Japan's Oligopolies: Potential Gains from Third Arrow Reforms

Abstract

Progress has been made in economic reform under the “Abenomics” first (monetary policy) and second (taxation reform) “arrows”. The third, which emphasises structural reforms, has been more politically difficult, thus far yielding mixed results. This paper explores the gains that are possible from the labour market, tax and competition reforms embodied in the third arrow program. Economic rents and industry concentration levels are first identified from Nikkei firm specific data and used to construct an economy-wide model that represents oligopoly behaviour and its regulation explicitly. The analysis finds that modest gains in efficiency are available labour growth and, when it is accompanied by corporate governance reform, the switch between company and consumption taxation. Larger gains are shown to be available from active competition policy and, particularly, from productivity enhancing FDI in services. Central to the results is that a resurgent Japanese economy requires efficiency improvements that raise home rates of return and rebalance its large home and foreign asset portfolio toward home investment and capital growth.

Keywords: Regulation, oligopoly, services, price caps, privatisation, general equilibrium, industrial reform

JEL Classification: C68, D43, D58, F41, F47, L13, L43, L51, L80