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Japan: Abe launches third arrow

June 24, 2014

On 24 June, Prime Minister Shinzo Abe and his Cabinet approved the Basic Policies for Economic and Fiscal Management and Reform and the updated Japan Revitalization Strategy. Drafts of the measures were published on 13 June and 16 June respectively and no major changes were introduced. Structural reforms represent the third arrow of Abe’s economic policies, which aim to put an end to decades of economic stagnation. Abe’s first two arrows of bold monetary easing and aggressive fiscal stimulus, which were unveiled early in 2013, have succeeded in hitting their mark so far.

The Basic Policies for Economic and Fiscal Management and Reform stressed that the economy has gradually recovered over the last six quarters and that the country is pulling out of deflation. Against this backdrop, the government claimed that it will, “further push ahead with its growth strategy.” Going forward, the government will focus on strengthening the country’s workforce amid a shrinking population, assuring a better environment for business and establishing new growth engines for the country. The guidelines for the FY 2015 national budget will strive to achieve both economic revitalization and fiscal consolidation with the aim of recording a primary budget surplus by FY 2020.

Under the revised Japan Revitalization Strategy the government plans to push forward 10 key reforms in the coming years. In order to make the country more attractive to investors and business, the government is focused on enhancing corporate governance, building up a better environment for entrepreneurs and start-ups and stimulating innovation—particularly in robotics. In the same vein, the government is expected to cut the corporate tax rate from the current 35.0% to “the twenties” in several years starting next fiscal year (April 2015) as well as to overhaul the USD 1.3 trillion Government Pension Investment Fund in order to seek higher returns by diversifying investment strategies.

The Japan Revitalization Strategy is also intended to foster the country’s workforce in the face of a labor shortage caused by the low fertility rate and replacement of the postwar baby boom generation. According to the National Institute of Population and Social Security Research, the overall population could drop by about a third by 2060. In this regard the government issued guidelines to promote women’s participation in business, bring in more foreign workers and upgrade working practices. Finally, the package also establishes that the government will promote the agriculture and healthcare sectors as new growth engines.

In order to accelerate the speed of the reforms, the government will strengthen the role of the National Strategic Special Economic Zones. These regions, which include Tokyo and the Kansai region, will be the spearhead of Abe’s reform and will be granted special powers to promote economic deregulation. In addition, the government vowed to accelerate the Trans-Pacific Partnership (TPP) along with other economic agreements.

The structural reforms approved on 24 June are far more ambitious than the growth strategy presented last year. As Tomo Kinoshita, Chief Economist at Nomura Securities, points out:

Unlike the first round of growth strategies announced in June 2013, the second round of strategies were risk in content and came at a time when investors had low expectations, and we think this will be positive for share prices over the medium term.

Analysts expressed concern that the planned cut in the corporate tax could derail Japan’s much-needed fiscal consolidation. That said, Junko Nishioka, Chief Economist at RBS Securities, stresses that:

Minister of State for Economic and Fiscal Policy Akira Amari mentioned finding “permanent resources for a permanent tax reduction” at the press briefing. We think this comment indicates a shift in his view towards expanding the taxable base via revisions to special tax measures and an amount-based standard taxation as proposed by the Ministry of Finance and LDP’s tax council.


Author: Ricard Torné, Lead Economist

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