Japan: Structural Reform "Lagging Element of Abenomics," IMF Says

3 August 2017

Japan, one of the world’s four largest traders and the third largest economy, will need to press harder with its structural reform efforts, said the International Monetary Fund (IMF) in an assessment published this week.

The economic assessment, known as an Article IV Consultation at the Fund, is part of the regular review required under IMF rules. This involves staff missions to the country involved, meetings with local officials and other stakeholders, and a report submitted for the agency’s Executive Board for review and comment.

“Abenomics has improved economic conditions and engendered structural reform, but key policy targets remain out of reach under current policies,” the report says, adding that “structural impediments” are also getting in the way of the Asian archipelago’s economic goals – particularly in ensuring continued growth and addressing deflation.

The Japanese economy is slated to see a 1.3 percent growth rate this year, building on a solid performance last year, according to the international financial institution.

“Structural reforms have advanced in energy and agriculture, trade and investment promotion, and corporate governance,” the report adds.

However, it also features a series of recommendations that it says Tokyo should pursue to address labour market problems, sub-par inflation, and “bottlenecks” that are hindering both investment and consumption at home.

“Abenomics” was launched by Japanese Prime Minister Shinzo Abe, who returned to the post in late 2012, having earlier served in the role from 2006-2007. The scheme’s three “arrows” of fiscal stimulus, monetary easing, and structural reforms were meant to target a difficult history with deflation, among other economic concerns.

The pace of these structural reforms and the overall progress of Abenomics also came to the fore during a biennial WTO review of Japanese trade policies and macroeconomic conditions earlier this year in Geneva, Switzerland. (See Bridges Weekly, 16 March 2017)

TPP-11, EU-Japan deal

The report on Japan focuses on an array of policy topics, emphasising more structural reforms and acknowledging the initiatives already undertaken. Among other recommendations, the staff report submitted to the Executive Board said that advancing with key trade deals could be one of several ways to facilitate needed policy changes in other areas.

“New trade agreements, including with the remaining eleven Trans-Pacific Partnership (TPP) countries and the EU, could encourage restructuring in the services and agriculture sectors,” the report says.

Those deals refer to the comprehensive Pacific Rim trade deal signed originally by 12 countries last year, and which is now looking for ways to move forward in the wake of the US’ withdrawal, as well as a political agreement on a future trade deal with the European Union. (See Bridges Weekly, 20 July 2017 and 6 July 2017)

While the TPP text has been completed, whether its 11 remaining members will stick to the same substantive commitments or revise the deal remains unclear. Japan’s legislature has ratified the current version of the accord, and is among those pushing for keeping the deal largely intact. (See Bridges Weekly, 15 December 2016)

Meanwhile, the EU and Japan will still need to hammer out some of the thornier issues in their trade talks to move from their current political agreement to a finalised free trade accord.

Overall, the staff appraisal part of the IMF document notes, among other recommendations, that “a more determined structural reform effort is needed,” and within that flags trade and foreign direct investment as two areas that could continue playing a role in supporting Japan’s economic growth.

Labour market reforms

Aside from its comments on trade, the structural reforms section focuses on Japan’s labour market, which is grappling with an aging population and “subdued” growth in wages, among other challenges that experts say could eventually prove damaging to the country’s economic prospects.

The report suggests that, given the “favourable economic environment,” now would be an opportune time to advance on such policy changes.

Among its recommendations involve taking further action to facilitate women’s economic empowerment, given that men in the workforce still greatly outnumber women.

“Looking at population dynamics and the projected steady decline in the labour force, Japan will need to make labour more efficient and more inclusive — by, for example, bringing more women into the work force in regular (full-time) positions and on an equal pay for an equal work basis,” said Todd Schneider, the IMF official tasked with leading the review.

The report also warns that wages are struggling to improve due to factors such as poor ability to transfer between jobs, among other factors.

“Structural reforms should aim to boost labour market flexibility, investment, and labour supply,” the IMF report says. It also calls for doing more to facilitate the employment of older workers and foreign nationals.

2018 elections forthcoming

Japan is preparing to host its next general election in December 2018 – a date which, while over a year away, has already prompted speculation over whether the ruling party will be able to remain in power and what this means for Abe’s eponymous policy, both before and after the election.

For example, analysts warn that the challenging domestic climate could mean that the Japanese leader refocuses his work away from the economy in the coming months, despite pledges from Abe that he will continue his efforts in this area.

“The economy has been the administration’s top priority and it’s our job to create employment and raise wages,” he told Japanese parliamentarians last week, according to comments reported by Bloomberg.

The Japanese leader is from the Liberal Democratic Party, and is currently facing domestic political pressures on various fronts, which have had implications for his poll ratings. An election within Tokyo this year already showed the party losing various seats, with analysts warning that the city election could be an early signal of how next year’s national-level polls may go.

ICTSD reporting; “Wages Shape Up as Key to Abenomics and the Future of Abe Himself,” BLOOMBERG, 24 July 2017; “The world’s third-largest economy may be derailed by a rising political crisis,” CNBC, 31 July 2017; “Japan PM’s party suffers historic defeat in Tokyo poll, popular governor wins big,” REUTERS, 2 July 2017; “Japan needs Abenomics, with or without the man,” FINANCIAL TIMES, 12 July 2017; “Abe Denies Cronyism Allegations as Support Continues to Fall,” BLOOMBERG, 24 July 2017.

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