Chasing the third arrow of Abenomics

It is no wonder that Japan greets Abenomics with caution.

At a retail level, the Japanese people have held deflationary expectations for years and, at a professional level, fund managers and corporations have seen unstable governments come and go. While there is directional consensus on the government’s objectives, there is doubt about its capacity to execute, to stay united in leadership, to take on the pressure groups and to stay the course beyond the initial monetary thrust.

The message seems to be: “I agree with what you are trying to do — in fact, I will vote for you — but I will not give you the benefit of the doubt until I see real progress on the structural front.”

As a result, neither fund managers nor manufacturers have embarked on material adjustments to their asset allocations or hedge ratios. There have been modest deviations from benchmark but those benchmarks themselves have been largely unchanged.

So, in the battle of convictions, we have the Japanese people on one side and the government on the other side, assisted largely by foreign investors.

Having already embarked on unprecedented monetary easing, Japan must follow through with structural reforms. The consequences of inaction, otherwise, are too great.

Notwithstanding the possibility of infighting within the ruling party, there is a critical mass of people in the executive branch, in the corporate sector and in academia who believe that their time has come — that they will prevail in pushing through supply-side measures. This resolve will have been emboldened by last month’s Upper House elections, which the Liberal Democratic Party (LDP) decisively won.

What sort of measures could be adopted? Here is a laundry list of what might constitute progress “under the third arrow”:

One, labour reforms: Greater flexibility in making workforce reductions would help reverse deflation. When companies can’t let staff go, the only way to reduce costs is to depress compensation across the board.

Two, women’s participation: Raising the participation rate of female workers to the OECD (Organisation for Economic Co-operation and Development) average will boost growth and output.

Three, agricultural reforms, particularly those in line with the Trans-Pacific Partnership. Four, healthcare reforms in line with global standards.

Five, power/energy competitiveness — especially reactivating nuclear plants that were halted following the 2011 disaster and then replaced with natural gas and coal imports.

Six, “Silicon Valley-style” new enterprise. It was highlighted at a recent World Economic Forum event in Tokyo that the venture industry in Japan is worth US$1 billion (S$1.28 billion), versus US$20 billion in the United States.

Seven, incentivising corporate capital expenditure and research and development via tax cuts or credits

Eight, outward investment into Asia in the form of co-investment with the private sector.

Nine, reducing or ending support for so-called “zombie” companies

Over the foreseeable future, movement in any of the items on this laundry-list — forward or backwards — will likely drive financial variables in Japan.

The key to Prime Minister Shinzo Abe’s “Third Arrow” was gaining a stable majority in the Upper House. His party now effectively controls all of the major committees in that chamber as well as their chairmanships. This, coupled with the LDP-led coalition majority in the Lower House, gives them an unchallenged hold over policymaking.

Japan is now poised to fire the third arrow.

ABOUT THE AUTHOR:

Lutfey Siddiqi is Managing Director and Asia-Pacific Co-Head of Foreign Exchange at UBS Investment Bank and Adjunct Professor at the National University of Singapore. He was named a Young Global Leader by the World Economic Forum in 2012.