Abenomics: The Missing Arrow

Jim Foster

Graduate School of Media and Governance

Keio University

Director, Keio International Project for the Internet & Society

What is the Third Arrow, Mr. Abe?

The Promise of Abenomics

• The return of the LDP and the election of PM Abe has raised hopes that the Japan’s economy is on the mend

• Some encouraging signs: stock market up 57 percent in 2013 fueled by nearly 25 percent depreciation of the yen

• The three arrows: quantitative easing, expansive fiscal policies and structural reform

• Two of the three arrows are in play, but what about the third (structural reform) – without it serious questions as to the sustainability of Abe’s policies

• Issue is particularly relevant for reform in the ICT sector, because of its central importance to future economic growth

“The Internet is the driver of future G-20 growth”Boston Consulting Group 2012

• Internet economy in G-20 countries forecast to grow at an annual rate of 8 percent through 2016

• Globally, Internet users are estimated at 3 billion by 2016 and the Internet Economy will be worth 4.2 trillion dollars (and probably more)

• Internet will constitute 12 percent of UK GDP, 8 percent of Korea GDP and nearly 7 percent of Chinese GDP

• Contribution of Internet to Japan GDP forecast to be 5.5 percent, just slightly above the 5.3 percent average for G-20 countries

• Will Abenomics change this dynamic and make a Japan a leader, not a follower?

WEF Ranking: A Decade of Steady Decline

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130

5

10

15

20

25

30

WEF Network Readiness Index Rankings

Japan USA Korea Singapore UK

World’s Most Advanced IT Nation?

• Abe administration released its ICT strategy last year; goal is to make Japan the “world’s most advanced IT nation” by 2020, including the setting of numerous KPI

• Contains a potpourri of proposals to improve utilization of ICT in disaster preparedness, government services, agriculture, energy, healthcare, broadcasting (4K and 8K), energy management, education (one computer for each student) and work at home.

• The first plan in nearly a decade to seriously address IT governance issues: strengthening role of CIO, reforms to government procurement and giving new roles to the IT Headquarters in the Cabinet

• But, will it work and does it go far enough – at just 32 pages, it is rather “light” reading

Great Competitive Infrastructure

Network Readiness Index Japan USA Korea Singapore

UK

Mobile Cellular Tariffs 136 52 84 28 91

Fixed Broadband Tariffs 21 23 68 72 18

Households with Internet Access

15 24 1 11 8

Mobile Broadband Subscriptions

3 8 1 9 17

Still Vibrant Business Sector

Network Readiness Index Japan USA Korea Singapore

UK

Firm-level Tech Absorption 4 18 8 10 23

ICT Patents 2 9 6 8 18

B to B Internet Use 7 8 2 20 4

B to C Internet Use 7 3 2 30 1

A Failure of Internet Governance

Network Readiness Index

Japan USA Korea Singapore

UK

ICT for Basic Services 42 29 6 3 17

Internet Access in Schools

43 24 10 6 8

Govt ICT Vision 46 31 15 1 25

Govt Use of Technology 48 15 33 2 45

ICT Legal Framework 42 20 15 2 5

The Problem of Internet Governance

Ten Recommendations to Improve Japan’s Internet Governance

1) Deregulation and Convergence of Telecom and Broadcasting

• Undertake a full-scale rewrite of the telecom and broadcasts law along the lines taken by other major OECD economies

• Bring to a conclusion to the debate over NTT’s future

• Reform of the legal structure underpinning IT governance has to be the starting point for the Abe government’s efforts to strengthen the base of Japan’s emerging Internet Economy.

• Right now, no one is in charge and no one is accountable.

2) National Communications Commission

• Create a National Communications Commission, borrowing from the experience of the UK’s OpCom and Korea’s KCC to strengthen transparency and regulatory consistency in administration of the ICT sector.

• Consolidate ICT promotion authority in a “Ministry for the Digital Economy”, establishing coherent leadership over the bureaucracy and bringing strategic accountability to government investment in ICT; a Japan Nellie Kroes!

• Neither the CIO nor the Cabinet Office has the expertise, the budget, personnel or the political clout to make the difference required

3) National ID System

• The requirement for use of a national ID system covering taxes and pension is now law and is to be implement by 2015.

• Issue is whether the system can be expanded to support other national and local government services

• Successful implementation will require a fundamental rethinking of how government services are delivered, running up against traditional bureaucratic procedures and labor union resistance

• This will be an early test of the Abe government’s commitment to reform

4) Fully Empower the CIO

• Japan named a new CIO nearly 18 months ago to reform and consolidate the way the national government procures ICT, based on a comprehensive strategy for the ICT sector.  

• The Abe government has subsequently elevated the CIO to the status of a deputy cabinet secretary and claims to have reduced duplication in ministerial budget requests by 10 percent.

• But this is still a long way from the strategic investment programs in areas like e-government, education and healthcare that Japan needs

5) Open Up Spectrum Allocation to Competition

• The Abe government has tabled legislation to introduce spectrum auction to Japan, leaving it virtually alone among OECD countries in this regard.

• While the merits of spectrum auctions might be contested, there is no argument that Japan needs more competition and transparency in the allocation of spectrum.

• A more proactive policy with respect to the use of unlicensed spectrum is also desirable. Current efforts to reallocate "white space" are stalled by resistance from license holders and bureaucratic inertia.

6) Revise the Personal Information Law

• An advisory committee on privacy reform has been meeting since September and will issue a report in June; legislation is expected by 2015

• Report is that the group is considering a proposal to establish a “new supervisory authority” and create guidelines for privacy administration along the lines recommended by the OECD

• But nobody knows for sure – the deliberations of the group remain private and there is strong resistance from the bureaucracy against the creation of a privacy czar or commission

• So for now, Japan continues to operate under a personal information act that has ill-defined guidelines and is only rarely enforced

• Japan is significantly behind the US and the EU in this area – and the lack of a domestic privacy framework is undercutting the ability of its companies to offer cloud services internationally.

7) Get More Japanese Content Online

• Apart from some recent modest revisions to the Copyright Law to allow short-term “caching” of copyrighted material by search engines, etc., there are still significant gaps in Japan’s copyright framework for the Internet, e.g. cloud storage by individuals of music and other content. 

• Additionally, TV and the production companies continue to drag their feet on licensing local content to (largely foreign) distributors and aggregators; this is a competition policy problem as much as it is an intellectual property issue.

• At the same time, Japan passed in October 2012 perhaps the toughest penalties against illegal downloads (2 years in jail and up to $20,000 in fines); but so far no major prosecutions

• Since content is key driver of Internet, efforts at enforcement must be balanced by promoting greater availability of content online

8) Facilitate Cross-Border Data Transfers

• Japanese government supports the principle of non-discrimination between data services in and out of Japan

• Keidanren joined with the ACCJ last year in urging government ministries to clarify administrative guidelines in line with this principle

• Yet lack of an agreed privacy framework and consistent security standards across government and industry creates business uncertainty and slows the migration of consumers to the cloud

• Fundamentally, Japan has to be the regional leader on this – otherwise, Chinese firms and others will set the standards and dominate the market

9) Invest in Capacity Building

• Japan’s ageing population and restrictions on immigration set physical limits on the potential for growth of the domestic Internet Economy, where “scale” is a key driver of growth

• Abe administration strategy focuses on ICT education in the schools and efforts to encourage more women to enter and stay in the work force through “remote work” is only a part of the answer

• Changes in the immigration law to allow more skilled engineers and researchers into Japan are clearly required

• Revisions to the labor law to promote more inter-firm job mobility and permit more flexible internal HR management also must be addressed

10) Collaboration not Closed Competition

• Japan-only standards don’t work for the global Internet – but there are still only tentative efforts in Japan to make international harmonization a priority

• The “Galapagos Island” syndrome remains a challenge for the future of Japan's Internet Economy.

• Current policy is still skewed to supporting Japanese company efforts to be more “competitive”, rather than focusing on how they might be more “collaborative”

• True measure of success is their record in partnering with foreign companies in and out of Japan

Whither Japan: Three Scenarios

•Stalemate

•Piecemeal Reform

•Open Convergence

Stalemate

• Existing players oppose reform and defend their business, stagnating growth• A ‘wait and see’ attitude to new services becomes dominant• Infrastructure utilization remains low; new value-added services are few.• Foreign firms disinvest as growth stagnates and regulatory impediments slow uptake

Piecemeal Reform

• Limited reforms with a domestic focus feed protectionist inclinations• Emphasis on domestic markets and existing assets fuels

local competition and strips value as companies struggle to hold on to their slice of the buy• Companies that can move offshore, innovation

dependence grows, revenue declines rapidly• Foreign firms eventually move in to pick up remaining

opportunities

Open Convergence

• Regulatory barriers to converged services removed; competition promotes new entrants• New framework encourages domestic partnerships and regional expansion • Converged services in telecom and broadcasting opens door to new services elsewhere• Japan emerges as regional hub; domestic and foreign firms collaborate on ‘cloud’ services

Japan and Internet Governance

• Open convergence is the preferred scenario for Japan and the Asia region; national economic arguments in Asia undermine the global utility of the Internet

• A strong Japanese voice supports greater diversity and autonomy in the region and balances calls for “cyber sovereignty”

• Influence based on strong economy and ability to articulate a shared vision for the future – a strong test for Abenomics and Abe’s policies generally

• Key principles include a right to access, respect for privacy, protections against cyber threats, an appropriate balance between protecting and sharing content online and support for international norms and standards for the Internet

• Japan should be a model and example for Internet governance – and it starts at home. This is the real “third arrow.”

Where To Go for More Information?

• Keio International Project for the Internet & Society (KIPIS)

• Interdisciplinary research group based on the Shonan Fujisawa Campus of Keio University focusing on Internet policy issues in the Asia region and globally

• A catalyst and a platform for brokering an interactive exchange between Asia and Internet policy researchers and advocates around the world

• See our website at http://kipis.sfc.keio.ac.jp