The real challenge will be in designing the third arrow, what Abe refers to as “growth.” This includes policies aimed at restructuring the economy, improving productivity and increasing labor-force participation, especially by women.
Some talk about “deregulation” — a word that has rightly fallen into disrepute following the global financial crisis. In fact, it would be a mistake for Japan to roll back its environmental regulations, or its health and safety regulations.
What is needed is the right regulation. In some areas, more active government involvement will be needed to ensure more effective competition.
However, many areas in which reform is needed, such as hiring practices, require change in private-sector conventions, not government regulations.
Abe can only set the tone, not dictate outcomes. For example, he has asked firms to increase their workers’ wages, and many firms were planning to provide a larger bonus than usual at the end of the fiscal year last month.
Government efforts to increase productivity in the service sector probably will be particularly important.
For example, Japan is in a good position to exploit synergies between an improved healthcare sector and its world-class manufacturing capabilities, in the development of medical instrumentation.
Family policies, together with changes in corporate labor practices, can reinforce changing mores, leading to greater (and more effective) female labor-force participation.
While Japanese students rank high in international comparisons, a widespread lack of command of English, the lingua franca of international commerce and science, puts Japan at a disadvantage in the global marketplace. Further investments in research and education are likely to pay high dividends.
There is every reason to believe that Japan’s strategy for rejuvenating its economy will succeed: The country benefits from strong institutions, has a well-educated labor force with superb technical skills and design sensibilities, and is located in the world’s most (only?) dynamic region.
It suffers from less inequality than many advanced industrial countries (though more than Canada and the northern European countries), and it has had a longer-standing commitment to environment preservation.
If the comprehensive agenda that Abe has laid out is executed well, today’s growing confidence will be vindicated. Indeed, Japan could become one of the few rays of light in an otherwise gloomy advanced-country landscape.
Joseph Stiglitz, a Nobel laureate in economics, is University Professor at Columbia University.
Copyright: Project Syndicate