JAPAN HAS been in a state of economic stagnation for much of the past two decades. The United States would benefit if this important ally could reverse that trend, aiding not only Japan’s own well-being and national security but also the balance of power in Northeast Asia.
The good news is that there is broad consensus about what ails Japan, and a new prime minister, Shinzo Abe, has come into office determined to act. Mr. Abe has fired the first two “arrows” in his “three-arrow” policy, aiming them at fiscal and monetary policy with the goal of ending Japan’s chronic deflation. His government is spending heavily on infrastructure, and the Bank of Japan has embarked on a massive asset-buying program.
Aggressive as these policies are, enacting them was relatively simple, politically, relative to tackling the third source of Japan’s woes: a vast web of regulations, subsidies and trade barriers whose net effect has been to support inefficient sectors, and the voters who live off them, at the expense of growth and innovation. Japanese productivity has remained essentially flat for the past two decades, a dangerous state of affairs in a country with a shrinking labor force and a growing dependent elderly population.
The politically powerful agriculture sector illustrates how self-defeating Japanese policy can be. Economists Takeo Hoshi, now at Stanford University, and Anil K. Kashyap of the University of Chicago have calculated that Japan’s farms got $53 billion in subsidies in 2010, an amount equal to the total value they added to the economy. In other words, farming made zero net contribution to Japan’s national income.
So markets were justifiably disappointed when Mr. Abe outlined Wednesday an underwhelming approach to these structural issues — his “third arrow.” He failed to tackle agriculture, offer a convincing approach to burdensome labor-market rules or provide enough details to show whether his ideas are new or just a repackaging of proposals tried before, such as “special zones” where companies can operate under looser regulations.
Political realism should mitigate some of the disappointment. A parliamentary election July 11 could decide whether Mr. Abe adds a governing majority in the upper house of parliament to his lower-house majority, which would greatly enhance his freedom of action. Under the circumstances, he needed to offer enough detail to maintain momentum and, potentially, gain a mandate but not so much that he frightened voters attached to the old system.
It’s worth remembering that Mr. Abe is still pursuing freer trade, in the form of the Trans-Pacific Partnership (TPP) agreement with the United States and other nations. The TPP could help Japan reform as much as, or more than, many measures it might take domestically, but it also threatens protected industries — and Mr. Abe must preserve political capital to make that deal.
Mr. Abe’s arrow fell short this week, but he could still make good on his promises of restored prosperity through reform. Whatever capital he gains in the elections would be best spent in pursuit of that objective, without which none of his other ambitious plans, including those for a more robust foreign and defense policy, can succeed.
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