Forecast

• Prime Minister Shinzo Abe will take advantage of the ruling party's parliamentary supermajority to try to pass sweeping structural reforms to make Japan more competitive internationally.
• Though the measures will face pushback in the country's parliament, the Diet, the opposition will not be able to block them.
• Nevertheless, Japan's deep-seated labor issues, such as underemployment and low numbers of women in the workforce, will take more than legislation to address.

Analysis

Japanese Prime Minister Shinzo Abe has spent much of the past few months forging ties with U.S. President Donald Trump's administration. But diplomacy is hardly his only priority for this year. As Tokyo ramps up its outreach to Washington and other regional partners, the prime minister will be busy trying to advance his domestic agenda before the Japanese Diet's current parliamentary session wraps up June 18. Passing structural reforms is the most significant component of Abe's three-pronged approach to getting Japan back on track to sustainable, long-term economic growth. It is also the most difficult to accomplish. Though Abe has made ample use of his plan's other two "arrows" — monetary easing and fiscal stimulus — to boost Japan's economic performance over the past four years, his promised changes to the economy's basic structure have gone largely unrealized. 

Today, however, armed with supermajorities in both houses of the Diet and facing a weak and divided opposition, Abe and his ruling Liberal Democratic Party (LDP) are better poised than ever before to make progress with their reforms. In an address to the Diet on Jan. 20, Abe outlined a range of legislative priorities for the current session, from changes to Japan's agriculture and energy sectors to labor and social reforms. The measures fall into two main categories: reforms to remove institutional and regulatory barriers to market competition, and reforms to even out long-standing imbalances in Japan's labor force. Each set of initiatives aims to improve productivity, encourage innovation and make Japan more competitive internationally. But because they target different facets of Japan's political and economic structures, they will face different obstacles.

Clearing the Way for Free Trade

The Abe administration has so far made much greater headway with clearing institutional and regulatory barriers than it has with reforming the labor force. Starting in 2014, Abe began working to dismantle Japan's powerful agriculture lobby, the Central Union of Agricultural Cooperatives, in large part to facilitate his country's accession to the Trans-Pacific Partnership (TPP). The lobby, known colloquially as Zenchu, oversees a nationwide network of agricultural cooperatives responsible for providing a range of goods and services to farmers. This role has enabled Zenchu to unite Japanese farmers into a coherent voting block with the political clout necessary to keep Tokyo from signing free trade deals, particularly with agricultural giants such as the United States. By curbing Zenchu's power, the Abe administration killed two birds with one stone. First, it overcame a long-standing sticking point in trade negotiations with the United States. Second, it set a precedent for deregulation, clearing the way for market-oriented reforms and price liberalization in key sectors such as energy and electricity.

Even though the United States has since withdrawn from the TPP, clearing the way for future free trade agreements is still a top priority for Tokyo. To that end, Abe emphasized the need for further agricultural reforms in his speech to the Diet back in January. The prime minister promised to introduce eight bills during the current parliamentary session that would make the country's agricultural sector more competitive, including legislation to promote larger-scale farming through the creation of a farm land bank. Abe also singled out the energy sector as a target for regulatory reform, promising to fully liberalize retail natural gas pricing by April 2017. These initiatives will doubtless face pushback in the Diet — especially among lawmakers from the rural regions where Zenchu's influence is the strongest. Even so, the opposition is unlikely to block the bills, considering Abe's power in the ruling party and, in turn, the ruling party's power in the Diet.

Changing How Japan Works

The same goes for Abe's labor reforms. In March, after struggling for years with Japan's business and trade union lobbies, the prime minister finally secured their support for a proposal to limit overtime to 100 hours per month and 720 hours per year. But other labor problems will be more difficult to resolve. Closing the pay gap between salaried and unsalaried workers, for instance, is still a contentious issue. Japanese businesses have long depended on temporary, unsalaried workers to fill nonessential or non-managerial functions. (The habit is based in part on financial concerns, but also on ingrained business customs that tie pay to seniority and make it difficult to fire salaried workers.) Corporations loath to change their practices have lobbied hard to block reforms to improve unsalaried workers' compensation, since the measures would entail higher costs for employers.

Overcoming Japan's chronic underemployment problem and low proportion of women in the workforce, meanwhile, will take more than legislation. These phenomena reflect not only the country's deeply held, if latent, social biases, but also its top-down economic structure. Over the course of Japan's postwar history, a handful of powerful companies with close ties to the government have come to dominate most of the industries associated with the country's emergence as an industrial powerhouse. The hierarchy has hobbled Tokyo's efforts to cultivate smaller enterprises focused on exports and technology, while also contributing to a two-tiered labor force in which less skilled workers are relegated to temporary jobs with minimal benefits. If implemented, the Abe administration's proposals to expand job training programs for women and other people trying to enter the workforce and to increase compensation for unsalaried workers would begin to redress the situation. Nonetheless, the measures wouldn't produce a noticeable change in Japan's labor force for several years — if they did at all.

The Abe administration and the LDP have yet to set a concrete timetable for introducing their structural reforms. And in the meantime, a more pressing piece of legislation — such as a bill to authorize Emperor Akihito's abdication in 2018 — could arise and put the initiatives on the back burner for the duration of the Diet's current session. Still, at least some of the priorities that Abe outlined in January are liable to become policy before the year's end, given the LDP's parliamentary supermajority and the administration's commitment to forging ahead with structural reform. The prime minister will likely focus on measures that will bolster his popular support (such as the unsalaried workers initiative) or undermine his opposition in the runup to general elections, which Abe must call by December 2018. If the prime minister succeeds, his reforms will buy his administration goodwill from Japanese voters and international markets alike. More important, they will enable Abe to conserve his political capital for more difficult legislative battles to come.