January 12, 2014 1:00 pm JST

Abenomics: Where's the deregulatory reform?

IZURU KATO

In the recently published 2014 version of the World Bank index of the ease of doing business, Singapore retained the top spot, Hong Kong came second, followed by New Zealand and the U.S.     

     Japan ranked 27th, a far cry from the days when it placed around 10th. By contrast, South Korea, which had previously been in the 20th-29th range, placed seventh -- a remarkable advance in ranking.

     Among the component indicators used to compile the overall index, Japan ranked top in "resolving insolvency," but took the 140th place (down from the 133rd in the previous survey) in "paying taxes." It placed 120th (down from the 113th) in "starting a business."

     As one of the criteria making up the "starting a business" indicator, the survey measures the time, in days, required to get a local limited-liability company up and running. New Zealand topped the list at half a day. It takes 2.5 days noted for Singapore and Hong Kong, and five days in the U.S. In Japan, the survey indicated, as many as 22 days are needed.

     It is very worrying that Japan has not shown substantial improvement in areas of the survey where it performs weakly. The world's attention is on Prime Minister Shinzo Abe and the "third arrow" of Abenomics. This survey suggests there is a lot of room left for deregulation in Japan.

Regional bias

Abenomics is often said to have led the domestic economy to pick up, but signs of a recovery have yet to spread through all regions. Some areas have been left behind.

     I recently visited Osaka. People there talk about how they see Japan's regional economies going. Economic conditions, they say, are getting a little better in Hokkaido, Tohoku and Okinawa, which they note owes much to the expansion of public-works spending. In Tokyo, securities companies and real estate businesses are enjoying brisk sales. And the Tokai and Kyushu regions -- home to many automobile businesses -- there is robust performance thanks to the weak yen.

     Meanwhile, in the Kinki area, which encompasses Osaka, Kyoto and their surrounding prefectures, they note that economic activity, though better than last year, is still weak. As they see it, although the decline in the yen's value helped lift earnings at electronics companies, a lack of exportable products has kept them from growing, making it hard for them to undergo a broader-based business recovery.

     An Osaka taxi driver said, "There is little feeling that things have become better than last year."

     The Bank of Japan's December Tankan survey indicated that the business sentiment diffusion index at companies of all sizes in every industry stood at plus eight. By region, the index was 15 for Hokkaido, 12 for Tohoku,10 for Tokai, 11 for Kyushu and 18 for Okinawa. It was 2 for Kinki. The index is calculated by subtracting the percentage of companies that feel business conditions are unfavorable from those that believe they are good.

     The latest Tankan survey suggests the Japanese economy is not yet on solid ground. The weaker yen and higher asset values driven by the "first arrow" of Abenomics, which refers to the BOJ's unprecedented quantitative and qualitative monetary loosening, help. As does the direct effects of the "second arrow" -- hefty fiscal stimulus. But that is not enough.

     I took part in the Japanese-German Forum that was held in Tokyo in late October. About 20 participants from Japan and Germany, such as politicians, bureaucrats, business leaders and academics, exchange views straightforwardly. It has been held alternatively in Berlin and Tokyo since the 1990s.

     At this year's forum, I made a presentation about the macroeconomic policy Japan is currently implementing. The discussions over that matter were really impressive. Many participants from the German side showed concern about Abenomics, describing it as "risky" or "maybe unsustainable."

     In the eyes of German participants, current Japanese policy looks like nothing more than the typical form of monetization of fiscal deficits that the Germans most hate. The government expands fiscal spending through massive debt issuance, while the central bank buys most of the government bonds to stem a rise in long-term interest rates.

Perilous level

The U.S. Federal Reserve in December decided to pare back its massive asset purchases, or "quantitative easing." If the tapering of asset purchases smoothly progresses, the monetary policy could be wound up as early as October this year. In that event, the Fed's total assets as a percentage of gross domestic product would stand around 26% at the end of this year.

     The European Central Bank has been for some time moving forward with trimming its assets. Its ratio of assets to GDP were estimated at about 24% at the end of 2013.

     Meanwhile, the BOJ has released its forecast that its total assets would come to 290 trillion yen ($2.74 trillion) at the end of 2014. If that scenario comes to pass, the ratio of its assets to GDP would rise to around 58%.

     By international standards, the BOJ would become an extremely huge central bank in terms of asset sizes. The bulk of its assets are Japanese government bonds. The central bank intends to maintain the current policy stance until the year-on-year rate of increase in the consumer price index stably stays at or above 2%. There is even a possibility that the BOJ could take additional monetary easing policy measures.

     Let's make a conservative assumption that, in and beyond 2015, the BOJ just increases its long-term government bond purchases by 50 trillion yen each year as it has been doing currently, while not raising short-term fund supplies. Even under this assumption, the BOJ's total amount of asset holdings as a share of GDP would exceed 100% in 2020.

     This quantitative and qualitative monetary easing must be stopped before such a state of affairs comes into reality. An economic recovery that excessively depends on monetization of fiscal deficits and a cheap currency harbors intrinsic risks. It is vitally important to shift government policies toward making more use of private-sector dynamism, by pressing ahead with measures such as deregulatory reform.

Izuru Kato is president and chief economist at Totan Research.