Abe Describes Strategy to Free Up Japan’s Economy

TOKYO — In a bid to give second wind to his drive to kick-start Japan’s economy, Prime Minister Shinzo Abe laid out a wide-ranging growth strategy on Wednesday that he said would beat deflation, increase personal incomes, unlock the long-squandered potential of its tech-savvy work force and reboot an economy written off in recent years for its seemingly unshakable malaise.

Initial enthusiasm over his program, dubbed Abenomics, of aggressive monetary easing, public works spending and economic overhauls had driven markets up by 80 percent from late last year, when Mr. Abe began his campaign for office, through the middle of May. But optimism has waned in the past two weeks, as investors have taken stock of the risks and shortfalls that accompanied the bet to end longstanding deflation. Investors have also demanded more specifics on how exactly Mr. Abe intended to encourage economic growth. The Nikkei 225-share index fell 3.8 percent Wednesday.

Mr. Abe sought to provide answers Wednesday. He said he would provide tax breaks to encourage foreign direct investment. He said he would remove cumbersome regulations, for example in the medical sector by removing a ban on sales of most pharmaceuticals on the Internet. And he pledged to combine Japan’s high-grade infrastructure and manufacturing prowess with the daring and creativity of a younger generation eager to seize the reins from the economic old guard.

“For 20 long years of deflation, Japan suffered a deep loss of confidence,” Mr. Abe said. “It is now time for Japan to become an engine of global economic growth.”

If Mr. Abe fails to deliver on his promises for bold change, the euphoria that drove Tokyo shares to a five-year high could evaporate further, economists warn. And without those fundamental overhauls, they say, Japan is at risk of sinking back into the economic torpor that has defined much of the past two decades.

Many economists and younger business leaders say that the crux of the overhauls lies in raising Japan’s economic metabolism by making it easier for new companies to to enter the market and for fading old ones — of which there are many in Japan — to exit. That would need to be paired with a more flexible labor market that would smooth the transfer of workers from ailing companies to promising new ones.

A 2010 study by the economists Kyoji Fukao and Hyeog Ug Kwon showed that Japanese companies set up after 1996 added the most jobs in the period to 2010, creating 1.2 million, compared with a net loss of 3.1 million jobs over the same period at all companies founded before 1996. Foreign companies added more than 150,000 net jobs to Japan, highlighting what is seen as the need for Japan to open up to more foreign direct investment, whose inflows came to less than 4 percent of economic output in 2001, compared to a fifth of the American economy and half of Britain’s.

That, economists say, would bring real change to a country famous for its world-class exporters like Toyota and Canon but also chock-full of laggards that are sheltered by regulations and kept alive by subsidies, sucking the lifeblood out of the Japanese economy. For Japan to make the productivity gains it needs to grow, economists say, these domestic companies must be opened up to more competition from both inside Japan and overseas. One catalyst for such change would be Japan’s participation in the Trans-Pacific Partnership free trade agreement, already announced by Mr. Abe.

Still, some of the fundamental overhauls needed for an economic renewal, like labor market changes, are conspicuously missing from Mr. Abe’s policy plans, as were vital details, said Akio Makabe, a professor in economics at Shinshu University in central Japan.

“At the start, there was hope that Mr. Abe was as committed to economic reforms as he has been with monetary policy and government spending,” Professor Makabe said. “But judging from this policy platform, that commitment appears to be wavering. Where is the labor market reform? Where is the real change? It seems he’s given in to the naysayers and listed up policies that just sound good.”

Article source: http://www.nytimes.com/2013/06/06/business/global/abe-describes-strategy-to-free-up-japans-economy.html?partner=rss&emc=rss