Japan’s long-ruling Liberal Democratic Party has figured out a novel and interesting way to stay in power -- govern pragmatically, focus on the economy and give people what they want.

Prime Minister Shinzo Abe and his party have been returned to power in decisive fashion in an early election. It’s not difficult to see why -- the Japanese economy is doing better than it has in at least a decade. The Pew Research Center finds that since Abe took office in 2013, optimism about the economy has exceeded the peak it attained in the mid-2000s under Abe’s mentor, Junichiro Koizumi.

Why are people so positive? One big reason is that essentially everyone in Japan who wants a job now has a job. Unemployment has been conquered.

Unlike in the US, where much of unemployment’s fall after the Great Recession came from workers exiting the workforce, Japan has managed to raise labor force participation. Most of this has come from bringing women into the Japanese workforce en masse. As might be expected, this has led to significant economic growth.

What’s more, growth isn’t just being driven by big company profits. Small and midsize businesses, a mainstay of Japan’s middle class, have been doing well under Abe.

It’s hard to argue with this record of success. Declarations that Abenomics has failed continue to pop up in the media from time to time, but that thesis is looking increasingly dubious. Japan’s economy hasn’t been this good since the 1980s, and the strong performance corresponds with Abe’s term of office. What’s more, Japan’s recovery probably isn’t due to a rise in external demand as Chinese growth slows and Europe and the US remain sluggish. Policy -- the success of Abenomics -- is the most plausible explanation.

This is a big win for people who believe in the power of monetary policy. The Bank of Japan’s unprecedented program of monetary easing hasn’t generated sustained inflation, but it has provided easy credit that has facilitated Japanese corporate restructuring. It has also caused the yen to depreciate, giving exports a boost. Meanwhile, policies like the new corporate governance code, agricultural reform and support for women in the workforce are probably also having a salutary effect, while a rapid inflow of foreign workers has helped fuel business expansion.

But much remains to be done. Japan may have improved a lot under Abe, but it’s starting in a very deep hole -- rapid aging presents a powerful headwind for productivity, and population decline discourages companies from investing in the country. To keep growing, Japan needs to continue improving the productivity of Japanese businesses. It also needs to figure out how to make growth more inclusive -- wage growth has been inconsistent, there is still a gulf between good full-time jobs and dead-end part-time jobs, and poverty remains a problem.

In other words, the work of Abenomics is far from complete. It’s time for Round 2.

To keep productivity rising, Japan needs to reform its labor market. One important change is to do away with long, unproductive work hours and encourage companies to reward efficiency and results. Though a few companies are already implementing such systems, the government wants more to make the shift. One idea is to eliminate overtime pay for white-collar workers, which some believe promotes spending too much useless time at the office. A more dramatic intervention would be to simply cap the overtime hours that employees are allowed to work. The Abe administration is working on both of these things.

Another needed change is midcareer hiring. Japanese companies and policy makers are trapped in a bad equilibrium -- companies don’t hire employees midcareer because they have a bunch of workers they can’t fire, but the government is afraid to let companies fire workers because it’s so hard for them to find another job. The Abe administration briefly tried making it easier to dismiss employees, but was stymied by stiff opposition from unions. A better tactic would be to incentivize companies to put systems in place for the regular hiring of midcareer employees.

There are a number of other structural reforms Abe could adopt in order to boost productivity. The country lacks fossil-fuel resources, and nuclear power is politically contentious for obvious reasons, so Japan needs to focus on renewable energy. Japan’s government should give tax breaks and other incentives to keep the solar industry growing, while deregulating hydroelectric power. The country should also consider supporting the development of business schools, to help teach the next generation of managers how to change the cultures of the corporations they work in.

On the issue of economic equality, Abe is already taking some important steps. After winning the election, he vowed to make both preschool and college free. He has also been pushing for rules to equalize hourly pay between full-time and part-time workers -- a move that would be especially important for women and young people, who are often hired for part-time positions. Abe also wants to reform the tax system to stop penalizing dual-income households, and to reduce the tax burden on low-paid, part-time workers.

So Abenomics is rolling onward. Although Japan has many daunting challenges ahead, its leadership is still pushing for needed reform on a large number of fronts. Japan’s government has its problems, but overall it’s being much more proactive and smart about helping its citizenry than many other rich-country governments. The US and the ruling Republican Party could afford to take some lessons from Abe’s success.


By Noah Smith

Noah Smith is a Bloomberg View columnist. -- Ed.


(Bloomberg)