Abe's 'drill bit' hits resistance on Japan labor reform

Mon Jun 23, 2014 7:53am EDT
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By Antoni Slodkowski

TOKYO (Reuters) - When Prime Minister Shinzo Abe vowed at the World Economic Forum in Davos to take a "drill bit" to the "solid rock" of vested interests in reforming Japan's economy, executives at companies such as General Electric (GE.N: Quote) and IBM (IBM.N: Quote) paid attention.

In the months that followed the January appearance at Davos, blue-ribbon panels sought out GE and IBM for advice on how to give companies more flexibility in hiring and pay.

But the labor market deregulation to be announced on Tuesday, as part of an economic package aimed at boosting investment in Japan and lifting growth, stops far short of the sweeping change foreign business leaders had sought.

That marks a setback at a time when investor optimism about the pace of "Abenomics" reforms has ebbed. The Nikkei .N225 stock index, a closely watched indicator for Abe's closest advisors which rose more then 50 percent in 2013 as investors cheered the first blast of Abenomics, is down 5 percent this year.

"Changes in labor regulations will be incremental. It's a step forward, but it's not that big," said Robert Feldman, chief economist at Morgan Stanley MUFG in Tokyo.

The story of how Abe's promised deregulation faltered on job market reforms when confronted by resistance from Japan's bureaucracy and political controversy illustrates the challenge for Abe's "Third Arrow", a growth strategy intended to boost private investment and compliment earlier programs of fiscal stimulus and monetary expansion by the Bank of Japan.

Although Abe's reform panel sought ideas from companies such as Ikea [IKEA.UL] and Danone (DANO.PA: Quote) in recent months, the crucial decisions were made behind closed doors by about half a dozen Tokyo bureaucrats over a few days in June, according to interviews with 11 people who participated in the process.

The result: a pledge to end compulsory overtime allowance for workers earning more than the equivalent of $100,000 per year, a change affecting less than 4 percent of Japan's workers.   Continued...

Japan's Prime Minister Shinzo Abe addresses a session at the annual meeting of the WEF in Davos January 22, 2014. REUTERS/Ruben Sprich