Abe’s third arrow targets growth

Japan’s prime minister laid out his growth plan yesterday, but the news failed to bring an end to market volatility.
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Japan's structural issues might be over-stated
<div style="text-align: left;"> Japan's structural issues might be over-stated </div>

Shinzo Abe is reckoned by some to be worried that ghosts haunt his official residence. More than five months after taking office, Japan’s prime minister has still not moved in — with no official explanation for his reluctance.

Whatever the reason, Abe’s decision to stay at home must have seemed like a good call until recently, but bad mojo isn’t so easy to shake. Worrying portents and mysterious movements are now haunting Japan’s financial markets, giving the prime minister new cause for sleepless nights.

His announcement yesterday of a growth strategy — the “third arrow” of his economic transformation — did little to change things. The plan calls for the creation of new special economic zones, tax breaks for investment and research, agriculture and energy reforms, as well as a few of other things aimed at creating a more efficient and flexible economy, as well as helping to slay deflation once and for all.

Markets rose immediately after his speech, but Abe’s powers of suggestion flagged within minutes. After trading sideways during the morning, the benchmark Nikkei 225 index ended the day down almost 4%, the Topix was down more than 3% and the yen dropped below the 100 level for the first time since May 9.

Volatility has been the order of the day since May 22, as the Nikkei has fallen in fits and starts from around 15,600 points to 13,000.

Much has been made of the need for Abe’s third arrow, and it is certainly true that Japan faces a challenge in creating an environment that promotes stronger and more sustainable economic growth. But in some ways Japan is in a better position than many other advanced economies.

Despite its long-lived slump, Japan is ranked 10th in the World Economic Forum’s Global Competitiveness Report, one place behind Hong Kong and ahead of Denmark, Taiwan and Canada. Not bad for a country that is supposedly beset by major structural issues.

More important, the challenges it faces in terms of demographics, labour market flexibility and corporate consolidation, among other things, are at least well understood, which is more than can be said for most of the problems in the eurozone. The Japanese, after all, are not rioting.

Abe’s real challenge is in executing his plan to address Japan’s problems, rather than arguing about what the problems are.

The prime minister’s fragility may be a bigger worry. He resigned from his first stint in the job in 2007 due to a recurrent bowel illness that was made worse by stress. The question now is whether he will have the stomach for a turbulent few years.

¬ Haymarket Media Limited. All rights reserved.
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