Which Parts of Japan’s Economy Most Need Reform Right Now?

I believe Japan needs to work on reducing the regulatory, political, and social barriers that hinder productivity and profitability in its economy. Further, to be more competitive in the global markets, Japan (DXJ) needs to get rid of the tradition and bureaucracy that are currently undermining the growth of an economy with a lot of hidden potential.

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To break the civil bureaucracy that’s hindering growth in the economy, Japan (EWJ) will likely need a set of structural reforms that help undermine government-backed monopolies in sectors such as power and agriculture while promoting privatization and competitiveness.

With the third arrow of his plan (see Part 1 of this series), structural reform, Shinzo Abe seeks to:

• break government monopolies
• reform hiring and firing policies for companies in order to enhance labor productivity
• reform Japan’s overly restrictive healthcare sector
• increase female workforce participation
• deregulate markets in order to boost competitiveness

Another prominent need of the Japanese economy is a change in its postwar system of lifetime employment. There are about 5 million workers who can’t be laid off, even with severance pay, despite their capabilities no longer matching companies’ requirements. On the other hand, about 40% of the capable Japanese workforce still struggles to get regular and well-paying jobs.

Labor market reforms would benefit companies such as Sony (SNE), Mitsubishi UFJ Financial Group (MTU), and Honda Motor (HMC) that operate in Japan.

Let’s now turn to Shinzo Abe’s reform agenda in the next part of this series.