Analysis: History casts doubt on bold Japan economic reform

If past is precedent, optimists hoping Japanese Prime Minister Shinzo Abe will defy vested interests to take bold action to open the country to more competition as a way to spur growth could well be in for disappointment.

Japan's list of reports urging reforms date back almost three decades and have rarely led to the bold action that critics say is needed to dig the economy out of stagnation.

Abe, who got a rare second chance at Japan's top job after his Liberal Democratic Party's (LDP) election win in December, has made structural reforms, such as deregulation, the "third arrow" of his "Abenomics" plan to revive the economy.

But skepticism runs deep that he can be as successful with economic reform, which experts say will be the acid test after his first two "arrows" of fiscal spending and hyper-easy monetary policy, a combination that spurred a stock market rally and bolstered Abe's popularity ratings.

"People somehow think that Japan can get by so it's not really necessary to take painful steps," said Junji Annen, a professor at Chuo University who has sat on several past deregulation committees and is now a member of Abe's new panel.

"We've been saying for a quarter century that action must be taken. I don't think this time will be all that different," he said, adding the government would face opposition to reforms and might well end up taking incremental rather than drastic steps.

"I worry that if the economy gets a bit better, they will ease up on reform," Annen said.

Proposals by a panel on industrial competitiveness and another on regulatory reform will be key to a growth strategy that Abe will unveil in June, ahead of a July upper house election that his ruling bloc needs to win to cement its grip on power.

Abe's advisers, however, are split over how extensive a role government should play in economic affairs. Some are keen to see public funds invested in key sectors, while others want to loosen the government's tight grip that critics say stifles innovation and new businesses.

Among the topics under discussion are loosening employment rules to make it easier to shed workers, deregulating medical and child care sectors, promoting use of the Internet, reforming corporate governance and overhauling electric power utilities.

REFORM REFRAIN

The list of reports urging reforms date back at least as far as the landmark "Maekawa Report" in 1986, when former central bank chief Haruo Maekawa and other advisers urged policymakers shift from export-led growth, to open markets and to make regulations the exception rather than the rule.

Within months of the report's issuance, foreign diplomats were complaining that Prime Minister Yasuhiro Nakasone had reneged on promises of change.

Taking up the reform refrain, a blue ribbon panel headed by business lobby Keidanren chief Gaishi Hiraiwa in December 1993 again urged the government to cut the red tape that was stifling growth. Four months after taking that advice on board, Morihiro Hosokawa had quit as prime minister, toppled by talk of a scandal and cracks in his unwieldy reformist coalition.

Much of Japan's past two "lost decades" of meager growth - including five years under an ostensibly pro-reform premier, Junichiro Koizumi - were also marked by promises to deregulate the economy. Many were kept, but many were not.

"The same issues have come up again and again," said Yoshihiko Miyauchi, the chairman of financial services firm Orix Corp, who served on a deregulation panel under Koizumi from 2001 to 2006.

"It's simple - everything we need to do and how to do it can be written up in a day. After that, it's a question of whether it gets done or not," Miyauchi told Reuters in an interview.

To be sure, few would argue that no progress has been made. Former economics minister Hiroko Ota, a member of Abe's deregulation panel, says deregulation has proceeded.

"It is a very slow process but it has proceeded," she said, citing a freeing up of financial services and the telecommunications sector as two key examples.

Still, Japan's World Bank ranking for ease of doing business slipped in 2013 to 24th place from 20th the year before, mainly because other economies implemented more aggressive changes.

Singapore ranked first, followed by Hong Kong, while the United States came in fourth and South Korea eighth. China moved up to 91st from 151st.

"PRO-ZOMBIES, ANTI-ZOMBIES"

The split between advisers casts doubt on just how drastic any loosening of bureaucratic controls will be.

"We don't have explicit confrontations and we don't yell at each other in meetings, but I am sure that there are different philosophies about how, and how much, the government should be involved in creating the strategy and reforming particular industries," Hiroshi Mikitani, CEO of e-commerce operator Rakuten and a member of the industrial competitiveness council, told Reuters.

Some panel members, such as Takeshi Niinami, CEO of chain store operator Lawson Inc, played down that gap, saying it reflected different perspectives based on companies' core businesses. Some, like Rakuten, want the government to step aside and allow innovation now; others in fields where investments may not pay off for decades want official backing.

Others, however, expressed concern that Abe's LDP would stick to its roots as a "big government" party especially if, as many now expect, it wins big in the July election. "The LDP is not a 'leave us alone' party," Chuo University's Annen said.

"It's in favor of a controlled economy."

Former U.S. trade official Byron Sigel, who negotiated bilateral trade deals with Japan in the late 1990s, echoed those doubts given the persistent clout of anti-reform interests.

"The problem with the way the reform process has been set up is that there is an over representation of entrenched older industries who have the size, connections and motivation to maintain the existing system," said Sigel, who now works for a global U.S.-based device and pharmaceutical firm.

"The industries of the future, the industries that need a more open deregulated economy to grow and the industries that will restore Japan's global competitiveness, are still relatively small players, if they exist at all today. Their voice is unlikely to be heard in the reform debate."

Still, Abe moved more quickly than expected to commit Japan to talks on a U.S.-led trade pact, the Trans-Pacific Partnership, raising hopes history might not repeat itself.

The TPP decision, which has helped keep Abe's popularity rates at sky-high levels of around 70 percent, was followed on Monday by an agreement with the European Union to start talks on a separate free trade deal that would further boost pressure on protected sectors.

"There is a split between 'pro-zombie' and 'anti-zombie factions, between one set of politicians, bureaucrats, and businesses who want to preserve the current system of vested interests, and different set of politicians, bureaucrats, and businesses who want more open competition," said Robert Feldman, chief economist at Morgan Stanley MUFG Securities in Tokyo.

"I think the anti-zombie faction will win this time because the standard of living has been deteriorating and I think the public has caught on to this."

(Editing by Neil Fullick)