Moody's: Abenomics' third arrow reforms positive, but remain a work in progress

Moody's Investors Service says that Japan's (A1 stable) structural reform efforts -- the so-called third arrow of Abenomics -- support the government's credit profile, but they remain a work in progress.

The ability of such policies to generate and sustain growth will be instrumental in determining whether Japan can maintain its credit quality over the longer term, as a declining population gradually increases the challenge of supporting a high debt burden.

Moody's conclusions were contained in a just-released report entitled "Government of Japan: Abenomics Third Arrow Supports Economic Revitalization Goals; Remains a Work in Progress."

On workforce reforms, Moody's report points out that the administration of Prime Minister Shinzo Abe has taken a range of steps to support labor participation by women, seniors and foreigners. These measures have allowed a stabilization in the size of the workforce. It has also taken action to improve labor conditions for the country's temporary workers.

However, harder structural reforms are still at the planning stage. Moody's says that without action to increase the flexibility of the labor market, the demarcation between permanent and nonregular workers will continue to constrain wage growth and dampen consumption. Ultimately, the workforce will also resume its declining trend. Both these factors would limit the scope for a stronger, sustainable pickup in growth.

As for reforms to boost corporate investment, Moody's report explains that a corporate governance code that came into force in June 2015and corporate tax cuts in recent years have yet to tangibly bolster domestic business investment.

Finally, a broadening of measures to deregulate certain markets, such as those implemented in the energy and agriculture sectors, could create new business opportunities, while supporting efficiency and productivity.