Arrow or Dart? Japan’s Abe unveils latest reform plan
Thursday, 26 June 2014 00:00
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Reuters: Prime Minister Shinzo Abe unveiled a package of measures on Tuesday aimed at boosting Japan’s long-term economic growth, from phased-in corporate tax cuts to a bigger role for women and foreign workers, but applause from investors is likely to be muted after Tokyo backpedalled on bolder reforms.
Japan’s economy has shown signs of revival since Abe took office 18 months ago pledging to end deflation and generate sustainable growth with a triple-pronged strategy he called his “Three Arrows”, but policymakers acknowledge that more must be done to cement the recovery after two decades of stagnation.
“There are no taboos or sacred cows for my growth strategy,” Abe told a news conference after the measures were approved by his cabinet.
He stressed that a “positive cycle” was emerging as rising corporate earnings lead to higher wages, but that the recovery had yet to spread to the regions.
Experts say Tuesday’s update of the so-called “Third Arrow” of Abe’s strategy to revitalise Japan - most of which had been trailed in advance - is a step in the right direction, but want to see how its reforms are fleshed out and implemented.
The first two “arrows” are massive monetary easing, which has helped push up asset prices, and fiscal spending to stimulate demand.
Private economists surveyed by Reuters forecast that the growth strategy could boost Japan’s potential growth rate by 0.2-1.5 percentage points from its current level of around 0.5 percent. But they noted that it would take time.
“Even after the government growth strategy is announced, various legislation must be enacted and it will take time for companies to begin to act. Therefore, it will be 10 to 20 years before the potential growth rate rises,” said Kenji Yumoto, vice chairman of the Japan Research Institute.
Yumoto said it was possible, but very difficult, for Japan to hit the 2 percent growth level the government says is needed to reduce its mammoth public debt.
The centrepieces of Abe’s plan are a future cut in Japan’s effective corporate tax rate - among the highest in the world - to below 30 percent over the next several years, and a promise to reform the $1.26 trillion Government Pension Investment Fund in ways likely to reallocate more money to the stock market.
The latest reform package is a welcome step for the Bank of Japan, which has called for bold government action to help sustain the current recovery fuelled in part by its massive monetary stimulus.
BOJ Governor Haruhiko Kuroda, a former senior finance ministry bureaucrat, has also warned against cutting Japan’s corporate tax rate without securing an alternative source of tax revenue, given the country’s massive public debt.
