Shinzo Abe’s Third Arrow

By Ichiro Suzuki Shinzo Abe came back to power at the end of 2012, after a 5 year hiatus that followed an unsuccessful 12 months stint as Prime Minister of Japan in 2006-07. On his return, his mandate was revitalization of the Japanese economy that had been long mired in a series of recessions and mild deflation for almost a generation. The policy mix, dubbed as Abenomics, consisted of the ‘three arrows’. The first arrow was an aggressive monetary policy. Since the Global Financial Crisis of 2008-09, the Bank of Japan (BOJ) had been criticized intensely for its reluctance to be engaged in a more aggressive monetary policy. The BOJ’s stubbornness stood out especially at a time when Fed chairman Ben Bernanke was pursuing an unconventional policy of quantitative easing (QE) after the Fed Funds rate had exhausted a room for further cuts. Three months after Abe’s return as Prime Minister, his term as BOJ governor had run out for Masaaki Shirakawa who had resisted a pressure to ease money. As soon as Haruohiko Kuroda had arrived, the new governor had embarked on a policy of aggressively buying up Japanese government bonds to inject liquidity into the financial market. Later, the BOJ’s operation was extended into buying ETFs of the Japanese stock market. In anticipation of what would arrive, the foreign exchange market had broken a spell of an intense upward pressure on the yen in November 2012, a month ahead of the election that brought Abe back to power. A dramatic fall of the yen had materially loosened monetary conditions. The second arrow was large scale fiscal stimulus on the Japanese economy that was devastated by a mega earthquake in Northern Japan in March 2011. The Liberal Democratic Party called for a need to solidify the country’s infrastructure to protect people’s life from future disasters, on top of reconstruction efforts that were already in progress. New construction projects were financed by issuing construction bonds that were technically recognized outside of general obligations of the government. The BOJ bought up those construction bonds, too, so as not to disrupt the financial markets. This fiscal policy also contributed to lifting the economy out of doldrums. Then there was the third arrow. It was about deregulation. The Japanese economy has long been known for operating under a heavily restrictive environment. Rewriting some laws could relieve the private sector from rigid rules that weighed heavily on growth, so said Abe. While it is very true, getting rid of stifling regulations is a great deal easier said than done. In fact, deregulation is an economic policy that came into vogue way back in the early 1980s among policy makers in the West, with the rises of Margaret Thatcher and Ronald Reagan. Back then, it was already talked about in Japan as well, and then Prime Minister Yasuhiro Nakasone delivered some. i.e. privatizing government-owned businesses such as telecom and railroads and taking these companies to the stock market. Well done, but it was still an easy part. Much harder deregulation can be done only with a fair amount of pains, since it creates a number of losers and a few winners. It requires a great deal of political capital to deliver serious deregulation.  Probably deregulation had better be done at the time of high economic growth in order to alleviate pains among those who lose in a change. Growth rates in the developed world was a considerably higher in the 1980s than it is today. The U.S. economy’s trend growth was the north of 3% and Japan grew 4% or higher those days. Worse, in thIs final full year of Abe’s prime ministership, the global economy is going through the deepest downturn since the 1930s.  Amid the coronavirus-induced crisis, a voice for greater government intervention has grown considerably, either for tighter regulations or handing out stimulus checks to voters. Long before the pandemic, the global financial crisis has made the world reawaken to the necessity for tighter regulations in the financial industry. The current U.S. administration seems the last hurrah of deregulation and tax cuts zealots that had ruled the governments around the world and the financial markets the last 40 years. With Donald Trump’s likely failure in his re-election bid, the world might shift the gear to the direction of re-regulation. This does not bode well for Abe’s Third Arrow. Deregulation is not easy to deliver even in good times, let alone amid an low growth environment and a shifting global tide away from light touch regulations. This is not a climate to call for lighter regulation, even if it had better be done in theory. About the author: Mr. Suzuki is a retired banking executive based in Tokyo, Japan

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