The Missing Arrow of Abenomics

TOKYO – In his drive to kick-start the Japanese economy, Prime Minister Shinzo Abe, shortly after taking office in 2012, introduced a large fiscal stimulus and put in place a bold program of monetary easing. Since then, Japanese policymakers have been working to launch what Abe calls the third “arrow” of his agenda: arduous reforms of key industries and the demolition of structural barriers to growth.

But the focus on public policy has left a “fourth arrow” – the private sector – untouched and seemingly ignored. This is unfortunate, because the government cannot fix Japan’s ills on its own. Annual productivity growth has been stubbornly sluggish, rarely rising above 2% for much of the past two decades, reflecting both missed opportunities and declining cost competitiveness.

Japan’s productivity slump permeates the entire economy; labor and capital productivity gains have nearly stalled in almost every sector – even in Japan’s signature advanced manufacturing industries. Labor productivity in the transport-equipment sector, for example, is barely half that of Germany.

This trend puts annual GDP growth on course to average only 1.3% through 2025, implying a third consecutive decade of stagnation. Such an outcome would coincide with – and exacerbate the effects of – an adverse demographic shift that will constrain fiscal revenues and drive up costs for universal health care and pension benefits.