Japan’s Economy Shrinks as Abe Puts Off Reforms

The prime minister’s refusal to liberalize agriculture and Japan’s sclerotic labor market is denying it growth.

Fog in Tokyo, Japan, September 27, 2010
Fog in Tokyo, Japan, September 27, 2010 (Flickr/Syume)

Japan’s economy shrank at an annualized pace of 1.6 percent between April and June of this year, calling into question Prime Minister Shinzō Abe’s commitment to controversial but pro-growth reforms.

Exports fell as did consumer spending, depressed by a sales tax hike. The Bank of Japan’s weakening of the yen has also made imported foods more expensive, putting further pressure on households.

Since the conservative Abe returned to power in late 2012, the world’s third largest economy has grown just 2 percent, even as his government deployed stimulus measures worth roughly 3 percent of gross domestic product.

Abe’s Liberal Democrats defended their majority in snap elections in December but barely one in two Japanese turned out to vote, reflecting widespread disenchantment with his inability to revive the island nation’s economy after decades of stagnation.

Liberal economic reforms that Abe promised and should help make companies more competitive have yet to be enacted.

Powerful agricultural cooperatives and high subsidies shield Japan’s farmers from international competition while rigid labor laws make it nearly impossible to lay off workers. Many firms limit hiring to part-time or temporary workers who are typically paid a third less than full-time employees. 17 percent of Japanese men aged 25 to 34 hold such jobs. For women of all ages, the rate is a staggering 57 percent. 70 percent of Japanese women also still quit their job when they have children.

The prime minister recognizes that low female participation in the labor force is a problem but has done little to increase the rate.

Productivity is also lagging. Firms are reluctant to invest in workers who are on temporary contracts while those with secure jobs need not compete. Japan’s GDP per hour worked is a quarter below the average for rich countries.

Trade negotiations with other countries around the Pacific Ocean, including the United States, which Abe insists are vital to resuscitating Japan’s economy, are on hold because his country is reluctant to reform agriculture and discuss significant cuts in tariffs.

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