The second of Prime Minister Abe’s “arrows” was a monetary stimulus that demolished the yen. This earned him, and BOJ Governor Kuroda, some scorn from the sound money people. A more optimistic read is here, from Professor Koichi Hamada. Both sides agree that Japan’s ultimate salvation will be the third arrow, structural reform.
The first task should be to eliminate or, at least, reduce the thicket of government regulations that is stifling economic dynamism – Koichi Hamada
This parallels the debate we have had in the West. The plan was to use fiscal and monetary stimulus to buy time and ease the pain of structural reform. Here in America, with the privilege of issuing the world’s reserve currency, we seem to have dodged the bullet. Quantitative easing alone was sufficient to paper over our structural problems until growth resumed.
Europe will not be so lucky. There, reform is a must. Mario Draghi has been dragging his feet on quantitative easing, citing the moral hazard specifically. Politicians will not tackle reform when times are good, and they expect to be bailed out when times are bad.
We refer here to Japan’s structural trap, instead of the more fashionable “secular stagnation,” because it’s more precise and also because of Robert Dugger’s seminal paper on the topic. The other term, due to Larry Summers, admits no policy action – as if stagnation were inevitable. Specifically, reforms that have been proposed for Japan include:
- Reduce government regulation
- Open protected industries (farming) to free trade
- Reduce the corporate tax rate
- Overhaul labor protections
- Encourage more women to work
- Reform the electricity market
This may read like Ayn Rand’s wish list, but it really is Abe’s third arrow. See interview here, for example. Jeremiah has no doubt it will succeed – if it ever flies. The pundits will then forgive Abe’s preparatory measures. He would become the first politician ever to escape a structural trap (the second, if you count Gerhard Schröder). No one will care how many arrows he used.
See also: Governor Kuroda – Genius or Madman?