Japan PM's "Third Arrow" reforms seen short of overhaul


Anyone expecting a broad overhaul of Japan's economy that would remove barriers to competition will likely be disappointed when Prime Minister Shinzo Abe launches his "Third Arrow" policy next month, but those with more modest expectations may be pleased.

Abe has promised to make structural reform and deregulation a key part of his growth strategy, the third tranche of his "Abenomics" prescription after hyper-easy monetary policy and big spending.

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The monetary and fiscal stimulus has already sparked Japan's fastest economic growth in a year in the first quarter, but corporate investment has yet to follow suit.

"The 'Third Arrow' was never going to be a magic bullet because deregulation means changing behaviour and moving from vested interests to new entrant investment," said Jesper Koll, head of Japanese equities research at JP Morgan in Tokyo.

"But they are pushing ahead. There is a growth strategy. The radical stuff is out and it was never going to be there, because you are in a country that is obsessed with creating a Japanese-style capitalism rather than market fundamentalist, Anglo-American-style capitalism. It's still Japan."

Some fresh details of the strategy could be revealed on Friday, when Abe is set to speak to business executives and academics. He unveiled some plans last month, including steps to make it easier for women to work.

Proposals by a panel on industrial competitiveness and another on regulatory reform are likely to form the bulk of the growth strategy. Abe, who took office in December after his Liberal Democratic Party's (LDP) election win, says he wants to announce the policy ahead of a June 17-18 Group of Eight summit in Northern Ireland.

Among proposals that are seen as positive are plans to deregulate the energy sector by breaking up utilities' grip on the generation, transmission and distribution of electricity; setting up a U.S.-style National Institute of Health to consolidate and prioritise medical science investment, and Abe's decision in March to enter talks on a U.S.-led free trade pact.

"Right now, I'd give them a 'B' for where they are and it could end up anywhere from an 'A' to a 'D' depending on how they follow through," said Byron Sigel, a former U.S. trade official who negotiated trade deals with Japan in the 1990s.

"It's all in the implementation, and how much political capital people are willing to spend to make tough structural adjustments - and they will be difficult."


Japan has a long history of crafting economic reform packages full of bold prescriptions and good intentions, many of which have ended up as empty promises. This time Tokyo is under international pressure to follow its hyper-easy monetary policy, which has so far escaped criticism despite the yen's dive, with reforms to ensure sustainable growth.

Those longing for sweeping changes, however, look set to be disappointed by decisions to put off politically painful measures, at least until after a July upper house election that Abe's LDP needs to win handily to ensure that policy proposals are quickly followed by legislation.

"They are not touching the vital points, such as medical care and agriculture," said Junji Annen, a Chuo University professor who sits on the deregulation panel. "Utilities' reform is coming out better than expected, but that is a sign of the times," he said, noting that the clout of the politically powerful utilities had been weakened by the Fukushima nuclear disaster.

The package is expected to contain a target of doubling Japan's miniscule agriculture exports to 1 trillion yen ($9.76 billion), a target Abe may mention when he speaks on Friday.

But it is likely to put off steps to ease barriers to corporate investment in farming in a nod to a heavily protected farm lobby, already upset by Abe's decision to join talks on the U.S.-led Transpacific Trade Partnership pact.

"It is true there are certain sensitivities because of the upper house election," Takeshi Niinami, CEO of convenience store chain Lawson Inc and a member of the competitiveness panel, told reporters this week. "Agriculture is one such issue."

Others areas where the package is likely to come up short are steps to free up Japan's rigid labour market to make it easier for firms to shift to growth industries from depressed sectors, improvements in corporate governance and addressing the question of immigration to make up for Japan's shrinking population.

Niinami, for one, held out hope that touchy topics would be taken up after the July election, but Chuo University's Annen took a more pessimistic view. "They won't drop these topics altogether but the question is will they continue (debate) vigorously, or reluctantly?" he said.

"It is entirely possible that the LDP wins the election by a landslide and just goes back to its old ways of catering to vested interests."