Sunday, April 24, 2016

Abenomics and the Limpness of the Third Arrow

The fundamental problem with Abenomics is that Mr. Abe does not have a coherent perspective on economic reform to work from, whether from personal expertise (he is not a trained economist and has minimal business experience), conviction (the economy is far from his first love), or through an economic czar to delegate the task to (there is no Heizo Takenaka to Junichiro Koizumi, no Zhu Rongji to Jiang Zemin). This was not been a problem for releasing the first QE arrow, essentially following in the footsteps of US and European monetary orthodoxy. The only meaningful opposition came from the Keidanren leadership, reflecting the elderly businessmen’s natural suspicion of easy money. But the businesses themselves? Probably not as reluctant to embrace what should be good for their bottom line. Besides, Keidanren had progressively lost its political relevance since it gave up the role of super-bundler for financing the LDP. The second, fiscal arrow, meanwhile, was essentially an extension of what the LDP and politicians in general are inclined to do and have been doing through the ages: spend public money.

The third arrow, which is (was?) structural reform, is a different animal. Reform requires whacking away at vested interests, but when you’ve been in charge for the better part of 60 years of a highly homogeneous society like the LDP, most of those vested interests will also be your bedrock constituencies. A difficult task indeed, and made more difficult by the lack of leadership. The uneasy coalition-secretariat of ministry bureaucrats do appear to have a core of consisting largely of the usually reform-minded METI, but without political vision and leadership, there is no way to take measures that run the risk of the dissatisfaction of vested interests and their ministerial representatives boiling over.

Here, the one notable exception to Abe’s unwillingness to seriously challenge powerful vested interests is instructive: his decisions around the Trans-Pacific Partnership negotiations. I believe that here, his main concern was the perceived need to reinforce the Japan-US alliance and cement the US pivot/rebalancing towards Asia—basically keeping the US onside. Barring such non-economic concerns, only incremental, largely tactical advances as far as the third arrow/structural reform is concerned are likely to emerge.