Japan Loses to Europe as Abe Heads to Davos

Japan fell behind European nations in a ranking of the best places to do business compiled by Bloomberg, underscoring the need for Prime Minister Shinzo Abe to take bolder steps to reduce regulation and attract companies.

As Abe heads to Davos to explain his government’s economic and diplomatic policies to investors and world leaders, Japan dropped nine spots to 12th position, in an index based on six criteria including the cost of setting up a business and readiness of the local consumer base. That left it behind countries including Germany, the U.K., the Netherlands, Spain, Sweden and France. Hong Kong maintained its top ranking.

Abe has vowed to make Japan the easiest place in the world to do business as part of the economic strategy he has promoted since taking office in December 2012. He has yet to introduce legislation such as corporate-tax cuts that companies have advocated to boost Japan’s competitiveness.

“Japan has a less business-friendly environment than Europe,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. “European nations are more seriously tackling reform in the labor market since they had the sovereign debt crisis. Japan has made little progress in the third arrow of Abenomics -- deregulation and structural reforms.”

Bloomberg Rankings measured nations on a scale of zero to 100 based on six factors including the costs of labor and material, and hiring and moving goods; the degree of economic integration; and less tangible costs such as inflation and corruption.

More Costly

While Japan scored 75.6, the same as last year when it achieved third place, it performed worse in ratings on the cost of setting up a business, prices of labor and material and the readiness of the local consumer base. Energy costs for Japan have surged as the yen’s drop of more than 14 percent against the dollar in the past year makes imported petroleum and gas more costly.

Japan is depending more on fossil-fuel imports because of nuclear-plant shutdowns after the Fukushima disaster in March 2011. Consumer spending in Asia’s second-largest economy may also slow with a sales tax increase in April.

“Last year’s growth was basically stimulated by policies, it’s not a self-sustained recovery yet,” said Masamichi Adachi, a senior economist at JPMorgan Chase & Co. in Tokyo. “The near-term implications of Japan’s policies are very positive but long-term implications are still uncertain.”

Encouraging Signs

Germany tied with Australia for fifth place, while France was 11th. The euro area emerged from a record-long recession in the second quarter of 2013 and European Central Bank President Mario Draghi said last month there are “encouraging signs” that the region’s crisis is easing.

“The business environment clearly improved, partly because the fears of the euro falling apart began to fade,” said Stephen King, chief global economist at HSBC Holdings Plc. “Japan has obvious constraints with the demographic story -- you can print money, you can’t print workers.”

Canada overtook the U.S. to claim second place as corporate tax cuts in recent years and a weaker Canadian dollar against the greenback in 2013 made it more attractive.

In China, where a labor force decline is robbing President Xi Jinping of an engine of three decades of growth, the score for the readiness of the local consumer base fell. The category includes the size of the middle class and household consumption. China slipped four places to rank 28, while the other BRIC economies of Brazil, Russia and India improved on their standings and made it to the top 50.

South Korea topped a separate Bloomberg ranking of the most innovative countries in the world. The government will establish “creative economy centers” this year to provide assistance to small- and medium-sized companies and help people with fresh ideas get financial aid without collateral, President Park Geun Hye said in a Jan. 10 interview.

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