The most immediate goal (the first arrow) of Abenomics has been to end the small but persistent deflation that arose some 15 years ago, and to achieve an annual 2 per cent increase in the Consumer Price Index (CPI).

When Haruhiko Kuroda became Bank of Japan (BoJ) governor in April 2013, he committed to achieving this goal by March 2016 (the end of fiscal 2015). He has correctly pursued an easy monetary policy, including a surprising further easing on 31 October 2014. The consumer price index (CPI) became positive once Kuroda’s policy was implemented and rose to a peak of 1.5 per cent in April 2014. Less anti-deflation progress has been made than expected. This was evident even before the dramatic decline in oil prices introduced a temporary deflationary blip. But performance will improve. CPI will resume an upward trend as global oil prices eventually stabilise.

Japan’s deflationary mindset has weakened significantly, but has not disappeared. Given the ongoing challenges of achieving adequate private sector aggregate demand, Japan’s very low interest rate policy will likely continue for several years at least. Increases may reach 1 per cent relatively soon, but Kuroda has had to delay reaching the 2 per cent target until September 2016 and he probably will have to announce a further delay.

Flexible fiscal policy is the second arrow of Abenomics. In principle, the policy is to stimulate until private aggregate demand generates full employment growth, and then to contract to reduce the government budget deficit and, eventually, the high gross government debt/GDP ratio of 246 per cent (the net debt ratio is 130 per cent).

The major policy debate continues to be whether to give higher priority to an austere budget policy of reducing welfare expenditures and raising the consumption tax, or to follow a full employment growth strategy by maintaining fiscal stimulus to ensure adequate domestic demand. My view is that growth is a better path than austerity to resolve macroeconomic difficulties, while maintaining strong pressure on policymakers to carry out necessary yet politically difficult structural reforms. The high debt ratio cannot increase indefinitely, without eventually creating a fiscal crisis.

Abe postponed increasing the consumption tax to 10 per cent, rescheduling it from October 2015 until March 2017, but has stated it will not be delayed further. This implies that whatever growth momentum has been achieved will be temporarily dampened.

A ¥4 trillion (about US$33 billion) increase in government revenue, more than was budgeted for fiscal 2014, provides the government leeway to delay fiscal reform. But eventually it will be necessary.

To carry out fiscal reform, Japan must cut welfare expenditures, raise taxes and reform the tax system — and do so without hurting the poor and middle classes, or the elderly. But Japan has been relying on consumption tax increases rather than other taxes, even though it hits poorer people harder. While it will be necessary to further raise taxes after 2017, this will be politically difficult. That is one reason good growth over the next several years is so important politically as well as economically and socially.

Major structural changes are necessary to achieve good growth. Thus, the third arrow of Abenomics is to ‘revitalise’ Japan’s economy to achieve sustained, full-employment, rapid growth.

Most third-arrow initiatives focus on increasing corporate investment, efficiency, and profitability. On June 30 2015 the government issued a revised revitalisation and growth strategy. It includes six major projects involving innovative technologies by the 2020 Tokyo Olympics: next-generation transportation systems; energy management; robotics; medical care; 20 million foreign tourists; and increased inward foreign direct investment. Deregulation to achieve more pro-business, competitive markets is stressed, particularly where ‘bed-rock regulations’ have remained so strong, notably in agriculture, healthcare, energy, and employment. The government has begun to implement policies in these areas, but there is a long way to go.

Labour force reforms have also been limited. Japan’s labour force is 66.1 million (June 2015 seasonally adjusted), down from the peak of 68.1 million in June 1997; 38.6 million (57 per cent) are male and 28.6 million are female. The unemployment rate in July was 3.3 per cent, and the ratio of positions open to those available is the highest it has been in 23 years. Since January 2013 male employment has increased by 100,000 and female employment by 900,000. The Abe government attributes much of this to its ‘womenomics’ policy, but it was mainly due to increased demand for labour in tightening labour markets.

And while Japan, like all advanced countries, seeks highly skilled foreign professionals, its immigration and foreign worker policies are restrictive and minimal. Japan would benefit from more foreign workers, unskilled as well as skilled, but is liberalising very cautiously. The main policy initiative will only add about 60,000 foreign skilled workers a year on five-year contracts.

Good Japanese economic performance from now on reflects the difficulty of realising large percentage increases in traditional measures when the levels are already high. With a declining labour force and population, 1 per cent or so real growth actually is pretty good over the longer run. Japan’s standard of living (GDP per capita) would improve at 1.5 per cent or so. With continued advances in medical care and technology, the quality of life can be expected to improve even more.

This is the reality of good Japanese performance in the longer run, so the Japanese, and those of us who study and care about Japan, will have to adjust our mindset accordingly.

Professor Hugh Patrick is Robert D. Calkins Professor of International Business Emeritus, the director of the Center on Japanese Economy and Business and a senior scholar at Columbia Business School.