Japan's last chance for reform
The prime minister's electoral win means there is no longer any excuse to delay structural reform.

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Article Highlights

  • Abe's victory in upper house elections may represent the most crucial moment for the Japanese economy in a generation.

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  • If Mr. Abe loses his nerve now, any hope of serious change in Japan may be lost.

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  • Shinzo Abe's electoral win means there is no longer any excuse to delay structural reform.

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Shinzo Abe's victory on Sunday in upper house elections may represent the most crucial moment for the Japanese economy in a generation. Mr. Abe's Liberal Democratic Party and its allies have secured majorities in both houses of parliament, and there is no longer any excuse for the prime minister to delay the significant structural reforms needed to revitalize the country. If Mr. Abe loses his nerve now, any hope of serious change may be lost.

 

The prime minister's electoral win means there is no longer any excuse to delay structural reform.

Mr. Abe's victory can be chalked up to a laser focus on Japan's economy, after the failed policies of the Democratic Party of Japan. Taking a page from popular former premier Junichiro Koizumi, Mr. Abe launched his second stint as prime minister by pledging dramatic fiscal and financial changes. Known as Abenomics, these included calls to increase government spending and double the size of Japan's money base. To the delight of Japan's cynical voters, Mr. Abe immediately carried out these promises, resulting in a jump in Japan's exports and 4% gross domestic product growth last quarter.

In addition, Mr. Abe finally committed Japan to joining the Trans-Pacific Partnership despite ongoing opposition from special interest groups. Mr. Abe's firm position has allayed the concerns of many Japan watchers that Tokyo would fail to join the only significant Asia free trade agreement in the works.

For all the headlines that Abenomics has garnered thus far, remember that fiscal and financial liberalization were only two arrows in Abe's policy quiver. The third and final arrow, meaningful structural reform, is the most important—but also the least defined. Now that elections are over, Mr. Abe and his advisers will have to convince Japan's businesses, markets and citizens that they have committed to a solid and specific plan.

Mr. Abe's advisors say that their goal is to increase annual growth to 2%, boost per capita income and challenge businesses to become more profitable. Yet they have offered few details as to the regulatory reforms they favor. Much attention has been paid to plans to gradually increase Japan's consumption tax from the current 5% to perhaps 10%, but a single tax increase does not constitute a structural reform plan.

If Mr. Abe truly wants to start revitalizing Japan, he can start by liberalizing the pharmaceutical and medical devices sector. Doing so would make abundant political sense in the world's most aging society. Reducing the time to market of new drugs and devices would increase competition and encourage further innovation.

From there Mr. Abe could broaden his focus to include other moribund parts of the economy. Japan's telecommunications sector is in dire need of competition, for instance. And there has been decades of debate over how to open the agricultural sector, as well as make Japan's labor market more flexible.

Mr. Abe should make it plain that a lack of structural reform has caused Japanese competitiveness to drop precipitously. Chinese and South Korean firms HAVE eaten into Japan's electronics and automobile export markets. Japanese corporations have responded by resisting foreign direct investment and sabotaging corporate governance reform. A few years ago, for instance, the cosmopolitan former head of one of Japan's largest trading companies told me that he doubted whether foreigners could fit into the upper levels of Japan's corporate management. That is the kind of close-minded talk one might have expected to hear in the 1980s, not after two decades of economic stagnation.

All of this adds up to a huge challenge. The threat to Japan's future is not solely economic in nature, but also political and cultural. Long-ingrained attitudes have to change. Entrepreneurship has to be encouraged and risk-taking applauded. Japan's corporate sector may congratulate itself on securing key roles in new global supply chains, but that has not helped free up Japan's sclerotic retail market or boosted a decade-long stall in income growth. If Japan wants to surmount its grim demographic outlook, it must invest more in cutting-edge education, technology and research.

Foreign observers have spent much of Mr. Abe's young term complaining about his supposed nationalist aggression in foreign affairs. They should be more worried that he is not aggressive enough in reviving economic confidence and tackling shibboleths that restrain productive energies. Mr. Abe should create a Japan that has the courage to say no to business as usual.

Mr. Auslin is a scholar at the American Enterprise Institute in Washington and a columnist for wsj.com. Follow him on Twitter @michaelauslin.

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