Third Arrow Reforms and Japan’s Economic Performance

Akihito Asano and Rodney Tyers

No 15-17, Economics Discussion / Working Papers from The University of Western Australia, Department of Economics

Abstract: Clear progress has been made in economic reform under the “Abenomics” first arrow (monetary policy) and measurable progress has also been made under the second (taxation reform). The third, which emphasises reforms to labour markets, company tax and competition, particularly in the hitherto highly protected services sector, has been more politically difficult and slower to emerge. This paper explores the gains that are possible from these three elements of the third arrow program. Economic rents and industry concentration levels are first identified from Nikkei firm specific data and used to construct an economy-wide model that represents oligopoly behaviour and its regulation explicitly. The analysis finds that modest gains in both efficiency and growth are available from increases in Japan’s labour supply and reductions in company tax rates, while substantial gains are possible from active competition policy that embodies pricing surveillance and price cap regulation, particularly in services. Central to resurgent growth in Japan are improvements such as these to efficiency in home industries that raise home rates of return and facilitate the rebalancing of Japan’s large home and foreign asset portfolio toward home investment and capital growth.

Pages: 66 pages
Date: 2015
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Working Paper: Third Arrow Reforms and Japan’s Economic Performance (2015)
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