Can Japan’s reforms change the game?

Mt Fuji

Two economies are associated in investors’ minds with the need for reform. In Japan, Mr Abe is well entrenched with a big majority behind his “three arrows” reforms. Designed to accelerate Japanese growth, the third arrow offered substantial changes to the way Japanese society functions and the way Japanese companies work. In India, many in markets are cheering on Mr Modi, who also enjoys considerable political support for a big programme of change to modernise his country. So how are they getting on? Can they do enough to change the game? Today I will look at the situation in Japan.

Japan’s problem, as defined by the Prime Minister and some investors, has been slow or no growth in overall output and income, with an absence of inflation. An ageing population has avoided undue risks and has saved its money often in low return “safe” bonds. A declining population has kept demand down. Wages have been suppressed by the absence of much growth in demand and by the high levels of automation in Japanese factories. One quarter of the population is over 65.

Two of Mr Abe’s famous three arrows have been used extensively. He has loosened monetary policy with large quantitative easing programmes and negative interest rates. He has increased public spending and borrowed substantial sums to promote more activity. The third arrow was the most difficult, to reform Japanese society so it is friendlier to growth and enterprise.

He seeks much greater female participation in the workforce, to compensate for the decline in men of working age. He has succeeded in getting female participation up to 66% from lower levels, but much female employment remains part time and/or low paid. He wants more women to take on managerial positions and to build businesses. Large companies now need to have a plan for greater female involvement, and some family tax changes have been made to remove disincentives for women to work for more money.

He also relaxed restrictions on well qualified executives and academics coming into the country from abroad to work, but numbers remain small in Japan which does not attract many migrants. He does not wish to encourage a general migration to boost numbers.

He has lowered corporate taxes a bit and introduced a Corporate Governance Code to make Japan a better place for large global companies. He has started on deregulating and introducing competition to sectors that have been traditional and restricted before. In energy, he has introduced some retail competition in supply. In agriculture, he has loosened rules around agricultural co-operatives somewhat and has permitted corporate ownership of farmland in an effort to introduce new practises and competitive forces.

The Japanese economy, however, remains restricted by its own laws and traditions. Airbnb was unable to work until some limited deregulation allowed some access to the market. Uber is not planned for under the Japanese taxi rules. Various regulations make it difficult to introduce drones and some forms of artificial intelligence. The government is wrestling with the paradox that it sees robotics and artificial intelligence as a great growth area, drawing on some of Japan’s manufacturing and engineering strengths, but developing the Japanese market for these items needs more reform.

Japan is doing better than its critics allege, if you adjust the output and income figures for the declining population. It remains a rich country with some excellent export industries and large companies. Its reforms are helpful at the margin, but none of them yet are sufficient to make a major difference to the demographic imperative, which is keeping numbers down and inflation low. Meanwhile its share market is supported by official purchases of exchange-traded funds and by a weak yen helping larger exporting companies.


The above article by John Redwood, Charles Stanley’s chief global strategist, was first published by Charles Stanley on 12th May 2017.