- Structural Reform
Two Decades of Stalled Reform: Why the Government’s Growth Strategies All Look the Same
June 15, 2017
As the Abe cabinet rolls out yet another economic growth strategy, the Tokyo Foundation’s Takeo Hoshi argues that the recycling of policy proposals shows the government spinning its wheels in the face of powerful interests that continue to block the regulatory reforms needed to revitalize the Japanese economy.
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It is June, time for yet another update of the government’s economic growth strategy, the third and most difficult “arrow” of the economic revitalization policy known as Abenomics. This is the fifth strategic growth plan adopted by the government of Prime Minister Shinzo Abe since 2013, when the cabinet approved the Japan Revitalization Strategy. The 2017 version, approved by a cabinet decision on June 9, spotlights technological innovation in areas like artificial intelligence and the internet of things to stimulate longer-term economic growth while addressing a wide range of social problems. The stated goal is to build on recent advances that some have hailed as a fourth industrial revolution to create something the government dubs Society 5.0.
The Abe Cabinet’s fifth growth strategy (Investments for the Future Strategy 2017) groups its policies under five basic paths to sustained growth. The first of these is targeted policy support in the strategic areas of healthcare, automotive products, distribution and production networks, economic and social infrastructure, and innovative financial services, or fintech. The second is the development of an innovation-friendly “ecosystem” featuring shared data platforms and increased labor mobility to support value creation in an advanced economy. The third is administrative and regulatory reform with an emphasis on evidence-based policymaking and reduction of red tape. The fourth comprises corporate governance reforms to speed up economic restructuring. And the fifth is building a system that supports the interregional flow of people, things, data, and money to create a “positive cycle of regional economic growth.”
Probing beneath the borrowed and invented buzzwords sprinkled throughout the document, one finds little that is new in the latest plan. Indeed, as the following review suggests, the same basic growth ideas have appeared year after year under a variety of labels, suggesting a fundamental lack of progress.
A Brief History of Abe’s “Third Arrow”
The Japan Revitalization Strategy released in 2013 was widely criticized for its lack of focus. Indeed, it was less a strategic plan than an enumeration of all the policies that, if properly implemented, might have a positive effect on economic growth. Another pattern established at this time was the mixed approach to restoring economic growth, with the emphasis divided between regulatory reforms aimed at facilitating private-sector-driven growth and the old industrial-policy method of targeting selected industries for government-driven growth.
In some contexts, to be sure, industrial policy may be effectively combined with deregulation, but the Japanese economy has long since graduated from the catch-up phase of growth, in which policymakers could predict the development of industry with a reasonable degree of confidence. The Japanese government itself stressed the need to shift the focus from government-led industrial policy to regulatory reforms aimed at unleashing the vitality of the private sector on several occasions. Yet government policies show little indication of any decisive shift.
Perhaps in response to criticism of the initial plan’s scattergun approach, version 2, released in June 2014, zeroed in on 10 major objectives: (1) enhancing corporate governance, (2) reforming management of public and quasi-public funds, (3) boosting industrial metabolism and accelerating start-ups, (4) reforming corporate taxes, (5) promoting technological innovation and spurring a “robotics revolution,” (6) enhancing women’s participation and advancement, (7) facilitating flexible working styles and workplace practices, (8) attracting talent from overseas, (9) aggressively rejuvenating agriculture, and (10) energizing the healthcare industry and providing high-quality healthcare services.
With the 2015 edition, the government announced that Abenomics was entering a new phase called Abenomics Stage II, in which the focus was shifting from the short-term task of pumping up demand to conquer deflation to the long-term structural challenge of overcoming supply constraints for sustainable growth amid a shrinking population. Yet the main difference between the 2015 strategy and previous versions was its reorganization of announced goals under two major headings: “Revolution in Productivity through Investment in the Future” and “Pursuit of Local Abenomics.” If anything, the focus was even more diffuse than before, with the emphasis leaning increasingly toward industrial policy, particularly where regional revitalization was concerned.
In the 2016 version, the government claimed to have completed stage 1 of its growth strategy, in which it had supposedly “cut away at bedrock regulations” and “carried out reforms previously considered impossible.” Now, in stage 2, it called for policies to reenergize private business activity. At the center of this strategy were “10 strategic public-private joint projects” aimed at cultivating “promising new markets.” For the most part, these followed the old industrial-policy model of relying on government investment to pump up sectors targeted for new growth by policymakers: the new generation of information technology (IoT, big data, and AI), healthcare, environmental and energy solutions, tourism, sports, existing home sales, services, and agriculture.
Failure to Follow Up
As the foregoing suggests, the latest growth strategy offers little that is new in the way of content. Industrial-policy programs continue under heading 1 (policy support in five strategic areas), and heading 5 (creating a positive cycle of regional economic growth). That said, the latest plan resurrects some of the regulatory reforms that receded into the background in 2016, when the industrial-policy emphasis was at its peak. The latest focus is on boosting labor mobility, speeding up business metabolism via corporate governance reforms, and promoting evidence-based policy.
These reforms have the potential to be game changers; the proposed “sandbox” system, for example–a key component of the government’s plan to promote evidence-based policymaking–is an apparent exception to the recycling of old ideas. Fintech sandboxes, implemented in Australia, Britain, Singapore, and other countries over the past two or three years, are deregulated spaces in which both financial institutions and non-financial players can experiment with new financial-technology solutions.
At first glance, this looks like a brand new addition to the government’s reform menu, but the fact is that a similar but more wide-ranging system was instituted in January 2014 in conjunction with the Abe cabinet’s first growth strategy. Under the Special System for Corporate Field Tests, the government announced that it would offer regulatory exemptions on a company-by-company basis for the testing of innovative business models in fields of the companies’ own choosing. Unfortunately, in the three and a half years since the system’s launch, only 16 firms have taken advantage of it. If the government is serious about pursuing evidence-based policy making, it needs to conduct a thorough evaluation to determine why the existing system is so underutilized and apply its findings to the design of the new regulatory sandboxes. There is still plenty of time, as the first sandboxes are not likely to appear until late 2018, given the time required to conduct a review and enact relevant legislation.
The Special System for Corporate Field Tests is just one example of a promised regulatory reform that has failed to pan out in any meaningful way. In fact, the only area where reform has made remarkable progress (at least on the surface) is corporate governance. By contrast, it is difficult to see any significant reforms to the labor market or reduction of administrative red tape, even though the Abe cabinet’s growth strategies have touted such reforms from the beginning.
The truth is that little has been achieved in terms of hammering out and implementing the proposed regulatory reforms. It was only last September that the prime minister set up the Regulatory Reform Promotion Council to draw up comprehensive policy recommendations. The council submitted its first report this past May. While I hope that this body will eventually make a real contribution to the reform process, the pace of deregulation has thus far been excruciatingly slow. Even version 5 of the Regulatory Reform Implementation plan, announced on June 9 this year, reads like a laundry list of reform ideas, rather than a concrete plan of action. Under the circumstances, there is real concern that deliberations will drag on indefinitely without yielding concrete progress.
Twenty Years of Wheel Spinning
We have seen that the substance of the Abe cabinet’s growth strategy has changed little over the past four years. In fact, most of the ideas contained in the latest strategy go back much further. In 2010, when the Democratic Party of Japan was in power, the cabinet adopted a New Growth Strategy aimed at revitalizing the stagnant economy through policy measures spanning seven areas: (1) green innovation, (2) life innovation, (3) Asian economic strategy, (4) tourism and local revitalization, (5) science and technology/information and communications, (6) employment and human resources, and (7) the financial sector. The similarities between that document and Abe’s latest growth strategies are obvious.
When it comes to regulatory reform, the lineage is even longer, extending at least as far back as the administration of Prime Minister Jun’ichiro Koizumi (2001–06). In May 2001, in his first policy speech to the Diet, Koizumi laid out the challenges facing Japan in its struggle to regain economic vitality. After identifying the disposal of nonperforming loans and banking reforms as the top priority, he continued as follows: “Secondly, we must create a competitive economic system befitting the environment of the twenty-first century. Such structural reforms will enhance the great potential for development inherent in the Japanese economy. In order to usher in a competitive industrial society, we will promote the creation of new industries and employment opportunities. We will ensure the effective functioning of the Council for Comprehensive Regulatory Reform and carry out regulatory reforms spanning all of our economic and social structures.”
Sixteen years later, most of those reform efforts remain unfinished. The reason the government continues to tout the same deregulation initiatives over and over is that it has yet to successfully implement them.
Of course, structural reform is politically difficult. Even when it promises to strengthen the economy as a whole, it often runs into fierce resistance from vested interests protected by the current system. There can be little doubt that such resistance has blocked major regulatory reforms for close to two decades now, despite widespread acknowledgement of their importance. One may be forgiven for asking whether Japan’s leaders have the political will to fight for the health of the Japanese economy in the face of vested interests.
The Real Scandal
In recent weeks, the press has been much occupied with the so-called Kake Gakuen scandal, involving suspected favoritism in the government’s approval of a private university’s plan to establish a new degree program in veterinary medicine. Most of the reporting and analysis, however, seem to miss the bigger picture. The question the media keep asking is whether the university received special treatment because the chairman of Kake Gakuen is a friend of the prime minister. But from a national economic perspective, the real scandal is a business environment so tightly regulated that approval of a new academic program is assumed to be impossible without special intervention.
Under pressure from interest groups, such as the Japan Veterinary Medical Association,  the regulator (Ministry of Education, Culture, Sports, Science, and Technology) has denied all requests for the launch of new veterinary degree programs for more than 50 years now on the debatable grounds that Japan already has enough veterinarians. The Abe administration sought to ease those restrictions by allowing a limited number of facilities to open inside of deregulated “special strategic zones.” Even so, the barriers to entry remained almost insurmountable. From this perspective, the real issue is not why Kake Gakuen received approval for a new veterinary program but why other schools, like Kyoto Sangyo University, were again denied permission.
This is just one example of the forces that have managed to block deregulation in so many areas and for so many years. In the face of such entrenched resistance, the government has been reduced to touting the same reforms over and over again under different names. This is the reason the Abe cabinet’s growth strategies are all substantially the same. And the wheel spinning will continue until Japan’s leaders are able to break up entrenched interests and forcibly push forward with needed regulatory reforms.