Shinzo Abe’s “third arrow” radical plan to revive Japan’s economy.

Japan’s parliament in June began debating legislation that would allow for the country’s first casinos. Whatever the merits casinos are as tourist attractions as the bill’s backers claim versus the social ills that opponents allege will flow from their opening, they form part of the so-called third arrow, or economic reform part, of Prime Minister Shinzo Abe’s radical plan to revive Japan’s economy.

Other measures are more standard fare in a package of economic reforms that was announced in June by Abe, who started his second term as prime minister in December 2012. They include changes for the labour market, cuts to company taxes, plans to enter into more trade agreements to open up sectors such as agriculture, special zones where red tape is reduced and changes that allow for economies of scale in the ownership of farm lands.

The third arrow could well be the most revolutionary in terms of how it could change Japanese society and the economy for years, bearing in mind that it can include (and exclude) any of the proposed regulatory changes or economic reforms that are often announced ad hoc. The first two arrows of Abenomics are fiscal stimulus, which is now being reduced, and further loosening of monetary policy – a radical change in itself because it involves central-bank asset purchases that aim to double the monetary base within two years to turn deflation into inflation and achieve consistent GDP growth per capita.

The Abenomics experiment was begun in May last year to resuscitate the economy of a politically stable country beset by two decades of stop-start growth, a decade or so of deflation, the world’s biggest pile of government debt, falling real wages and a shrinking and aging population. The results, so far, are promising for an economy that Bloomberg estimates is 3.5% smaller than when Abe first came to power in September 2006. (He lasted two years.) The economy has expanded for five straight quarters and generated inflation. Investment, production and business confidence have improved and a lower yen is helping exporters. Readings of these measures, however, are not improving enough to lift Japan’s long-term growth projections.

One big challenge for the economy now is that, in an effort to tackle its debt, the government boosted the sales tax by 3 percentage points to 8% on April 1 this year. The resulting drop in consumer spending is expected to shrink the economy over the second quarter. (The tax rise boosted core consumer inflation to a 23-year high of 3.2% in the 12 months to April this year. Core consumer prices are rising at an estimated 1.3% pace when tax effects are excluded.) This means the vague third arrow has taken on greater significance as a means for reviving Japan’s economic future, particularly as Tokyo wants to become a stronger regional economic and political counterweight to China.

Shadowy arrow

The reforms announced in June were generally vague. The government, however, was most specific in saying that it wants to reduce the corporate tax rate from 35.6% to below 30%, where Australia’s rate sits. It is still to outline, however, how it will replace the lost revenue to stop adding to the government’s gross debt that amounts to about 240% of GDP.

The more-abstract announcements cover tougher corporate governance rules, including measures to untangle crossholdings among companies, to boost shareholder returns. They embrace enhanced ability for super funds to buy equities. Among others are changes to farming that allow for the consolidation of small farms and proposals to end utility monopolies to make the energy industry more efficient. Proposals for the labour market could be among the most contentious because they comprise proposals to allow more immigrants in a monocultural and homogenous society, tax changes to encourage higher female participation and steps to boost their numbers at executive level (which might be counterproductive to the government’s hopes to boost the birth rate) and more flexible labour laws. “In my growth strategy, there are neither taboos nor sacred cows,” Abe said in a televised address on June 24.[1]

Abe’s government needs to prove it can turn announcements into regulatory and legal achievements. The vested interests Abe confronts are significant. The severity of the challenges facing Japan may well give him the best-possible environment to succeed.

The fate of the legislation covering casinos may well provide a gauge as to whether or not Abe can overcome vested interests. For among the opponents of Las Vegas-styled and owned casinos are the Japanese businesses that operate various forms of legal gambling, from lotteries and gaming machines to sports betting, who fear foreign competition more than they are troubled by any social ills that might come with casinos.

Financial information comes from various media sources including The Wall Street Journal and Bloomberg.

[1] The New York Times. “Shinzo Abe’s bid to shake up corporate Japan.” 24 June 2014. http://www.nytimes.com/2014/06/25/business/international/shinzo-abes-bid-to-shake-up-corporate-japan.html?hpw&action=click&pgtype=Homepage&version=HpHedThumbWell&module=well-region&region=bottom-well&WT.nav=bottom-well&_r=0

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