By Fareed Zakaria
The G-8 summit was meant to be Japanese Prime Minister Shinzo Abe's moment. Under his leadership, the land of the rising sun seemed ready to rise again, ready to breakout after twenty years of stagnation. The stock market rose nearly 40 percent in his first five months in office, businesses in Japan were talking about expansion for the first time in decades, and Tokyo's property market, long moribund, was stirring to life.
It is all part of Abe's bold break with the failed policies of the past. Past Japanese politicians had danced around the country's problems. Now here was someone to take them on. But a funny thing happened on the way to the coronation. Japan's stock market began falling sharply, businesses pulled back and serious observers wondered if this was one more false start in Tokyo.
So, what's going on?
In launching his term in office, Abe had announced that he would fire three arrows to revive the Japanese economy. The first was a more expansionist monetary policy – buying tens of billions of dollars of Japanese bonds each month, to try to move from inflation to inflation...taking a cue from policies of the U.S. Federal Reserve under Ben Bernanke. The second arrow was fiscal expansion – a $116 billion stimulus plan.
These two arrows were designed to shock the economy out of its stasis...and businesses and investors cheered. Then came the announcement of the third arrow – and it turned out to be a rubber dart.
The government announced a series of tiny reforms and some attempts by government to boost certain industries. What was missing is what Japan desperately needs, namely real reforms that open up the economy and make it more friendly for business. Monetary and fiscal stimulus, you see, are great – but the path to sustained growth is to get the economy to be more competitive and more productive.
For instance, The Economist magazine points out that unless a Japanese company is actually going out of business, it cannot fire any of its workers. Japanese economists have long argued that this makes firms highly unwilling to hire new workers or to raise anyone's wages.
The World Economic Forum's Global Competitiveness Index measures 144 countries on their flexibility of hiring and firing – Japan comes in at a staggering 134! Japan has many storied corporations, but it needs reforms to make it easier to start new businesses. Among 31 high-income countries, Japan ranks 26th in the ease of starting a business in the World Bank's Doing Business report.
Japan also needs to open up its many protected industries to competition, which will create new energy and growth in these sectors. Japanese agriculture, for example, gets massive subsidies, by some measure three times those in the European Union and six times those in the United States.
Reforms are hard to do in democratic countries, as we’ve seen from Greece to Italy. But there’s still hope. The Economist reports that insiders in Abe's party, the Liberal Democratic Party, say that they have been cautious because Japan faces an impending election for its upper house of parliament. Once that’s done – and the signs are the LDP will do well – the prime minister will announce a new raft of reforms.
Shinzo Abe has the opportunity to go down as his country's Margaret Thatcher, a leader who administered tough medicine to the country and revived its economy and its spirits.
But to succeed at that task, he has to load up a powerful third arrow in his bow, aim carefully, and fire.