Those three arrows of Abenomics were designed to be fired together. Monetary and fiscal stimulus can boost aggregate demand while the reforms that bring immediate pain for longer term gain are implemented. So far, the easy work of creating, if not spending, more money has been done, but the difficult reforms that take on vested interests are still to be tackled.

Japan’s population is shrinking, with 1 million fewer people now than in 2008. Even more importantly, it is ageing. The share of the elderly is becoming larger and the working-age population is dwindling. Incomes will only grow through increased productivity. What the economy needs are reforms that break through the vested interests holding back productivity growth and allow resources to be deployed where they are most productive.

Following three years of challenging progress on structural reform — Abenomics’ most important arrow — Abe launched a second round of arrows in September 2015. The three new arrows aim to create a strong economy, provide better childcare support and improve social security.

The three new arrows are meant to bring about meaningful structural reforms. While not entirely new or innovative, they will hopefully serve to re-energise policy.

These new arrows come with targets. Abe pledged to increase nominal GDP to 600 trillion yen (US$4.9 trillion), which is a 20 per cent increase. No timeframe was provided and the target will be difficult to meet with a shrinking population. The focus should be on incomes, rather than the aggregate size of the economy.

The new second and third arrows are all about demographics. They aim to stabilise the population at 100 million in 50 years from the current 127 million.

Limited childcare is the most immediate bottleneck in increasing the fertility rate. With a shortage of childcare places, it is difficult to increase the fertility rate from the current 1.4 to the target of 1.8 — still below the replacement rate of 2.1 — while simultaneously trying to increase the participation of women in the workforce.

Japanese women are some of the most educated and capable in the world but many find it difficult to stay in the workforce and maintain a career. Work and family culture need significant change. Abe’s ‘womenomics’ reforms have helped increase female participation, but from a low base. It is not yet clear whether this increased participation is mostly in career-track professions or the growing non-regular workforce.

Policies around improving the social security system are focused on the other end of the age spectrum. A target has been set to reduce the half a million elderly on waiting lists for nursing homes by 150,000 within 10 years. That will help the 100,000 or so workers each year who drop out of the workforce to care for elderly relatives.

Increasing spending on the very young and the elderly is necessary, but to do so in a sustainable way requires scaling back other benefits. Japan needs social security reform — patching up the existing system will not be enough. Massive, poorly targeted subsidies and wasteful spending should be cut back.

The original second arrow, flexible fiscal policy with medium-term consolidation, doesn’t look like it has hit its mark with no credible plan to return to primary surpluses. Gross government debt is at an unprecedented 245 per cent of GDP and the social security burden will only grow as the population ages.

The three new arrows of Abenomics need to better target vested interests and focus more closely on productivity enhancing reforms. The agricultural and services sectors are heavily protected from international and domestic competition.

Japan’s performance on global competitiveness indexes is mixed; areas like trust, infrastructure and sophistication see the country excel, but concerns remain over issues such as Japan’s regulatory environment. With a stock of foreign direct investment as a proportion to GDP of around only 3 per cent, more clearly needs to be done. Foreign managers, capital and technology will not easily come to Japan without institutional and cultural reforms.

The ‘second stage of Abenomics’ was announced in April with familiar sounding policies like cutting corporate tax rates, aiming to double expenditure by inbound tourists by 2020 and requesting companies to commit to wage hikes. A promising sign is that agricultural reform and measures to welcome foreign direct investment were also included in this second stage. Whether real changes are made in those areas will be the litmus test.

Japanese companies are, as usual, leading the way in bringing some dynamism to the economy. Many are expanding operations abroad in search of new markets, employing more non-regular workers to create flexibility in the labour force and implementing their own measures to help women stay in the workforce. But it is mostly larger companies that have benefited from Abenomics thus far, rather than small business, workers or the broader business environment. And the Japanese economy will need more help from the government.

When Abe was first prime minister in 2006–7, his popularity suffered as the economy stagnated. When he took office again in 2012 he knew he had to revive the economy to stay in office, and ultimately his government and the country’s future rests on its capability to aim its arrows at meaningful targets and hit their mark. To maintain prosperity, the government must be prepared to address the country’s underlying structural problems, not just the immediate symptoms. If another lost decade is to be avoided, Abe’s work is only just beginning.

Shiro Armstrong is co-director of the Australia–Japan Research Centre and co-Editor of East Asia Forum at the Crawford School of Public Policy at The Australian National University.

This article was first published here in JETRO Magazine.