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Policies stunting Japanese economic growth

Japan's recovery, the longest since World War II, has always been Japan's to lose. With each passing day, politicians in Tokyo seem more intent on doing just that.

This is the most convincing and organic revival the world's No. 2 economy has seen in decades. The biggest banks are healthy, businesses are hiring again, property prices are up and foreign investors are rediscovering the place.

Yet something is missing, and it's by far the most important ingredient to getting Japan to grow faster: Households aren't spending more.

In savings-obsessed Japan, encouraging consumers to stuff fewer yen in low-yielding bank accounts or under the tatami mat is vital to raising growth from 2 to 3 percent or more. That's necessary to reduce Japan's massive public debt and deal with a aging population and declining birthrate.

Instead, economists such as Jesper Koll of Merrill Lynch & Co. say that this year Japan will experience the sharpest rise in household savings since 1997. In a Nov. 24 report, Koll said that since early 2006, the savings rate probably shot up to 13.9 percent of disposable income from 12.3 percent.

The 1997 jump in savings reflected an increase in the nation's consumption tax to 5 percent from 3 percent to plug a budget deficit. Perhaps it's just new confidence, but a similar dynamic is afoot amid fresh plans to raise consumption taxes.

It's just one of Prime Minister Shinzo Abe's proposed moves that may be damaging household spending. Another is talk of increased pension and social-security contributions.

It seems a cruel irony that some of the treatments for forces holding back Japanese growth may dampen things even further.

The onus is now on the government to bring things to the next level. That means increasing productivity, boosting entrepreneurship, shoring up the pension system, better utilizing the female work force, attracting more foreign capital and improving corporate governance.

There's also something even more basic and immediate to do: End Japan's dual addiction to free money and debt.

Japan is growing again and, for the first time in a dozen years, it's adding more to global growth than it's subtracting. What hasn't changed is the central role played by ultra-low interest rates and government-bond issuance.

Japan finds itself with a Catch-22. Drastic steps are needed to put its economy on a healthier, more sustainable path in the long run, yet attempts to do so will curtail growth in the short term. Weaning Japan off easy money and debt isn't politically expedient, especially amid expectations for slower growth in the United States and China, its biggest trading partners.

Abe is talking more about the need to trim debt with plans lack detail and, ultimately, teeth

These changes won't get Japan closer to growing at its potential. If the government wonders why the Nikkei 225 Stock Average is down this year while indexes thrive across Asia, they need look no further than their own policies.