Prime Minister Shinzo Abe, who entered office at the end of 2012, has made reviving the economy a top priority. His plan for doing so, known as “Abenomics,” included fiscal and monetary stimulus combined with a promise of big structural reforms that would draw more women into the work force and get corporations to spend more on higher wages and new investments. His policies produced impressive results early on but have lost much of their oomph in recent months — partly because the government raised tax rates prematurely and partly because the promised structural reforms have not gone far enough.
Fixes for Japan’s Economy
by the Editorial Board, New York Times
http://www.nytimes.com/2014/09/11/opinion/fixes-for-japans-economy.html
The news that the Japanese economy had shrunk by 7.1 percent in the second quarter this year from the previous three-month period suggests that the country’s hard-earned recovery is in danger of stalling unless the government changes its flawed policies.
Prime Minister Shinzo Abe, who entered office at the end of 2012, has made reviving the economy a top priority. His plan for doing so, known as “Abenomics,” included fiscal and monetary stimulus combined with a promise of big structural reforms that would draw more women into the work force and get corporations to spend more on higher wages and new investments. His policies produced impressive results early on but have lost much of their oomph in recent months — partly because the government raised tax rates prematurely and partly because the promised structural reforms have not gone far enough.
In April, the government raised the sales tax from 5 percent to 8 percent. The move was meant to signal to investors that Mr. Abe is serious about reducing the country’s large debt. But it also caused a sharp drop in consumer spending, which was no good for a fragile economy. Japan has to reduce its debt, but the tax should have been phased in gradually to avoid jolting consumers. The government should postpone a second planned increase of the tax rate, to 10 percent, scheduled for next year.
Instead of raising taxes, Mr. Abe and the government need to press forward with structural reforms and changes to longstanding practices that have stifled the economy. One important change would be to require Japanese corporations to include more independent directors on their boards. This would encourage fresh thinking, more risk-taking and more aggressive investments.
A recent paper by two International Monetary Fund economists found that Japanese companies had far fewer independent directors than companies elsewhere — 9 percent for the companies listed on the Tokyo Stock Exchange in 2013 compared with 70 percent in the United States and more than 50 percent in Britain. A lack of independent directors reinforces conservative attitudes toward investing found in many Japanese boardrooms, as well as the accumulation of cash that is substantially larger than that in businesses in other Group of 7 countries.
Another way to help the economy would be to get more women into the work force and into higher-paying jobs, creating a new source of consumer spending. An I.M.F. economist estimated that raising the participation of women in the labor force from 62 percent to the 70 percent level that exists in other large developed economies would raise per capita gross domestic product by 5 percent. The government has tried to encourage more women to seek employment by making it easier to find child care, but it could do a lot more. It needs to push businesses to hire more women, and it should enforce anti-discrimination laws more strictly.
Mr. Abe promised to jolt Japan’s moribund economy. He now needs to inject some energy into his own policies.