「My trip to Paris to speak at Japan Euro Dialogue Seminar」
Haruo Shimadal. Introduction
This is a brief report of my recent trip to Paris to participate and givea speech at a dialogue seminar which was held by IFRI (French Institute ofInternational Relations) and Japan Ministry of Foreign Affairs as well as JFIR
(Japan Forum on International Relations) in the evening of March 9, 2015.
The seminar is planned as a part of a series of international symposiums
under the common title“The Future Which is Created by Cooperation of Japanand Europe: in Pursuit of Governance by Law and Prosperity”. On November 21,
2014, the symposium was held in Tokyo by inviting European influential opinion
leaders. These opinion leaders are expected to give reports when they returnedto their home countries on what they learned by joining such symposium andrelated activities to various intellectual audiences in Europe so that they
can contribute to promote in Europe understanding of Japan and Japanese
foreign policies.
One of the invitees, Dr. Claude Meyer, senior advisor, center for Asianstudies, IFRI and associate professor of CERI, Sciences Po., who met myself
during his visit to Japan last fall strongly demanded to invite myself to aseminar of intellectual and professional audiences in Paris. Responding to
his request, Ministry of Foreign Affairs decided to invite me to the seminar
mentioned at the beginning.
It was already in February when I first heard from ministry of foreign affairs
that they wish me to accept this offer of invitation. Since my time table
usually is fully booked by two or three months in advance, so when my secretarychecked my schedule she found that it looks practically impossible to accept
this offer.
However, she found a slight possibility by canceling a couple of appointments
on March 9. She told me that it could be possible for me to participate tothis seminar but I could stay only one night in Paris. A round trip of Parisand Tokyo, 12 hour flight plus few hours each way, with only one night stayover in Paris is obviously a very hard plan to travel. I talked this plan to1

my wife, she first said to me that she would tolerate me to do so if it was
twenty years ago, but she would not let a 72 year old husband to take sucha bold attempt. However, a few days later she changed her thought for somereason and tolerated me to accept the offer from the ministry of foreign
affairs.
My secretary whispered that this project suits me well as a professor of
economics and much interested and involved in international affairs. In fact,
she knew well and assisted me to an important extent that I had been preparing
a 51 pages long and informative report on Abenomics for my own professional
interest much before I was given this offer so that this offer apparently looked
to her an ideal opportunity for me to discuss my paper with important
intellectual audience.
The staff of ministry of foreign affairs worked well to arrange the best
possible trip toward the last minute. They apparently advised ANA (All Nippon
Airways) to provide me the best service they could offer for a business classpassenger on both ways between Tokyo and Paris.
The schedule turned out to be very tight as imagined. I took off Haneda
airport shortly after noon of March 9, arrived in Charles de Gaulle airport
shortly after 15:00. The staff of Japan Embassy in Paris took a good care ofme to bring me to the hall of IFRI in time for the seminar which is scheduled
for 17:00 to 18:30 while letting me check in the hotel on the way.
Since the traffic was smooth I was able to arrive at the hall half an hourearlier so that I had a chance to talk to main players of the panel. Professor
Claude Meyer, Dr. Francois Nicholas, senior economist, director of center for
Asian studies of IFRI, director of Asian research of IFRI, who is supposed
to chair the pane, Ambassador Mr. Yoichi Suzuki of Japan, who represents thesponsor of this project gave a brief speech at the beginning of the seminar.
The hall was soon filled with audience.
At the chat before the session, Ms. Nicholas advised that on the three arrowsof Abenomics, spend not much time on the first and second arrows, but explain
well the content of the third arrow, which is growth strategy. She added thatthe first two arrows are rather well known in Europe but the content of thethird arrow is not as much known, and this is the area that European audiencewish to know and understand. This advice was helpful for me to sense the focus2

of interest of audience so that I could plan resource allocation within thegiven 25 minutes appropriately.
The discussion was good which I will introduce in some detail later. In theseminar, professor Clause Meyer gave a well organized introductory speech for
10 minutes which was followed by my speech of 25 minutes. Then the floor was
opened for Q and A.

ll. The Back Ground
I was much impressed by the keen interest and breadth and depth of knowledge
of French intellectual people on Abenomics.
Aside from general curiosity and intellectual capacity of elitist Frenchpeople, I suspect that there are due reasons why European people are interested
in Abenomics and have been paying keen attention to its development anddeployment.
Europe, particularly of Eurozone, has been experiencing a difficult timeof dragging stagnation for recent years particularly since the onset of Greek
crisis shortly after the Lehman crisis. The problem of Greece has beentransmitted to other countries such as Italy, Spain and even to France throughthe channels of financial institutions and network. European central bank,ad hoc EU committees, and the governments of EU member countries, IMF and otherrelevant institutions tried to prevent the issue to develop to major financial
crisis.
They soon had to face the problems unique to EU itself. That is the very
nature of loosely combined multi-country system which makes it much moredifficult to determine and conduct remedies speedily and thoroughly.
North and South differentials in terms of productivity and wills of fiscal
discipline. This difference it particularly large between Germany andMediterranean countries such as Greece and Italy. The sharp contrast in thefiscal difference makes the consolidated and unanimous policy decisions much
more difficult than otherwise.

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Still another fundamental problem unique to EU is that while the currency
is unified into EURO across different countries within the EURO zone, fiscal
policies are basically not unified and left to the self discipline of eachof the member countries which are only bound by uniform criteria such as the
maximum annual government debt to GDP.
Imposing the same currency on member countries of different productivity
without obliging them to accept autonomous inter-country fiscal adjustment,
the country of low productivity tends to lose international competitivenessof its industries and consequently accumulate fiscal deficit wile the countryof high productivity, in contrast, tends to increase industrial
competitiveness and consequently does not suffer from the issue of fiscal
deficit.
These structural difficulties unique to EU made it more difficult to conduct
for EU swift, uniform and thorough remedies and structural reform on thefinancial sector and institutions compared to a country like the US. While
the reform of financial institutions and fiscal policies has remained
insufficient, EU, particularly of EURO zone, began to suffer from deeper
stagnation which may well lead EURO zone into chronic deflation.
In order to prevent the economy from falling into deflation, many countries
attempted extra-ordinary policy of QE (quantitative easing). Since theinterest rate has remained very low in many countries in the wake of the Lehman
crisis, central banks supplied huge amount of “base money” by purchasing
national bonds and other financial commodities. The Federal Reserve Board of
the US has conducted three phases of major QE since the Lehman crisis andconsequently supplied abundant liquidity not only to the US but also to theentire world, which helped to encourage economic activities of various
countries.
Japan plunged into the group of QE since the spring of 2013 under the slogan
of Abenomics. ECB has been increasing the supply of base money side by sidewith US, UK and other major countries. However, since the threat of falling
into deflation has become increasingly serious in recent years, there has been
increasingly serious policy debate as to whether ECB should promote a
distinctively large scale QE to stimulate the EURO zone economies. Some argue
that ECB should do it such as Mr. Mario Draghi, the president of ECB, whileothers such as financial leaders of Germany and Netherlands oppose against4such a policy choice arguing that such massive QE would weaken the fiscal
discipline of deficit prone countries.
After a long and intense debate, ECB finally made a major decision on January
22 that it will start a major QE from March. It was decided that (1) ECB will
provide extra-ordinary large amount of base money in order to stimulate theEURO zone economies. The total of 60 billion EURO bonds (of which 45 billion
is government bonds of member countries) will be purchased by ECB and central
banks of member countries every month. (2) This QE is promoted in pursuit ofgenerating inflation of 2% starting from March 2015 presumably until September
2016.
And on March 9, this operation started. It was an unexpected coincidence
that our symposium was held on the same day.
There are arguments both pros and cons about this action of large scale QE.
Those who justify this action such as Mr. Mario Draghi and his supporters argue
that by providing sufficient amount of liquidity to the market, investment
will be encouraged, economic growth will be stimulated, and consequently
prices will increase so that EURO Zone economies can avoid trapping by fatal
chronic deflation.
Contrary, those who oppose and criticize this QE such as Mr. Jens Weidmannof the Bundes Bank, and Mr. Klaas Knot, he'd of De Nederlandishce Bankargue
that this action has a danger of weakening or even losing the fiscal discipline
in many EURO Zone economies particularly in Southern and Mediterranean areas
and thus deteriorates the EURO Zone economies rather than to promote growth.
They emphasize that structural reform policies such as labor market reform
should be needed rather than macro monetary policy as huge across the board
monetary easing policy.
Following the initiation of this voluminous QE, markets have responded invarious aspects as early as next day. Prices of government bonds of Northern
European countries, where market evaluates relatively good fiscal discipline,
went even higher so that financial institutions are obliged to buy bonds withvery low or even negative returns. In contrast, bonds of countries which are
deemed with low level of fiscal discipline yield high returns and quickly
became scarce assets relative to demand. The exchange rate of EURO relative5

to other major currencies started to drop rapidly in the wake of QE which gives
rise to hope of increasing export of EURO economies.
Given this back ground of economic policy debate, Abenomics provides aninteresting case of real experiment. Abenomics aims at salvaging Japanese
economy out of sticky chronic deflation which persisted nearly two decades
since the mid-1990s. If Abenomics successfully realized good economic growthwith decent rate of inflation by the policy mix of three arrows, the experienceof Abenomics will be of important reference or model for European policy makers.
If it is judged to have failed, then, the case of Abenomics will be of reference
to them as the experience not to learn or follow.
European observers seem to know well about the first two arrows: The firstarrow is an extra-ordinary policy of supplying large volume of base money togenerate inflation and change the mindset of people from deflationary to
inflationary expectations. It seems to have succeeded to the extent that stock
prices and corporate profits increased and modest inflation started. However,it aggravates the implicit risk of losing fiscal discipline of the government
and the public.
The second arrow is an active fiscal policy by supplying fiscal spending
whenever necessary. This policy certainly helped maintain the stability ofthe economy in the process of transformation, but risks the attainment of theten year fiscal reconstruction plan which Japan committed to achieve.
Although the third arrow was shot twice in June 2014 and June 2015, theireffects are less clear and understood not only by foreign observers but also
by Japanese public partly because the list of policies are too many, and partly
because structural reform policy tends to take long time before policy effects
begin to emerge.
Since the onset of Abenomics at the beginning of 2013, economic performancehas been mixed or somewhat disappointing for the subsequent two years. Except
for good news about stock prices, momentum of inflation seems to have been
weakened with unfortunate sharp decline of oil prices, the pace of wage hikes
has been slower than price increases so that real wages have been declining
for the recent year and a half. Economic growth has been secularly slowing
for these two years. Slight increases in economic growth in the most recent
quarter seems to indicate some hope for year 2015.
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Indicators and economic outcomes seem mixed. It is much too early to judge
either the success or failure of Abenomics particularly because the growthstrategy, consisting largely of structural reforms, of Abenomics takes timeto yield any results. For us to make any meaningful evaluation of Abenomics,
we need to understand the components and their progress of growth strategy.
It is for this reason, I was invited to contribute to this symposium in Paris.

lll. The Symposium: My presentation and Q&A.
The symposium started punctually at 17:00 in the lecture hall of IFRI.
Following the introductory remark of Dr. Francois Nicholas, of IFRI、Ambassador
Mr. Yoichi Suzuki gave an opening speech explaining why this symposium wasto be organized and emphasizing the importance of mutual understanding between
Japan and Europe as well as the importance of this symposium.
Following Ambassador’s speech, Dr. Claude Meyer, senior advisor of IFRI
spent 10 minutes speaking systematically as to why European people,
particularly French, are interested in “Abenomics” explaining
comprehensively economic issues which EU and France are faced that have much
relevance to what Abenomics attempts to tackle in Japan.
Then the floor was given to me. After thanking the invitation to this
symposium, I got on the substance of my speech.
I emphasized first that the primary strategic intent of Abe administration
is to get Japanese economy out of the sticky deflation which lasted nearly
2 decades. I heard this directly from Mr. Yoshihide Suga, minister of chamber,when he gave speeches twice in my seminar. The package of economic policy called“Abenomics” was devised as a strategy to salvage Japanese economy from thedepth of chronic deflation.
Abenomics is said to consist of three arrows: (1) monetary policy of
extra-ordinarily large scale QE (quantitative easing), (2) active fiscal
policy, and (3) growth strategy by means of structural reform.
(1) The first arrow: monetary policy. This is to supply distinctively large
amount to “base money” to the market so that economic activity is stimulated
7and exchange rate of yen gets reduced and through these channels prices will
begin to rise to generate inflation. The real intent of this policy is to change
the “deflationary expectation” of people to “inflationary expectation.”
In April 2013, Mr. Haruhhiko Kuroda, president of Bank of Japan who wasjust appointed, declared in his first press conference that BoJ will commit
to generate inflation of 2% within 2 years, and to double the supply of basemoney to achieve this goal.
This declaration gave strong impacts to foreign major speculators andinvestors before it affects the mind set of Japanese public. Expecting agreater supply of yen they plunged to large scale future selling of yen togain huge profits, and also invested huge amount of fund into Japan’s stock
market anticipating sharp rise of stock prices.
Due largely to such moves, exchange rate of yen dropped sharply as much as
20% in 2 months, and stock prices jumped more than 80% in half a year.
Expectations of increased corporate profits and drastically increased stock
prices certainly changed the atmosphere of Japanese economy and society.
These developments may certainly be regarded as the merits of the first arrowof Abenomics. However, one must note that this first arrow has a huge implicit
risk associated with it. This is because much of the Japanese government bonds
provided to the market is purchased by BoJ, which may be interpreted as thegovernment loses fiscal discipline. If the market judges it is indeed the case,then prices of JGB may drop sharply which will have serious consequences toJapan’s fiscal and economic situation.
(2) The second arrow: active fiscal policy. In the process of transformationfrom deflationary to inflationary economy, the government is prepared tosupply fiscal spending timely to smooth and support the process. In fact the
government provided voluminous extra-ordinary budgets a few times in addition
to largest annual budgets in history. These active fiscal spending certainly
supported the stability of the economy.
However, this active spending made it more difficult to attain the planned
fiscal reconstruction. Japan is suffering from a huge government fiscal
deficit which amounts to as much as 1200 trillion yen or 2.4times of GDP. The
Japan’s fiscal reconstruction plan proclaims that in ten years from 2010 till8

2020, the deficit of primary balance which was 32 trillion yen or 6.7 percent
of GDP be eliminated. The plan stipulates that the deficit should be halved
by 2015, the mid point of the 10 year plan, namely, 16 trillion yen or 3.2percent
of GDP.
While this figure on the orbit of the plan is barely attained in 2015, itis deemed difficult to stay on the orbit of the plan after 2016. Indeed, thecabinet office of Japanese government predicts that on the better scenario
of economic growth, namely, 3 percent nominal and 2 percent real annual growthfor 10 years, the primary balance will still have deficit as much as 1.6% ofGDP. Judged from the actual performance, the economy will not likely to achieve
this good scenario up to 2020, and the deficit will be much larger
realistically.
If Japan is judged from experts in the market that it cannot satisfy its
fiscal reconstruction plan, it is possible that they judge that the Japanese
government cannot maintain fiscal discipline. This could trigger a sharp
decline of prices of JGB, which will jerk up interest rates and aggravatealready huge government deficit swell like a snowball, namely, the fiscal
crisis.
(3) The third arrow: growth strategy. All these risks can be absorbed if
Japanese economy grows at a sufficiently high rate for a lengthy period. Inorder to attain the objective of fiscal reconstruction plan and to enrich thefiscal basis to provide necessary social security services to the aging society,
it is desirable that the economy will grow annually more than 3% in real terms
and 4% in nominal terms for the coming decade.
Therefore, the growth strategy is the most critical part of the Abenomics.
It Japanese economy grows well thanks to Abenomics, then we can say that
Abenomics is a successful strategy. If not, Abenomics will be a failure. Prime
Minister Shinzo Abe and his team members devised the third arrow in June 2013.
This is now called the first version of the growth strategy of Abenomics.
The report of the plan of strategy consists of 94 page papers. It consisted
largely of three action plans (1) industry recovery plan which emphasizes
renewal of industry and employment structure, (2) creating strategic market
in such areas as health, energy and infra-structure, and (3) international

9deployment plan of increasing free trade share in the total trade from thecurrent 19% to 70% in five years.
The growth performance of Japanese economy in the wake of announcement of
this growth strategy has been rather disappointing. The growth rates (adjusted
to annual figure) of four quarters of 2013 were 4.9% and 3.5% in the firstand second quarters, but after the announcement, dropped to 1.3% and even down
to 0.3% for the third and fourth quarters. Prime Minister Shinzo Abe and his
team decided in December 2013 to write the new growth strategy by June 2014
and implement it forcefully to generate growth of Japanese economy. Since thisis the topic which French audience and experts wish to know most, let me explain
in some detail the second growth strategy in what follows.

lV. The Second Growth Strategy of Abenomics
Prime Minister Shinzo Abe emphasized that in the second growth strategy heand his team tackle vigorously to break into the so-called “bed rock” ofregulations and vested interests which disturb efficient economic activity.
Major areas identified as bed rock include: agriculture, medical services,
work rules etc.
The Abenomics team consists largely of four committees, (1) industry
competitiveness committee, (2) regulatory reform committee, (3) economic andfiscal policy advisory committee, and (4) national strategic zone committee.
In fact these committees have been working vigorously shortly after thedisclosure of the first growth strategy on the second growth strategy.
The second growth strategy was disclosed in June 2014. The strategy consistsof 3 major reports from the committees mentioned above, which altogether amountto more 300 pages and cover several hundreds of policy items. Financial Timesand the Economist described this as “not an arrow but a bundle of one thousand
needles”(of acupuncture).
My frank judgement is that the attempts of structural and institutional
reform by Prime Minister Shinzo Abe and his team are much more outright, serious,and forceful compared to most of the previous administrations in post war Japanas an effort to change outdated structure and institutions of Japanese economy.

10Despite the fact that the second growth strategy includes many policy
statements and not easy to read through, it is important for us to understandto judge whether the Abenomics is meaningful and realistic or not. To fill
the knowledge and information gap, let me introduce or explain 10 important
areas focused by the current growth strategy of Abenomics.
1. Renewal of industry and employment
Part of reasons for the sluggishness of Japanese economy is considered as
the allocation of industry and labor resources in the outdated sectors. To
promote the reallocation of industry and labor resources toward more modern
and future oriented sectors, the government enacted “competitivenessreinforcement law” in December 2012. This law authorizes to control subsidies
to promote such reallocation of industry resources.
2. Corporate governance and capital market
Japanese corporate governance has been viewed as less transparent and moreclosed and inward oriented than it needs to be. Also, capital resources havebeen utilized less effectively and efficiently than they should. To counteract
such deficiencies, Abe administration promotes such measures as follows:(1) Revising Corporate Law was enacted by which publicly open corporations,regardless of its size, should appoint at least one independent member of theboard, (2) All the publicly listed companies have to determine “governancecode” to secure the transparency of management for investors,(3) Major
professional investment organizations have to determine and follow“stewardship code,”(4) Change the allocation policy of the fund as much as
130 trillion yen of the Government Pension Investment Fund from low risk low
return assets to higher return assets.
3. TPP negotiations
TPP or Trans Pacific Partnership is one of the most thorough free trade
agreement. Abe administration thinks that joining TPP will help develop Japan’s free trade arrangements with trade partners and secure large free trade
market opportunities.

11Currently the US and Japan are the two countries which have outstandingly
large market shares among those participating to the negotiation. The US joined
the group in 2010 and Japan in 2013. Negotiators of participating countries
have kept negotiate conditions of trade, investment, intellectual property
rights etc. encompassing more than twenty areas earnestly since 2013.
As negotiation proceeded, the focus has been narrowed down on some difficult
areas which need political initiatives to reach agreements. Particularly
important is fuller liberalization of a few agricultural items for Japan andsome conditions of auto trade for the US, and intellectual property rights
and government involvement in corporate activities for some Asian countries.
An important issue is whether and when the US congress will allow thepresident to have TPA or trade promotion authority which can speed up theprocess of negotiation. Since 2016 will be the year of presidential electionin the US, which will paralyze the political and administrative activities
in the US other than the election, we hope that the US, Japan and some othercountries which have important stakes on the prospect of negotiation will takecourageous actions to lead TPP to the general agreement with in 2015.
4. Agricultural reforms
Abe administration wishes to make agriculture a growth leading sector byreforming its structure in which resourceful farmers and agricultural
corporations can do their business more freely and actively by means ofabolishing non productive regulations and breaking vested rights.
Agricultural reform is an important element of Japan’s effort to prepare forjoining TPP. Prime Minister Sinzo Abe took a strong initiative to promotereform in the following three areas: (1) abolishing rice acreage reduction
policy, (2) reform of national agricultural cooperatives, and (3) reform ofland ownership regulations.
(1) Abolishing rice acreage reduction policy implies that by lifting thepolicy which has been isolating rice farmers from market competition for 40
years letting farmers face up the competitive menace to encourage their effort
for productivity increase.
(2) Reform of national agricultural cooperative means by stripping theirauthorized rights to control uniformly local agricultural cooperatives,
12letting the local cooperative find and develop their own ways to improve
efficiency of agricultural production.
(3) Reform of land ownership regulations implies by relaxing regulations
imposed on farm land ownership, making it easier for productive large-scale
farmers and agricultural corporations to own the land to product highproductivity farming.
5. Employment Regulatory Reform, Utilization of Female Human Resources, andIntroduction of Foreign Workers(1) Reform of working hour regulation: Work ways of Japanese workers regulatedby the law are apparently the factor which disturbs productivity of Japanese
workers. Indeed, Japanese labor productivity in recent decades is much lower
than counterparts of competitive advanced economies. This is due to Japanese
outdated labor law which was enacted shortly after the defeat in World War
II imposing the same working hour regulations on both blue and white collar
workers in an attempt to abolish status differentiation at the workshop.
Now that service industries provide more than 80% of employment, the factthat the labor law which was designed to regulate production workers 70 years
ago not surprisingly disturbs creative service workers from achieving highproductivity. Prime Minister Shizo Abe and his team earnestly try to introduce
rewards not paid by working hours but rather by performance and also introduce
the status of “exempt” for white collar workers. These attempts have been
resisted by Japan ministry of labor and trade unions, and have been realized
only partially.
(2) Utilization of female human resources. Japanese female workers’ averagelabor force participation rate itself is more or less comparable of advanced
Western nations. However, unique for Japanese female labor is that during theage range of child bearing and rearing, the rate stays very low. This meansthat the human capital accumulation is terminated during the child rearing
period and is not used in the latter part of their career because they can
get only casual jobs.
Prime Minister Shinzo Abe earnestly advocates the necessity for Japan tomake use of female human resources and try to enrich the public systems to
support and assist child dealing, introduce the tax system which is less13

discriminatory for working wives, and promote non-discriminatory practicesof employment and promotion for females at the workshop. Results of such
efforts have not been visible yet but will be realized in the long run.
(3) Utilization of foreign workers. Since Japanese labor force is predicted
to shrink sizable in the long-run due to shrinkage of population, it is only
natural to introduce foreign human resources to supplement such a decline.
Abe administration tries to relax the limits which have been imposed on
introduction of foreign workers in an attempt to supplement increasingly
scarce workers particularly in construction industry in the face of unfilled
demand in North eastern regions devastated by earthquakes and also by
increasing demand arising from constructions relating to 2020 Tokyo Olympics.
It is notable, however, that Abe administration is highly careful that theireffort not to be interpreted as opening doors generally for foreign workers
worrying about the negative attitude of the Japanese against general
introduction of foreign human resources. I will touch upon this problems later.

6. Shrinking Population and Revitalization of Regions
In May 2014, a well qualified study group disclosed their research result
which tells us that if the current inter-regional mobility will be unchanged
for the next 40 years, a half of Japanese communities (cities, towns andvillages) will begin to disappear after 40 years because female populationof child bearing age range (20 to 40 years old) will be halved in thosecommunities. Since the study disclosed actual names of communities which are
predicted to disappear within half a century or so, it gave a big and serious
repercussion in Japanese society and policy circle.
Since politicians are very sensitive to regional population movement
because it relates directly to changes of votes, Abe administration had tobe serious to tackle the issues arising from such population changes in regions.
The government launched a major campaign and policy efforts under the nameof “revitalization of regions.” Under the campaign, the administration plans
to provide variety of subsidies to communities particularly of remote regions,and solicit ideas from communities to revitalize themselves. My frank viewis that the mega-trends of population would not be easily altered by such
subsidies and solicitation of ideas.
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7. Reduction of corporate tax rate.
Prime Minister Shinzo Abe is taking a strong initiative to reduce corporate
income tax rate in order to enhance competitiveness of Japanese corporations
and also make Japan a more attractive place for foreign companies to locate
themselves in Japan.
The current corporate income tax rate in Japan is 35.6% which is only
comparable with that of the US and much higher than many of developing andadvanced economies which Japanese businesses have to compete. Prime Minister
Shinzo Abe has been advocating to reduce the rate to less than 30% in several
years. Toward the end of 2014, reflecting the strong will of the Prime Minister,
the government tax panel decided to reduce the tax rate by 2.5% in 2015. Further
reductions are necessary to realize the target the Prime Minister proposes.

8. Medical reform
Japan has enjoyed half a century ago, a couple of important merits in theworld of medicine such as one of the lowest medical costs to GDP and the longest
longevity of the population. However, with changes of mega-trends such as aging
of population, development of medical technology which jerks up costs ofmedicine dramatically, and slowing of economic growth which makes increasingly
difficult for the population to bear the increasing medical costs.
For the last several decades, the government strengthened the regulations
both on prices and quantity of medical services, which resulted in weakening
merits of market competition such as innovation. Under such circumstances,the public suffered from heavy burden of medical costs, mal-allocation of
medical services in spite of practically bankrupted public medical insurances,
deficit ridden hospitals and deterioration of quality of medical services.
Japanese medical industry and policies now have a myriad of problems.
Abe administration views that medical industry can be potentially a leading
sector of Japan’s growth and also international competition. Challenges torealize such goals will need dozens or hundreds of thorough reforms andinnovations. For recent few years, Abe administration has been focusing only15

on relaxation of one peculiar policy regulation, which prohibits the patient
to receive publicly uninsured treatment while receiving insurance benefit on
related treatment.
Abe team, particularly of regulatory reform committee, has been working hard
to relax this regulation in spite of strong opposition and resistance byministry of labor and welfare and by the association of medical practitioners.
Abe team has attained some progress while it has been dwarfed in the process.

9. Social security reform
Social security reform is perhaps the single largest policy issue for Japanto secure sustainability in the long run. Under the mega-trend of rapid aging
of population the social cost of aging has been growing dramatically. Currently
the ratio of “national burden” or the average burden of tax and social security
payments for the public is 40 percent for the society with 25% of populationof age 65 and older. In 2050, when the proportion of aged population will be
about 40%, the national burden is estimated to rise up to 72 or 73 percent,which means the public can have only a quarter of income as dispensable. Thisobviously means Japan will lose “sustainability” in the long run.
This is a consequence of absence of major and effective reforms of social
security system for more than half a century. Japanese social security system
was constructed around 1960 when the population was very young. While thepopulation has been aging dramatically in recent half a century, no major andfundamental reforms have been executed so that the current system is completely
outdated and unfitted to the society where population is aging and the age
structure is almost opposite relative to half a century ago.
While knowing the importance and the need of comprehensive, fundamental
and thorough reforms of social security system, Abe administration so far has
not been able to launch such reforms. They tried some reforms toward the endof 2014, which ended up with reforms to impose higher contributions from
relatively richer people and larger corporations.

10. National strategic zones

16Abe administration advocates the policy of designating selected areas inJapan where special deregulations and institutional reforms can be realized,
the reforms which cannot be applied to other areas. So far, a dozen or so ofareas have been identified as “national strategic zone.” Outcomes fromproclaimed deregulations or special policies have not been visible yet.

11. Government’s request for wage hikes
Prime Minister Shinzo Abe asks strongly industrial circles to raise wages
of workers. This is because Abenomics will not succeed without appropriate
wage increases which are hopefully higher than the rate of inflation. If not,people will suffer from declines of real wages and lose confidence on
Abenomics.
Since mid-2013 when inflationary trend began to be visible, Prime Minister
Shinzo Abe earnestly asked leaders of industrial and financial organizations
to persuade managers of their member companies to raise wages. In the wage
round of 2013, large firms increased wages by 2 percent or so, however, smallerfirms were not quite able to raise wages high enough to maintain real wages.
Toward the end of 2014, Prime Minister Shinzo Abe asked the cooperation ofindustrial leaders even more earnestly to raise wages. The industry leadersagreed to respond the request of the administration for the wage round of 2015.
It is expected that real wages will increase somewhat in 2015 partly becauseof wage increases and partly because of decline of oil prices which slows down
the pace of inflation.

V. Will Abenomics Succeed?
The contents of Abenomics could be summarized as above. Now the major
question to be probed at the Paris conference of IFRI is the question as towhether or not Abenomics will succeed. Let me suggest a few observations in
an attempt to think about this question.
First, let me review briefly the economic performance for the recent two
years since the outset of Abenomics.

17

The relationship between prices and wages has been rather disappointing.
Prices have been rising reflecting the effects of unprecedented monetaryeasing particularly by increased import prices pushed up by reduced exchange
rate of the yen due to the expectation of drastic increase of base money. In
contrast, while wages have been rising but the pace of rising is more modest
then prices so that real wages have been declining for year and a half sincesummer 2013.
Consumer price index has been increasing 0.9% in July-September 2013,
1.4% in October-December, 1.5% in January-March 2014, 3.6% in April-June after
raising consumption tax from 5 to 8%, 3.3% in July-September. In contrast,
wages increased for the same period, -0.4%, 0.4%, 0.8%, and 1.5%. As a result,real wages have kept declining since summer 2013 until now. This trend may
well give rise to dissatisfaction and distrust against Abenomics on the partof the public.
Export performance has also been disappointing. It was expected that export
would increase substantively reflecting sharp declines of exchange rate ofyen thanks to the unprecedented increase of base money. However, exports haveincreased only sluggishly, if any, since the beginning of 2013 until recently
and did not contribute to enhance the economic growth rate.
Economic growth performance for the same period has also been disappointing.
Quarterly growth translated to annual growth rate has been
6.0% in January-March 2013, 3.0% in April-June, 1.6% in July-September, -1.5%
in Oct.-December, and 5.8% in Jan.-March 2014 reflecting rush purchases rightbefore the increase of consumption tax rate, -6.7% in April-June, -1.9% in
July-September, and 1.5% in October-December.
Aside from these short-run economic performance, it is necessary to assess
the performance of Japanese economy in medium to long-run particularly becausemuch of the content of “growth strategy” of Abenomics is structural reformwhich will take a rather long time to materialize its intended effects.
In view of long term growth, many experts and research organizations havebeen studying the growth potentials of Japanese economy. According to a summaryof the cabinet ministry, the estimated growth potentials are disappointingly
low.

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For example, IMF estimates 0.8% for the coming decade, Mitsubishi ResearchInstitute 0.6% and 0.5 % each for the first 5 years and latter 5 years of coming
decade and 0.4% afterwards. Nikkei center estimates 0.6% for the decade. Nissei(life insurance) Institute estimates 1.1 and 1.2% for the first 5 and latter5 years of the same period, Mitsubishi UFJ (bank) Research Institute estimates
0.7% and 0.6% for the same period. Most optimistic is Daiwa Research Instituteestimates 1.3% and 1.3% for the same period.
Economic growth rates attainable under such assessments as above will not
be good enough to solve any of the major tasks that Japan needs to tackle tomaintain its sustainability. One is the fiscal reconstruction. We have alreadyseen that cabinet ministry of Japanese government discloses their recent
estimate of primary balance up to the target year of 2020. According to theirestimation, primary balance will still be left with the deficit equivalent
to 1.6% of GDP or 11trillion yen in 2020. The above mentioned estimates ofgrowth potential suggest that Japanese economy will not even be able to achieve
the good scenario which the government uses for their estimation.
We have examined rather in detail the contents of the second growth strategy
of Abenomics. If we scrutinize the contents, we would be left with an impressionthat it is the policy to change the nature of Japanese economy which has been
forged during the period starting from the postwar reform and through the
postwar growth. We would be left with the question as to whether this is the“growth” strategy.
The growth strategy which can be most effective for developing economies
like China today or Japan during the 1960s and 1970s is public investments
to enrich infra-structure such as railways, highways, ports, cities etc. This
type of growth strategy could no longer be effective to a matured economy like
Japan after 1980s. Japan now suffers seriously from the huge government debt
because the public investments conducted voluminously to enhance economic
activity since the late 1980s actually did not generate economic growth.
The estimates of growth potential as quoted above are affected heavily by
the decline of population and workforce in the near future. They seem toindicate that given the heavy constraint of shrinking population, economic
growth as such could not be conceived.

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What the growth strategy of Abenomics tackles is the change of the structuraland institutional nature of the Japanese economy forged during the 70 yearsof postwar process of development. I think that this is a fully legitimate
strategy because one could not hope to generate economic growth without
altering the structural nature of the economy which is hardened by accumulated
vested rights of interest groups. However, if the structural reform of
Abenomics would be promoted well, would the growth be generated under the heavy
constraint of long-term shrinkage of population?
I suggested a conceptual break through to overcome this apparent impasseby referring to several cases of remarkable economic growth attained in theworld even under severe constraints of population or other economic resources
such as Dubai and Singapore. These are very small countries and may not be
useful references for a mid-size country like Japan. I quoted, therefore, themost useful and powerful model which Japan should learn from is “Japan 70
years ago.”
Japan 70 years ago is a completely devastated archipelago because of bombing
in the process of defeat in the war. Japan lost all the vested rights in theworld, and even lost 3.1 lives of population. Countries suffering from thismuch of damage, in many cases, could not possibly hope to recover and growpowerfully.
However, Japan grew remarkably and achieved the status of the second largest
economy in the world only next to the United States within a quarter of century
afterward. Question is why and how Japan made it. My view is that Japan wasable to materialize this miracle because Japan denied and abolished completely
the prewar system of the country and created an entirely new country where
all people are freshly encouraged to work hard and compete.
Reforms of Abenomics are good. I fully appreciate the efforts of Prime
Minister Shinzo Abe and his team. But it seems that Abenomics is not strong
enough and thorough enough to deny, abolish and change completely the postwar
economic system which has been constraining and holding down the potential
capability of Japan and Japanese to generate the powerful economic growthrequired in the new era.
I suggested 9 major reforms and policies which should be pursued to change
more thoroughly to liberate the potentials that the Japanese and their country
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have to generate fresh growth in the forth coming era. Since I have describedsuch policies in detail in my essay, entitled ”Two Year Experience of“Abenomics” and Forthcoming Challenges for Japanese Economy” which was
carried as a previous essay in my blog （http://www.haruoshimada.net/blog/
2015/02/two-year-experi.html）, I will not repeat it here.

Vl. Questions and comments from the floor
Following the presentation, many points were raised by questions andcomments from the floor. Let me introduce some of them.
On the general performance of Japanese economy, audience expressed fairly
positive evaluation. The growth rate has been certainly low, but the economy
experience steady mild growth. Stability of the economy is appreciated. I
responded that the current growth rate is far less than what is needed to overcome the danger of fiscal crisis and to enrich social security to take careof increasing costs of aging of population.
The huge fiscal debt attracted attention. The government’s debt is certainly
very large. But it was pointed out that most of the JGB is held by the Japanese
so that it may not be sold as easily and quickly as the case of Greece a few
years ago. In other words, Japanese economy should be in fact more stable thanit looks in the very large amount of government debt. I responded that morethan 10 percent of JGB is held by non Japanese and the Japanese investors as
well, largely of financial institutions, may well sell the JGB if they judge
holding JGB will lose the capital value.
Aging of population and the robustness of the social security also attracted
attention. This issue is perhaps the most serious issue that Japan is facedin the medium and long-run.
Reflecting one of my policy recommendation to legislate the immigration law,a question was raised from the floor if Japan really needs to introduce foreign
human resource meaning introduction of foreign workforce could not be thesolution to counteract the serious issue of shrinking population and workforce
which Japan is faced and will be faced more in the future.

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I responded to this question emphasizing the need for Japan to make theconditions for accepting foreign immigrants transparent by enacting theimmigration law. Japan currently has only immigration control law and refugee
recognition law but does not have an immigration law, which is rather rareamong advanced countries in the world. Many countries are competing hard to
attract and incorporate capable and talented foreign human resources as theirnationals. The fact that Japan does not have immigration law which prescribes
the conditions to accept foreign people as Japanese nationals is a serious
drawback in attracting capable foreign people.
The question was raised as how professor Thomas Piketty was received in Japan.
I commented that he was very much welcomed by Japanese media. There is a Piketty
fad almost as a fever. His huge book became the best seller. Books to explain
the gist of his voluminous book were also sold well.
Japanese media simplified its content that the modern economies have a built
in nature of expanding income differentials of people because the rate of
return on capital tends to be higher than rate of economic growth. I pointed
out that he wrote many other things to describe the modern history of economies.
Perhaps the single most important finding is that the process of enlarging
differentials were dissolved twice by world wars.
I added that his recommendation in Japan to levy heavy capital gain tax on
the rich would not give meaningful effect to mend the problem of growing income
differential given the structure of income differential in Japan.
I was impressed particularly by the fact that the audience, mostly French,
had a keen attention and good knowledge on Japanese economy and Abenomics.
I hope that my presentation is of some use to satisfy their curiosity.

Vll. After the symposium
After the seminar, I was picked up by my old and good friend, Professor
Frederic Jenny of ESSEC. We were joined by his wife in a good French restaurant
in downtown and enjoyed dinner and talk, which we did not have for a long time.
Next morning, I had an appointment with a person in Paris to arrange a projectin the near future. Before lunch, Embassy staff escorted me to Japanese Embassy
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in Paris and had a nice talk with Ambassador M. Yoichi Suzuki for about anhour. We discussed much about changes of mega-trends of Japan and the world
and about the future. The lunch was planned as a working lunch with a journalistof Le Figaro. His questions were sharp and I explained in some detail thestructural reform policies of Abe administration.
The embassy staff drove me directly from the restaurant to the airport.
The ANA flight took off shortly afterwards in the evening of March 10, andarrived at Tokyo Narita airport in the morning of March 11, and I resumed mywork at my office which was waiting for the last few days.
After the trip, it looked to me almost unbelievable that this much of things
were done spending only two days and a half including a round trip flightbetween Paris and Tokyo. The trip was fruitful not only by having been able
to exchange views with European intellectual on Japanese economy, but also
particularly personally to have been able to see my good old friends in addition
to make new friends. All this was done by being helped by nice people and their
good will.

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