Strategic zones and labour reform to get Abenomics back on track?

Author: Naohiro Yashiro, International Christian University

Since Japanese Prime Minister Shinzo Abe came back to power at the end of 2012, the first two arrows (expansionary monetary and fiscal policy) of his ‘Abenomics’ economic policy package have been relatively successful in re-igniting Japan’s economy and raising expectations for economic growth. But momentum seems to be falling away as the third and decisive arrow — structural reform — has yet to be released.

This is not surprising. Expansionary macroeconomic policies are broadly popular, but reforms that enhance market competition by removing barriers to entry may not be. Ironically, the landslide victory of the Liberal Democratic Party in the Upper House election in July 2013 actually increased the number of legislators who oppose structural reform, reflecting the vested interests of various political pressure groups.

But one exception to this inertia is the Strategic Special Zones policy. This is a national project focusing on the economic development of Tokyo and other major metropolitan cities through regulatory reform and fiscal incentive measures. Legislation was passed in December 2013, and six areas of the special zones were decided including the Tokyo and Osaka metropolitan areas, Okinawa prefecture, Fukuoka and Nigata cities on 28 March 2014. A major part of the reform includes raising the floor-area ratio so that it is possible to build higher apartment buildings in the limited land space in the city centre. The government will also waive a section of current regulations to allow international schools to use the facilities of public schools, and to allow foreign patients to consult foreign doctors in the special zones, providing better services for foreign families working in Japan. This is just the first round of regulatory reform: the second and third round reforms are expected later this year.

There are also several measures concerning labour market regulation that will be implemented in the special zones. These policies are particularly important for the third arrow’s success.

The first measure will establish guidelines on working conditions in Japanese firms. A major issue with the Japanese labour market is not necessarily that regulations regarding employee dismissal are too rigid but that legal outcomes from dismissal cases are hard to predict.

Article 16 of the Labor Contract Law states that ‘a dismissal shall, where it lacks objectively reasonable grounds and is not considered to be appropriate in general societal terms, be regarded as a misuse of the right and therefore be renounced’. But the law does not specify the meaning of the word ‘appropriate’, leaving an exact determination in each specific dispute to individual judges. In the special zones, guidelines detailing appropriate conditions for workers will be established by the government, which will prove useful particularly for foreign firms with less experience in Japanese labour disputes.

The second measure involves extending the time that fixed-term contract workers must work at a given company before they are required to be given an unlimited contract as a full-time permanent worker until the retirement age of 60. The law requiring unlimited contracts after five years of employment was established under the previous DPJ government to encourage job security. This regulation is burdensome, particularly for newly established firms with fewer prospects of future business development. It is proposed to increase the time period to 10 years. The relaxation of this regulation was originally intended to be an exception that would be implemented only in the special zones. But labour authorities are proposing to extend it nationwide, preferring not to have multiple standards for labour regulations across Japan. Such nation-wide regulatory reform in this area would not have been possible without the special zone initiatives.

The third measure is the introduction of official procedures for the dismissal of employees with severance pay, following the examples of Germany, France and Italy. This will make the employment adjustment process more transparent for both employers and employees. However, the agreement is yet to be concluded with labour authorities, and it will consequently form an important part of the agenda for second and third round negotiations for the special zones.

Some question why special zones are needed at all. If regulatory reforms are required, why are they not done nationwide? The answer lies partly in the nature of Japan’s consensus-based society, not favouring top down decision making. It takes time to change long-standing policies, in particular those relating to labour markets. It is seen as preferable to experiment with reforms in specific geographical areas, and gradually extend them nationwide if they prove successful.

The goal of the Strategic Special Zones is to ensure that the affected cities — which are some of the world’s largest — offer the most convenient arrangements possible for doing business. This is an ambitious target, and labour market reform is essential if the Japanese government wishes to achieve necessary structural reform as the ‘third arrow’ of Abenomics.

Naohiro Yashiro is a visiting professor of economics at the International Christian University.