Post-electoral mandate for Abenomics – How will economic reforms in Japan take shape going forward?

Given the overwhelming response to my previous article on the first half report of Abenomics and its progress, I will like to take this opportunity to analyse further and provide my thoughts on the latest election victory by Japan’s ruling coalition parties of the Liberal Democratic Party (LDP)/New Komeito Party, led by its leader, and Primer Minister Shinzo Abe which took place over the weekend of July 20 – 21, 2013. As expected, given the majority of the pre-results polls, Prime Minister Abe and the LDP coalition won a majority stake in the Upper House of the Japanese Diet (Parliament), capturing 74 electoral seats out of the 121 seats in the 242-seat House which were up for grabs during the weekend elections.

With the election victory in place for the Abe government, Prime Minister Abe and his Cabinet wasted no time in carrying out its economic reforms, dubbed as the ‘Three Arrows’ (Fiscal, Monetary, and Structural) on a more positive mandate. As discussed in my previous article, the ‘Third’ Arrow which is the structural component, is one of the most difficult challenges that Prime Minister Abe has to tackle in getting Japan back on track on the trajectory path of positive economic growth. One of the most critical issues Japan is facing is the demographic picture, namely the declining birth rates, and rapidly aging population. There have been calls for the Japanese government to loosen its grip on immigration standards, encouraging greater female labour force participation, provision of child care subsidies to ease the burden of typical dual-income households in relation to taking care of their children during work, technology innovation that will drive productivity growth, etc. However, the reforms needed to carry out these measures remain quite challenging due to many opposing voices, especially on the topic of immigration, the reluctance of many young Japanese couples to get married, and give birth to two or more children, which is a common prevalence in many developed countries, such as Japan.

Based on my observations so far on tracking the economic progress of Japan following the election of Prime Minister Abe in January 2013, I noted that there has not been quite a significant amount of buzz regarding the presence of technology-oriented venture-capital firms providing funding for startups, and/or the small and medium-sized enterprises (SME) where most of Japan’s economic growth is being driven, and is expected to do so going forward. Various information regarding industrial production, tankan (sentiment index) surveys, non-industrial sectors, have reportedly shown various gradual improvements, however when it comes to the overall subject of funding the start-ups, it has so far not been quite prominent in the level of emphasis/priorities by the Japanese government. I noticed that most of the innovation projects are being driven by the academic community, and not much from the private sector. I believe that there is always an Asian stigma of failures on the part of young graduates taking on entrepreneurships as part of their career paths, but there is still some hope for these startups to start afresh if the Japanese government will provide the necessary environment for private sector initiatives to thrive, particularly for young startups which need heavy capital investments in order to start their businesses.

On the expansion of international trade, and free trade, this issue has always been one of the most sensitive topics that previous Japanese governments have not resolved completely partly due to the export-oriented economy, its closed door policies particularly in the area of agriculture and farming, etc. In a Bloomberg Online article published on July 22, 2013, it was reported that several business leaders/lobby groups have urged the Abe government to look into corporate tax reforms, ease regulations, lossen labour laws, and join the international free-trade agreement known as the Trans Pacific Partnership (TPP). These moves are thought to be one of the most promising ways to build on Japan’s efforts in opening up its economy, and get the economy moving again after almost two decades of deflation. It is also thought to be one of the ways to introduce competition into the economy which will drive innovation and productivity among many Japanese corporations. It is seldom heard of regarding the issue of competition coming from most of the heads of these Japanese corporations, as for the past decades, many Japanese corporations have shunned competition which they believe drive them out of their businesses, however, there seems to be a change in attitudes among these Japanese corporate leaders on the issue of competition, and how will it impact their businesses going forward.

In light of the positive sentiments coming out from the latest election victory by the coalition led by Prime Minister Abe, I believe that the new Japanese government needs to also do more in strengthening the economic fundamentals of the country, particularly its growing debt levels, which many have dismissed it, saying that it does not pose any major issues. The Japanese government must do more in lowering its debt levels in the process of implementing the necessary economic reforms, because it could impact various generations of Japanese people to come. There is also an issue of massive amounts of Japanese debt being held outside the country due to the security risks that it might pose, including the threat of massive redemptions due to loss of faith in the value of the Japanese Yen currency, another bout of global credit meltdown which might cause distortions to interest rates, and other economic drivers, etc. With these issues in focus, particularly with the conclusion of the Upper House elections, it is time for Prime Minister Abe to get down to the business of keeping Japan on the course towards a sound path of economic growth, low debt levels, and a sustainable set of economic policies that are needed to keep the country vibrant again.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc