Taking advice from pop stars is rarely a wise move for politicians.
And given Japanese prime minister Shinzo Abe’s momentous task, this is particularly prescient in his case.
A hit track on Meat Loaf’s bestselling album Bat Out of Hell was called Two Out of Three Ain’t Bad. However, a ‘two out of three approach’ simply isn’t good enough – for Abe to revitalise Japan’s economy it requires all three of his ‘arrows’ to hit the mark.
The first two arrows of fiscal stimulus and monetary policy were loosed to instant effect, and they have been successful in combatting deflation and weakening the yen, which has helped stocks to climb.
However, the positive effects from the first two arrows are waning, and progress on structural reforms – at the core of Mr Abe’s longer-term growth strategy – has been slow and unconvincing. On April 1, the consumption tax went up by 3 percentage points to 8 per cent, piling on further pressure.
Although the tax is a bid to bolster deteriorating government finances, the fear is that growth might be derailed. Thanks to last-minute spending from businesses and consumers ahead of the sales tax hike, there was a short-term benefit to GDP, with the first quarter figure coming in at 1.6 per cent – equivalent to an annualised rate of 6.7 per cent.
But Mr Abe has attempted a ‘take two’ for the structural reform ‘third arrow’ announcing details of his ambitious and wide-ranging plans.
Ranging from healthcare reforms to the encouragement of local and foreign entrepreneurship, through to an overhauling of corporate governance (witness the new JPX-Nikkei 400 index), Mr Abe’s plans are “less a single arrow and more a 1,000-strong bundle of acupuncture needles”, to paraphrase a recent Economist leader.
Demography has long been recognised as Japan’s Achilles heel. Yet they could just provide the catalyst to allow reforms to be implemented.
A rapidly shrinking workforce has softened divisive issues such as higher levels of immigration and greater female participation in the labour market. Removing the post-war system, obsessed with lifetime employment, is probably Mr Abe’s greatest challenge.
His commitment was evident in a bylined Financial Times opinion column on June 29, where he stated: “We need to help people make the most of their talents.
“Inflexible labour systems will be reviewed to enable all people, including women, youths, older workers and people with special talents, to fully display their capabilities. Enabling previously untapped resources to fulfil their potential will bring about robust and sustainable growth.”
Mr Abe’s progress so far has left policymakers confident that things will be different this time. Indeed, apart from a massive stimulus spend of ¥5trn (£28.9bn), the Bank of Japan stands ready to fire another monetary salvo if growth continues to slow.
Regardless of the macroeconomic backdrop, Japan is a stockpicker’s market. Not only is it home to many world-class companies, there are also some hidden gems among the heap of lacklustre ones.
Japan remains a large economy with the potential to recover. Mr Abe does not have the same margin for error that Meat Loaf clearly had, but he appears to be aware of this, and is stubbornly committed to delivering results.
Graham Duce is director of multi-asset at Aberdeen Asset Management
