In February, Japanese Prime Minister Shinzo Abe visited Washington, where he met with US President Barack Obama and other politicians. Abe, who previously served as prime minister in 2006, told his US audience: “Abe is back” and “Japan is back.”
While a lot of people are wondering how Japan’s economy is going to make a comeback after more than 20 “lost years,” many are also worried that Japanese militarism may be coming back to life. However, still more attention is being paid to the monetary, fiscal and growth policies that Abe calls his “three arrows.” How is Abe going to shoot these arrows? Why does he need three and why is he shooting them one at a time, instead of all at once?
In January, Abe announced a series of urgent economic measures designed to bring about a “Japanese New Deal.” These measures are centered on three core policies, the first being one of expanded fiscal stimulus, with more than ￥20 trillion (US$205 billion) budgeted for public sector projects to maintain economic stability in the short term.
The second is to boldly apply relaxed monetary policies to hold down long-term interest rates with the aim of raising Japan’s inflation rate to 2 percent, and also use such policies to keep the yen’s exchange rate down to promote investment and exports.
The third is to draw up a grand strategy for promoting economic growth, which involves reviving the Japanese industry by boosting investment in sectors related to technology and employment. These are the core policies that have come to be known as the “three arrows” of “Abenomics.”
What difference has Abe’s New Deal made to Japan’s economy so far? Abe shot off two of his arrows in the course of his first 100 days in office. The Nikkei 225 Stock Average responded by climbing past 14,000 points, while the value of the yen fell beyond the psychologically important mark of ￥100 per US dollar.
As well as stimulating consumption and helping increase exports, these policies prompted some employers to raise wages in April. After a 20-year wait, the Japanese economy may now be seeing the light of day and opinion surveys are showing Abe’s approval ratings at as high as 75 percent. This is the atmosphere in which Abe’s third arrow was launched on Wednesday last week.
After two lost decades, it is hard to convince people that Abe’s New Deal will have much effect. Furthermore, people may be afraid of the radical nature of Abenomics. Most observers agree that the Bank of Japan’s super-relaxed monetary policy is only a short-term measure and people should not expect too much of it.
However, if this policy is combined with a strategy of structural reforms designed to promote economic growth, Abenomics could turn out to be more than just radical measures. Also, Japan and the US recently reached an agreement on Japan joining negotiations for the Trans-Pacific Partnership free-trade agreement, lighting a fuse that will spark economic growth.
Abe has also reinstated Japan’s Regulatory Reform Council, which was scrapped by the previous Democratic Party of Japan administration, and relaxed regulations governing employment, the energy sector, the environment, healthcare and other areas, while offering tax incentives in a bid to create a business-friendly environment.
The Japanese New Deal is not the same as the original New Deal promoted by former US president Franklin Roosevelt in response to the Great Depression in the 1930s. Whereas Roosevelt employed Keynesian expansionary monetary policies to attain employment security, the policy strategies of Abenomics are formulated to include structural complements that cover three aspects: fiscal, monetary and industrial policy.
All three arrows of Abenomics have now been fired and only by flying together will they hit their targets. Building a more business-friendly environment is a key theme of Abenomics. If businesses fail to innovate and grow, it will be impossible to stimulate the economy and the Japanese New Deal will lose its sustaining motive force.
With fresh economic policies cooking on a high flame, it looks as though Japan’s economy is starting to heat up. By contrast, the 13 measures proposed by the Cabinet to rejuvenate the Taiwanese economy at the end of last month, which involve investing NT$3.24 billion (US$109 million) over five years, are widely viewed as a “cold dish.”
In the face of waning national competitiveness and a weakening capacity for innovation, Taiwan’s financial and economic officials need to, as Nobel Prize-winning economist Daniel Kahneman put it, be “thinking, fast and slow” about how to promote a policy package that is both visionary and effective, rather than employing start-stop piecemeal policies whose effects cancel each other out.
Only by achieving this will the nation’s business sector and the public be able to stop worrying about the deteriorating situation and only then will Taiwan have a chance of progressing from having a miserable economy to an upbeat, strong one.
Leonard Wang is a professor in the Department of Applied Economics at the National University of Kaohsiung.
Translated by Julian Clegg