Shinzo Abe's critics often suggest that the Japanese prime minister has yet to tackle serious structural reforms. They are quite wrong.
Abe has been advocating and embracing structural reform ever since he took office in 2012. Reforms in corporate governance, agriculture cooperatives and labor markets are some of the examples where specific measures have been implemented. It is true that benefits from these reforms have not become fully visible yet. The areas that need reform in this country to promote economic growth are the areas facing certain "structural problems" and thus require some time to address them. A quick fix cannot be expected.
But it is high time that some of the burden was shifted from a government that is working hard to revive the economy to companies and to individuals to do more to boost productivity.
The Japanese economy currently faces multiple deep-rooted problems, such as a shrinking population which reduces the potential economic growth rate, increasing social security costs, a deteriorating fiscal balance, and prolonged deflation which has encouraged risk-averse behavior. The experience during the last decades suggest that addressing and finding solutions to these issues are not so easy. No precedents or examples exist in other countries and no textbook theories can be referred to. In fact, Japan has been the forerunner in trying to cope with problems which other countries are bound to face in the future.
Too big and mature
Nevertheless, the market and the media usually expect the Japanese government to be able to introduce a quick fix to solve them. Is it realistic to assume that the government has the ability to implement effective policies to solve all these issues instantaneously? Does it have the necessary policy tools in its tool kit? Is it a matter of government's will or decisiveness?
During the post-World-War-II high-growth period, it is true that government policies did play an important role in promoting economic growth. Successive five-year economic plans were formulated by the government to guide the economy through these periods. But, the government already abandoned the idea of formulating economic plans at the turn of the century, recognizing that the Japanese economy was too big and too mature for the government to play an important role in guiding it through multi-year plans. The changing role of government policies and their effectiveness had to be acknowledged.
Obviously, even today, the important role to be played by monetary and fiscal policies in supporting the private sector should not be denied. At the same time, we need to remind ourselves that the Japanese economy is a democratic and market-driven economy led by the private sector and the government does not have full control over every aspect of the economy. Certainly, we cannot dictate people's behavior. Let's look at the current situation from this viewpoint.
The first arrow of Abenomics, namely monetary policy has been employed to its full extent, especially since Haruhiko Kuroda took the helm at the Bank of Japan in 2013. Nevertheless, it is true that he has not achieved his target to get out of the deflationary world. As he has insisted repeatedly, monetary policy alone will not be able to ignite inflation. Actions on the part of the private sector, including both the household sector and the corporate sector, are essential to this end. Unless inflationary expectations are recreated in people's minds, policy efforts could remain vain.
The second arrow, namely fiscal policies have been implemented flexibly with a view to find a fine balance between the need to support the economy in the short run and to achieve fiscal consolidation in the medium term. Although an increase in the consumption tax rate had been proposed to reduce the debt level and to alleviate the burden of the future generation, the Abe cabinet postponed such an increase twice in view of the potential negative impact on economic growth. The side effect of the delays in tax increases has been that people have become increasingly concerned about the future availability of their pension and health care benefits, lowering their incentives to consume today. Active use of fiscal stimulus at this time, proposed by some, would simply worsen the situation. The government has already shown considerable flexibility in managing the budget. Isn't it about time for the private sector to accept some burden of creating a brighter future?
The same also applies to the third arrow, namely structural policies, as well. Take the example of corporate governance reform. More active use of independent non-executive board members has been advocated as a typical measure in this area. In response, the number of non-executive Board members of listed companies has increased significantly in recent years. One of the aim was to encourage independent Board members to challenge the views of the CEOs who are sitting on large cash reserves resulting from their recent favorable profit situations. A market economy will not grow unless companies use their profits for more investment for their future, higher wages for their workers, or higher dividends for their shareholders.
Status quo mentality
Have we seen enough beneficial results from corporate governance reform? Probably, not yet. Is it the government's fault? Probably, no. Calls from the prime minister for higher wage increases have been ignored or rejected by both the CEOs and the trade unions. A shrinking population and global competition are forcing the Japanese to continue to be risk averse and play on the safe side.
There are numerous other examples where the government's proposals for specific reform measures have been rejected or delayed by the objections from the vested interest groups. Farmers resisting agriculture reforms, teachers resisting educational reforms and taxi drivers resisting Uber, the global ride-hailing group, are some of the examples.
Why are the Japanese not willing to take positive and proactive steps in the right direction? A collective orientation to compete in conforming could be reinforcing a status quo mentality. The Japanese need to develop respect toward diversity in their society to welcome change and accept differences. It may take some time, but small steps in each and every individual citizen's mind could be very important.
In these circumstances, should we continue to ask whether the government is seriously embracing structural reform? Isn't it time to start asking whether the private sector is serious about structural reform and whether all citizens are ready to embrace reform for themselves?
Shigeo Kashiwagi is a guest professor at Keio University, Tokyo, and former Japan executive director at the International Monetary Fund and the Asian Development Bank.
