Making Abenomics Work

Missing the target.

In his quest for allies in Japan's rivalry with China, Prime Minister Shinzo Abe has reached out to Southeast Asia, Australia, India and now Latin America, where he started a five-nation visit on Friday. He'd do more to strengthen Japan if he refocused his energies where they're most needed: at home.

Officials say Abe's trip is a chance to boost exports to the region, which Chinese President Xi Jinping also visited earlier this week. They could use a boost: Japanese exports shrank 2 percent in June from a year earlier.

QuickTake Abenomics

That figure, though, underscores the real problem. Abenomics isn't yet working as hoped. The competitiveness part of the prime minister's agenda -- the "third arrow" of Abenomics -- is still lacking. Without it, the fiscal and monetary arrows can only do so much.

Monetary stimulus has driven down the yen, but rather than boosting exports, this has made imports more expensive. The trade deficit in the first half of 2014 was the biggest since 1979. Domestic prices are rising, too -- as intended -- but the Bank of Japan's ability to raise inflation to its 2 percent target is still in doubt.

Fiscal stimulus has run its course. Real incomes have been under pressure since Abe pushed through a sales tax increase in April -- a rise that was needed to get Japan's public debt back under control. Meanwhile, companies are sitting on $2.3 trillion in cash, rather than investing it in new machinery or raising wages.

Supply-side reform will have to take up the running. At the end of June, Abe unveiled a complicated bundle of new structural changes, his most ambitious so far. Many of these plans are sound. The proposals to strengthen corporate governance and increase women's participation in the workforce are especially welcome. But they're mostly small-bore, and their sheer variety weakens their impact. They fall short of the frontal attack on labor, immigration and tax laws that Japan still needs and Abe once seemed to promise.

Instead of gathering his strength for that purpose, the prime minister is spending some of his dwindling political capital on a new security policy. His government recently revised Japan's position on defending friends and allies that come under attack, softening the country's post-war commitment to pacifism. The change makes sense and has long been supported by the U.S. -- but it's unpopular.

With Abenomics a work in progress, Abe can ill afford this expense of political resources. The new structural reforms, inadequate as they may be, face strong resistance. Abe's own Liberal Democratic Party is wavering, and he needs to stay popular to prevail. The same logic applies to talks over the Trans-Pacific Partnership trade deal, which Abe hopes to accelerate while in Latin America this week. Those efforts won't amount to much unless he can face down his own farm lobby.

Serving as premier for the second time, Abe understands the problem. He's repeatedly promised to concentrate on the economy and not be distracted by issues dear to Japan's nationalists, as he was during his first term in 2006-2007. His speeches have mostly kept that promise -- but speeches aren't enough. A planned ministerial reshuffle presents an opportunity to put more forceful reformers, including more high-profile women, into key jobs.

If Abe can't transform Japan's economy, new friends abroad won't make much difference.

--Editors: Nisid Hajari, Clive Crook.

To contact the editor on this story:
David Shipley at