yen”, but this was not the case as Japan adopted the policy for domestic purposes, and the exchange rate only returned to the pre-crisis level of 120 yen per dollar. Nonetheless, the Japanese economy faces new challenges such as a volatile stock market, geopolitical risk in the Middle East, downward trends in the Chinese economy, and an interest rate hike in the U.S.

Last but not the least, Prof. Takenaka advised the Abe government to take advantage of the momentum that will be generated through hosting the Tokyo Olympic Games in 2020, and accelerate the remaining reforms. When it comes to the previous 1964 Tokyo Olympic Games, Japan’s bullet train system, Shinkansen, was launched nine days prior to the opening ceremony, and several high-end hotels opened the same year. Recently, the number of foreign tourists increased rapidly thanks to the relaxation of visa policy, the depreciation of Japanese yen, and growing income of neighbouring countries.

In the following Q&A session, Prof. Takenaka commented on the recent introduction of a negative interest rate by the Bank of Japan (BOJ). While the monetary base of the U.S. has expanded five times since the Global Financial Crisis, Japan’s base has yet to double. Therefore, BOJ Governor Haruhiko Kuroda may consider another round of Quantitative and Qualitative Monetary Easing (QQE). Based on Prof. Takenaka’s analysis, unlike the U.S., the exit for Japan is still far away and the policy is still at a nascent stage.

Regarding the planned consumption tax hike in April 2017, Prof. Takenaka reiterated his objection to it because the tax increase should be avoided when a deflation mind-set remains, and also because fiscal rehabilitation should be done by normalising the macroeconomic environment first. He believes that Prime Minister Abe and Cabinet Secretary Yoshihide Suga are also opposed to the tax hike, and are looking for reasons to postpone it.

In regards to the competitiveness of Japanese electronic appliance manufacturers, Prof. Takenaka referred to the case of Samsung, which was doing well a few years ago but is currently facing difficulties. He believed that the electronic appliance business is unable earn high margins any longer. For example, Hitachi is shifting their focus from home appliances to infrastructure, and is currently enjoying historically high profits.

In responding to another question, Prof. Takenaka observed that the Japanese government is focusing more on income redistribution and staying away from a growth strategy as the Upper House summer election approaches. Similarly, the Tokyo government is lagging behind other metropolitan areas such as Kanagawa or Osaka in advancing structural reforms, but Prof. Takenaka believes that peer pressure should move Tokyo forward in the end.

Prof. Takenaka also discussed corporate governance reform in Japan. Two years ago, he promoted the introduction of independent outside board members in the industrial competitiveness council. In 2015, the Tokyo Stock Exchange adopted a corporate governance code where they ask firms “comply or explain,” in effect forcing many of them to accept the independent outside board members mechanism. Another paradigm shift may come from labour market reforms. Currently, a number of Japanese firms still adhere to lifetime employment and the seniority system, and employees in low profitable companies are not moving to other firms, which is bringing down countrywide efficiency. A change in firing policy could modify such practices and potentially enhance competitiveness.

On 22 February 2016, Prof. Heizo Takenaka, Professor of Faculty of Policy Management and Director of the Global Security Research Institute at Keio University, presented a talk at the LKY School.

This article is written by Takehiro Masutomo, Li Jie, Ying Weiwen and Blake Berger. They are researchers at the Centre on Asia and Globalisation, Lee Kuan Yew School of Public Policy.