Structural Reform: Key to Abenomics

Printing money to quick-start an economy is nothing new, even though the degree to which Prime Minister Abe is doing so--doubling the money supply in two years--is unique. Fiscal spending has been the primary tool of Japanese Prime Ministers for more than three decades. However, it is PM Abe's implementation of Structural Reforms that will determine whether the Prime Minister will be seen as Japan's greatest modern post-war leader or a flash in the pan.

PROMOTING ENTREPRENEURSHIP

Reforms to promote entrepreneurship should be at the top of Abe's reform agenda. The lack of entrepreneurship in a country with Japan's technical advantages and human capital resources is untapped gold. To change the situation, Japanese entrepreneurs need to be provided incentives for success instead of penalties for failure.

The lack of Japanese entrepreneurship is not culturally or societally rooted, but rests in Japan's bankruptcy tradition. In Japan, if a business fails, the debt falls onto the founder as personal debt, which often causes bankruptcy. Moreover, one's debt and losses can pass on to relatives. Not surprisingly, this is a significant disincentive to starting a business.

Bank policies in lending must also be eased so a percentage can go to riskier, earlier stage investments. Among developing countries, Japan sits at the low end of start-ups. There is no excuse for this, in a country as technologically rich and with such a history of business success and prowess.

Another critical factor in bolstering entrepreneurship is increasing the number of Venture Capital (VC) firms. VC's in Japan are rare, yet they are an essential element of spurring innovation and entrepreneurship--where would the U.S be without Silicon Valley? To promote the development of VCs and a VC culture, Abe should promote legislation that encourages VC business, for example, providing tax breaks on the profits of new venture capital start-up firms. The government must also develop the educational system and business culture to support the profession of venture capitalists. Corporate CFOs or individuals with "intrapreneurship" experience should be provided incentives by the Japanese government to take a leap in starting their own businesses. The talent exists; it merely needs to be fostered.

DEREGULATION

Japan has industries that are ripe for reform. The most obvious are health care--including, hospitals, doctors, nurses, and elder care--and the pharmaceutical sector. The Prime Minister would find wide public support for health care reform, and this is where he should begin the deregulation process.

Energy is a second important area for deregulation. Given the security concerns surrounding energy, the key in this case is to allow domestic companies a first shot at opening them. Moreover, most countries' energy sectors are dominated by domestic firms; Japan should be not asked to bow to different standards.

Finally, the environmental sector in Japan offers enormous commercial opportunity. The sector is in its infancy, and it is a prime example of where bottled up research inside Japan's corporations could yield tremendous commercial gains.

INCREASING WOMEN'S PRESENCE IN THE WORKFORCE

Women are embarrassingly underrepresented in Japan's workforce. Adequate day care facilities, a social security system that supports females working outside the home, and other practical steps are the key to better representation. Not only would these reforms this add millions of productive people into the workforce, they would boost the economy by injecting millions of dollars, consumers, and taxpayers.

TRANS-PACIFIC PARTNERSHIP

While many have advised that Prime Minister Abe use Japan's entry into the Trans -Pacific Partnership as a strong- arm tool to pry open his reforms at home, this is an unrealistic and over-rated tool for Japan. It is a Western method of convincing corporations and citizens to move toward reform and would backfire. Japanese people would see this as a ruse; a cloaked blackmail. If Abe wants reform in certain sectors, he should deal with those issues and sectors directly, either earning the right, straightforwardly, to open the doors or not. To use a international pressure to make changes that will affect Japan and its citizens would be counter-productive. To the Japanese, it would fly in the face of self-determination.

PRIVITIZATION OF THE POSTAL SYSTEM

The holy grail of Japanese reform, and perhaps the one reform that would have the most impact, is the privatization of the government-controlled postal system. The Japanese Postal system is the largest financial institution in the world. Its savings assets are larger than the savings of all other Japanese banks and financial institutions combined. Reform will be challenging (as former Prime Minister Koizumi can attest, in his honorable but failed effort to reform the system). However, if accomplished, it will have the most long-term impact of any reform on Japan's economy.

There would be billions of capital injected into the private sector, numerous businesses would sprout immediately, and those businesses, simply by operating, would spawn other businesses. The break-up would, by definition, spawn and jar the political and economic networks that have thwarted reform for generations. Like groups of tangled and twisted wire, these institutions are comfortable in their mesh.

Mr. Abe's problem, however, is that the postal service's three groups-postal, savings, and life insurance do serve a purpose and are for the most part, profitable. A system that provides the public with numerous critical services and essential works, even if not efficiently, effectively finds it hard to garnish public ire and clamor for break-up, in any country: The U.S. healthcare system and the decades it took to bring about reform is a prime example.

There is fear within the Postal System's that if one breaks the system up, they all will face the insecurity of privatization. Privatization means lack of control!

If successful, it would be the single largest and most important economic act by the Japanese government in this century.

REMEMBERING THE MEIJI RESTORATION

In his efforts to alleviate the fear and apprehension that enacting major reform brings, Prime Minister Abe would be astute to remind the public that the last time there was major structural reform overhaul in the Japan--the Meiji Restoration Period 1868-1912--the country fared quite well. During Meiji Japan opened up to the outside world (deregulation and open-competition). It allowed its citizens to act more privately and independently (privatization). It utilized its human talent to exploit its indigenous textiles and domestic natural resources (free trade). In reforming, adopting ways of the outside world the Japanese people, culture and economy responded by creating one of the greatest economic transformations in world history.