Japan PM should focus on regulatory reforms, say economists

[TOKYO] Japan's Prime Minister Shinzo Abe ought to prioritise regulatory reforms, according to economists in a monthly Reuters poll whose forecasts show they remain pessimistic on prospects for the pace of inflation to pick up in coming years.

After reshuffling his cabinet last week in an effort to shore up sinking public support, Mr Abe said the economy remains his top priority. He repeated that he will seek to engineer a positive cycle of higher corporate profits, prices and wages.

The new cabinet lineup, announced after a series of gaffes and missteps by Abe's government, gave a lift to his support.

But Japan is still faced with prospects of sluggish economic growth and no meaningful pickup in inflation.

In the poll, Japan's economy is forecast to expand by 1.4 per cent in this fiscal year, which ends in March 2018, and just 1.1 per cent next. Core inflation is seen averaging 0.6 per cent this year and 0.8 per cent next, well short of the Bank of Japan's 2 per cent target.

A majority of analysts polled by Reuters August 1-9 also said Mr Abe should proceed swiftly with deregulation, but there was doubt he will do so.

"Bold deregulation, which is a part of (Abe's) growth strategy, has not progressed much and the government needs to work on that," said Takumi Tsunoda, senior economist at Shinkin Central Bank.

"To encourage liquidity in the labour market is an important policy, which could support the potential growth rate and also would help raise wages," he said.

Of 31 economists who answered an additional question on what Mr Abe should do to regain public trust, 18 said he should focus on regulatory reforms.

Among those respondents, 11 cited a need to reform to Japan's restrictive labour market, while six said the government should prioritise reforms in the medical and elderly care system. One said Mr Abe should encourage introducing better technology and artificial intelligence to Japanese industry.

To a separate question on what Mr Abe was likely to do, a majority of respondents - 23 of 34 - predicted the prime minister will focus on investment in human resources development and education. Only five thought he will make regulatory reforms a priority.

In the Reuters poll, 31 out of 35 analysts forecast the Bank of Japan's next move will be to start unwinding its ultra-easy monetary policy. Four said the BOJ will adopt more easing measures.

But that next move, whether it is scaling down or increasing stimulus, likely won't come until late 2018 at the earliest, according to the poll.

With inflation at just 0.4 per cent, the BOJ last month for a sixth time pushed back the timeframe for achieving its 2 per cent target. It now expects inflation will not reach that level until sometime in the fiscal year ending March 2020.

"When the underlying CPI... and medium-term inflation expectations rise above one per cent, we expect the BOJ will raise the 10-year yield target for the first time," wrote Hiroshi Ugai, chief economist at JP Morgan.

"Since the BOJ focuses on upward momentum of inflation, we do not expect the BOJ will ease monetary policy even if the rising pace of inflation is far behind the BOJ's outlook."

REUTERS