The right target for the third arrow: Corporate managerial efficiency in Japan compared with the United States

Reuters

Japan's Prime Minister Shinzo Abe waves as he arrives to attend the Enniskillen G8 summit, at Belfast International Airport, Northern Ireland, June 16, 2013.

Article Highlights

  • Will Abe's aggressive economic reforms succeed?

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  • Inefficient capital allocations should be the target for Abe's economic reforms.

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  • If Abe makes the right moves, he could enter the ranks of great reformers.

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Japan has reinvented its economic model before. Following the Meiji Restoration, the Japanese rapidly industrialized by intentionally borrowing from the West. After the Second World War, Japan achieved a second economic miracle, rising from the ashes to become the world’s second largest economy in only a quarter century. During the 1980s its industrial might came to be feared around the world; indeed, many in America warned that Japan might soon overtake or even “buy up and own” America. This rapid development became known as the “Japan Model” and has since been emulated throughout East Asia as a development template.

In the past two decades, however, Japanese corporations have tended to rest on their earlier accomplishments. The Japanese economy has stagnated and leading Japanese brands have been knocked down from their once pre-eminent positions.

Now Prime Minister Shinzo Abe is attempting an aggressive reform program in order to revitalize the Japanese economy. Can he succeed? We believe he can, but only if he aims his “third arrow” of structural reform at the right target. That target should be the inefficient and unaccountable way that Japanese managers allocate capital.

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