EDITOR’S note:

Amid its saber-rattling against China over territorial disputes, Japan’s Prime Minister Shinzo Abe is pushing through radical economic reforms at home.

His reforms, often referred to as Abenomics, are underpinned by the following three pillars: quantitative easing, fiscal stimulus and institutional reform. Together the three components are dubbed “Three Arrows.”

Will these arrows hit the target and what impact will Abenomics have on the Chinese economy?

Chen Youjun, assistant researcher at the Shanghai Institutes for International Studies, recently spoke to Shanghai Daily opinion writer    Ni Tao about Abenomics.

Q: How do you perceive Japan’s quantitative easing, the “First Arrow” of Abenomics?

A: The First Arrow is expansive financial policy, or massive quantitative easing, namely, to stimulate the economy by incessantly increasing money supply.

In terms of monetary policy, Abe has no scruples about leveraging his political capital to effect a change of guard at the Bank of Japan.

Now Japan’s banking chief defers to the government, which is contrary to the traditional role of central banks.

Central banks, including the Fed, are supposed to be independent. But now the Bank of Japan is simply following the instructions of Abe, and has pumped a huge amount of liquidity into the economy. Japan’s base currency has ballooned to over 200 trillion yen (US$1.96 trillion), a figure that is unprecedented in history.

The massive liquidity will certainly exert an impact on the Japanese economy, especially on inflation.

Q: How about the “Second Arrow,” which is fiscal stimulus?

A: Actually Abe’s fiscal policy is but a continuation of the economic doctrine of the late 1980s, the difference being that it is much more aggressive.

So far Abe has met with little resistance in adopting fiscal expansion, thanks to his deft use of political capital.

But a negative effect of fiscal expansion is Japan’s ever-growing debt load. The latest estimate of Japan’s deficit, or public debt, is 1,100 trillion yen, which averages about 7 million yen for each Japanese household and is roughly equivalent to two years’ wages of an ordinary employee. Fiscal deficit is a daunting problem, and Abe’s constant use of deficit spending will only make matters worse.

We ought to stay cautious against a possible Japanese bond crisis. Although Japan’s debts are primarily owned by domestic buyers, unlike the European bonds, a slice of foreign-held debts that go bad will set off a chain effect and pose a systemic threat to future issuance of bonds and solvency of debts.

Q: The “Third Arrow” is institutional reform. What has Abe done?

A: The “Third Arrow” is often called regulation reform, which simply means supplanting old policy regimes with new ones. A term Abe likes to bandy about is “female economics.” Japan is still very much a masculine society, with men dominating corporate management.

The reason Abe conceived of this “female economics” is not that women are necessarily more productive than men at work, but that he intends this coinage as a display of will to challenge the status quo and push through reforms. With cognitive changes, Abe hopes to send a signal to Japanese society that change is coming and will break the old mindset.

Another step by Abe is to employ his personal connections with Japan’s Keidanren (Federation of Economic Organizations of Japan), big companies and smaller companies to negotiate an across-the-board pay raise for their employees.

After 2000, the pay level remained somewhat stagnant. When the Democratic Party of Japan came to power in 2009, some civil servants and employees of big companies even had their wages cut by 20 percent. This is actually a fatal blow to the Japanese economy, for if people’s salaries drop, so will consumption and companies’ revenues and investments. This works like a vicious cycle. That’s why Abe, once in office, would institute a pay raise. Big companies complied. Their summer bonus this year increased 5 to 10 percent from the previous year. To make the pay raise a general trend, smaller firms need to conform to it.

Abe’s third policy orientation is to develop high-tech industries, including new energy, automobile, robots and electronic communications. Energy is a key sector. Following the 2011 mega-quake and the subsequent nuclear meltdown, nuclear energy as a share of total energy supply plummeted from 40 percent to less than 2 to 3 percent. Japan hasn’t entirely given up on nuclear energy, but its focus has shifted to renewable energies like wind, thermal and tidal power.

Abe also plans to tap Japan’s old population. Senior citizens over 65 years old account for over 30 percent of its population. Their savings, if freed up for market activities, are vital to the Japanese economy.

Q: Abe’s hike of the consumption tax rate is controversial, because it may hurt consumption. What is your view?

A: I think his decision to raise the consumption tax is not whimsical. At this juncture, Japan is left with no other choice. With its 1,100 trillion yen of debts, and growing expenditures, Japan is actually spending more than it can afford. Since its sources of revenues are limited, Japan can only rely on tax increases. And taxing consumption has the most immediate effect.

Abe’s decision is necessitated by economic circumstances, but it is a well-calculated move. He did it in steps, rather than raise the tax rate from 5 percent to 10 percent in a single breath. Starting in April, he first raised the rate from 3 percent to 5 percent, and then to 8 percent. Public opinion is closely monitored to see if there is room for further hike and how to institute it, incrementally or otherwise.

Meanwhile, he implemented policies to cushion the impact of tax hikes, for instance, bestowing larger fiscal transfers and subsidies on poor households.

He is also mulling cutting corporate taxes to counteract the negative fallout of heavier consumption tax. All his moves are linked. Together they form a system, aimed at achieving an inflation rate of over 2 percent and speeding up  economic recovery. However, Abe will encounter practical problems.

Another challenge lies in how he can harness the ruling troika of politicians, bureaucracy and businesses in Japan and tame vested interests. His policies are relevant only when they are supported by associations like Keidanren.

Q: Abenomics’ impact on China?

A: A hallmark of Abe’s economic overhaul is the restructuring of Japan’s economy, with an emphasis on enhancing its productivity and competitive advantage, as well as on phasing out obsolete industrial capacity.

As such, Japanese firms will surely relocate part of their outmoded productions and assembly lines to areas outside of Japan. China is a potential destination.

For our part, we need to examine if these productions are beneficial for China’s own industrial upgrading, and help resettle them in needy locales.

On the other hand, an undeniable feature of Abenomics is its “de-Chinese” focus, in particular, its desire to wean Japan off its dependence on China as a part of its global industrial chain. Several industries even seek to be disconnected from the operations in China.

This tendency has a real impact on Sino-Japanese economic partnerships and the impact is becoming broader in scale and scope.

Q: How should people regard the changing balance of economic power between China and Japan?

A: I think the problem lies more with Japan than with China.

Japan must first reposition itself correctly. It must come to terms with the changing economic picture.

After China’s GDP overtook Japan’s in 2010 to become the second-largest economy, many Japanese, astounded, could not accept the fact.

All of a sudden, their sense of superiority that Japan was always the better economy in the post-war world evaporated.

Add to that the pain of the lost 20 years, pessimism is all the rage in Japan, and it was given an outlet in 2010, the pivotal year that China surpassed Japan. Bitter feelings have since lingered.

As China consolidates its lead over Japan, Japan is struggling to keep up. In 2013, China’s GDP is 9.3 trillion yuan, almost twice as large as Japan’s 5 trillion yuan.

The Japanese government needs desperately to allay its citizens’ frustration and anger at being bested economically by China.

If it refuses to see things as they are, Japan will end up losing badly.

Abe is now exploiting popular fears of China and magnifying them.

In other words, he is provoking the Japanese, expecting harder work from them to spur the economy, a move that is not without consequences.

Should his reform fail, the unpalatable results will be myriad.