Japan PM Slow to Tackle Crucial Reforms

The Nikkei Stock Average has regained 20,000 points and Japan’s jobs-to-applicants ratio is improving, yet Prime Minister Shinzo Abe’s reluctance to tackle reforms needed for the country’s growth raises questions about the leader’s commitment to his signature economic policy.

“In order for Japan’s economy to achieve more than a recovery and continue stable, long-term growth after that, it is essential to strengthen Japan’s growth potential,” proclaimed a key economic and fiscal policy plan finalized in June 2013, about six months after Abe took office as prime minister for a second time, Nikkei reported.

The three “arrows” of Abenomics—aggressive monetary policy, flexible fiscal policy and a growth strategy that promotes investment—grabbed the market’s attention and drew investors to Japan.

That was four years ago, and the government approved the fifth iteration of the plan Friday. But the country’s potential growth rate now stands at 0.69%, according to the Bank of Japan, compared with 0.84% in the second half of fiscal 2014—a sobering take on what Abenomics has actually accomplished.

The government and the central bank have focused on the first two arrows. The BoJ’s total assets have topped 500 trillion yen ($4.53 trillion), while long-term interest rates remain around zero. In terms of fiscal policy, Japan has passed seven supplementary budgets in just five years, spending about 25 trillion yen in the process.

“Extreme fiscal spending and other measures have led to a distorted allocation of resources in the economy and reduced productivity,” said Ryutaro Kono, chief Japan economist at BNP Paribas. Monetary and fiscal tools were only supposed to serve as a Band-Aid until growth ignited. But by relying too heavily on them, Japan neglected to lay out an effective growth strategy.

The Nikkei asked 10 economists to rate aspects of Japan’s economy. The tourism sector, which served over 24 million foreigners last year, ranked the highest at an average of 4.6 out of 5. Corporate tax reform followed at 3.3, thanks to a decrease of more than 7 points in the effective rate.

But while tax cuts helped boost businesses, many are merely hoarding their cash. Total internal reserves held by Japanese corporations have grown some 40% under Abe to 390 trillion yen. No solutions are in sight.

Amid a growing labor shortage, workplace reform received a disappointing 2.6. Economists rated social welfare reform a measly 2.2, followed by fiscal consolidation at 2.1.