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Tsuyoshi Nishikawa, wearing the ubiquitous commuter surgical mask, with his wife Rina in Tokyo’s Marunouchi district: ‘I don’t think Abenomics has had any effect.’

Iain Marlow

Tsuyoshi Nishikawa and his wife Rina look every bit the modern Japanese couple as they walk cheerfully along a street in Tokyo's sparkling Marunouchi district.

The stylish pair live in Saitama prefecture, just outside the capital. Mr. Nishikawa, dressed in a crisp navy jacket and suede shoes, works for a major Japanese construction company. Ms. Nishikawa, in a sleek winter coat and black heels, works in a café.

The Nishikawas got married two months ago and seem to embody the new-found optimism surrounding Prime Minister Shinzo Abe's radical "Abenomics" plan, aimed at pulling the Japanese economy out of its two-decade slump. The stock market recently reached a 15-year high, as investors bet the fragile recovery will gather steam. Now the government is transitioning from the first two "arrows" – printing money to end Japan's two decades of deflation and spending huge sums on public infrastructure – to the third arrow: Structural reforms to boost Japan's growth.

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But like the broader Japanese economy, the Nishikawas are far from prosperous. Mr. Nishikawa's wages have stagnated and his wife only works part-time, a member of the increasingly irregular work force. Like many ordinary Japanese, they do not invest in stocks, and have seen little benefit as shares have risen.

"I don't think Abenomics has had any effect," Mr. Nishikawa says.

Three years after he took power, Mr. Abe is still struggling to make Abenomics work. His structural reforms have made some progress, but the benefits of Abenomics have not trickled down to ordinary citizens, while Mr. Abe's reforms have begun to tear at the fabric of Japanese society.

Corporate profits have climbed with the weaker yen, and Japan's elites are getting richer. But the countryside is emptying out, as farmers face bankruptcy. Japan's growing ranks of elderly, meanwhile, are worried about health care and social security, while young people wonder what Japan's future holds for them. This year is the test for Abenomics' success – or failure. Early indications are worrisome: The government on Friday reported a zero consumer price index increase for February, a sign that the pull of deflation has returned despite massive stimulus efforts.

Japan's economic overhaul is being closely watched by other countries grappling with some of the same problems – deflationary forces, slack growth and policies that rely on surging levels of government debt.

As the "third arrow" reforms roll out, the confidence of couples like the Nishikawas is crucial for a sustained economic turnaround in Japan. That's because the country's structural problems – a shrinking work force, a lack of women in the workplace, aging farmers – are inextricably tied to demographics: Japan's population is aging rapidly and has begun to shrink. Japan's leaders desperately need people to feel financially secure enough to have children. That has not happened yet.

"We do talk about children, but then we talk about wages and we're not confident in our financial situation," says Mr. Nishikawa, 43. "We're worried that we won't be able to have kids."

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Window of opportunity

After the Second World War, with many of its cities in ruins, Japan began a tentative economic recovery before growing furiously for decades. In the 1970s, growth was surging, Japan introduced a generous social security scheme, and Harvard's Ezra Vogel wrote Japan as No. 1: Lessons for America.

Surging growth turned into a runaway bubble that eventually collapsed in the 1990s, ushering in a so-called "lost decade" that has never really ended. Real estate prices and the stock market crashed.

Japan still has world-class infrastructure, railway firms, auto makers, research institutes and financial institutions, and is the world's third-largest economy. It has also maintained its high standard of living and low unemployment, thanks to a preference for wage cuts over layoffs.

But the slump has dragged on, and Japan's ability to maintain its quality of life looks doubtful. As administrations experimented with Keynesian stimulus, government debt ballooned dangerously – and is now 250 per cent of Japan's gross domestic product.

Mr. Abe inherited a bleak economy. But with a snap election in late 2014 behind him, economists say he now has a chance where others failed: A window of political stability, a central bank governor in Haruhiko Kuroda who believes in slaying deflation, and a government united behind a mission.

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"Before, there was not really prime ministerial leadership within the government," says Susumu Kataoka, a senior bureaucrat at the Cabinet Secretariat, which co-ordinates policies. "With Abe, that has dramatically changed. There is a big stress on each ministry, on each minister, that if [Abenomics] is not implemented, it is their fault."

The full breadth of the reforms being undertaken is astounding: the first major agricultural reform in 60 years; liberalization of the energy sector; health care reforms; a push to increase female work force participation; corporate governance reform; an attempt to get citizens to invest in riskier assets; and programs to bring in foreign workers, in a society where immigration is taboo.

"We've seen concrete effects from Abenomics," says Kiyoshi Tanigawa, manager of industrial policy at the Japan Business Federation, or Keidanran. "Of course, there are some weaknesses in consumption that we see in Japan. But we think we need to push forward with reforms. This is an important year to see if Japan can actually come back."

One clear victory for Mr. Abe's structural reform came in early February when negotiators struck a deal with the Central Union of Agricultural Co-operatives, or JA-Zenchu, an enormous farming group that lobbies for steep tariffs against foreign products and controls a vast amount of Japanese agriculture. The deal stripped JA-Zenchu of its ability to audit the roughly 700 co-ops across Japan – a first step in Mr. Abe's vision of forcing farmers to become more competitive as he pursues the Trans-Pacific Partnership free-trade deal, which includes Canada.

Shin Haseda, a 61-year-old rice farmer in Akita prefecture, is anxious about all the change. He may be the last in a line of rice farmers at least 15 generations long. Like many of Japan's farmers, whose average age is 66, Mr. Haseda has only a small plot of land (2.6 hectares), another part-time job (in his case, as a dog trainer), and has a tenuous succession plan – his son is a businessman in Tokyo.

"My son is thinking, if there was a job in Akita, that he could work part-time there, and also farm, but so far that hasn't happened," Mr. Haseda says. "I'm a small-scale farmer, so I'm the target of Abe's reforms. People talk about competitiveness and globalization, but we have to ask whether we can survive with global competition."

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Agricultural reform is a microcosm of Mr. Abe's broader dilemma: Economists like it, but people are wary. Steep tariffs protect a dwindling number of farmers – just 4 per cent of total employment – at the expense of the population. And some see this as a way to push Japan's farmers to go global: To capitalize on Japan's reputation for quality rice, beef and fruit among Asia's rising middle class. But even supporters of the reforms acknowledge that many farms will have to go under, while others fear this could replace Japan's cautious, quality-obsessed farmers with profit-hungry agri-business titans.

Saito Kazuhiro, 38, a third-generation rancher in Hokkaido with four employees and 240 Holsteins, worries Mr. Abe is out to create a different sort of Japan.

"The government is thinking, the larger the [farm] size, the better – but this isn't the right way," he says. "You have to provide delicate care, and if the companies become bigger, it's going to be hard. Quality control is going to suffer."

Gender inequality

When Kimie Iwata graduated in 1971, Japanese women were expected to quit their jobs after their first child and become homemakers. Despite her own marriage and children, Ms. Iwata defied expectations and pushed on with her government career, working long hours and dealing with transfers to other parts of Japan. When she moved to the private sector in 2003, she became the first female executive vice-president at Shiseido, a well-known Japanese cosmetics firm founded in 1872.

"It was a hard life," she says. "I don't want women of this generation to go through the same hardships."

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The statistics on gender equality in Japan are dismal. Roughly 40 per cent of Japanese women don't work, far more than other developed nations, and roughly 70 per cent of women quit after having a child. Women earn 30 per cent less than male counterparts, and nearly 90 per cent of Japanese managers are men. In 2013, female recruits accounted for just 26 per cent of new central government employees. Japan ranks 104 out of 142 nations in the World Economic Forum's gender gap report. The poor state of equality between the sexes has deep, historical roots in the male-dominated, "salaryman" work culture – long hours and mandatory, drunken carousing – that was believed to have propelled the country to industrial success.

Now an adviser to Shiseido and an outside director at Kirin Holdings, Ms. Iwata also serves on a cabinet committee composed of ministers and executives. She was around for the implementation of Japan's 1986 law on gender equality, and has seen the government become more focused on getting – and keeping – women working as Japan's demographic crisis looms larger.

And that crisis is huge: Estimates suggest Japan's working-age population will fall to just 44 million by 2060 from 80 million in 2013, while Japan's total population could shrink in that same time frame to about 86 million from 128 million.

"This time they're serious," Ms. Iwata says.

Mr. Abe has pledged to create an additional 400,000 child care spots by the end of 2017, and has introduced a number of measures to publicize firms' progress on gender equality – which includes getting companies to declare the number of women in executive posts in annual filings. But Ms. Iwata knows this requires no less than a wholesale shift in mindsets. And although there is buy-in from a thin slice of elite executives who are sensitive to Mr. Abe's pleas, she sees great resistance among middle managers.

"Middle management is the problem," she says. "Many managers understand what's written on paper, and the head of the personnel department is serious. But there are a lot of managers who haven't pushed women to succeed, and so they're hesitant."

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Mr. Abe, though, has seen some progress. The government says more than one million women have joined the work force since the start of Mr. Abe's reign, while the percentage of women in management has risen from a paltry 6.9 per cent in 2012 to 8.3 per cent in 2014.

Kaoru Nomiyama, a 22-year-old who just landed a job at a major insurance company, plans to keep working after marriage, but figured that means she needs to work for a big, listed company with more flexibility – and under more scrutiny – than smaller firms that employ the majority of Japanese.

"I was thinking about the future after I married someone, because I want to keep working," she says. "I can get transferred if my husband gets transferred."

Sato Sawako, 32, doesn't have that option. The TV producer has a one-year-old child and works for a smaller company she worries may not abide by standards aimed at large firms.

"At the company I work at, I don't see how the policies will work," Ms. Sato says. She couldn't find a spot in a government-subsidized daycare and is already paying for a more expensive private option, but she suggests that things are getting better for women in Japan. "Because everyone's talking about the need to improve the system, it will be easier."

Corporate governance

For Masaki Shizuka, it's been a long battle.

About 15 years ago – well into Japan's economic malaise – the senior executive officer at the Tokyo Stock Exchange began pushing for reforms in corporate governance that would raise standards and help kick-start growth. It did not go well. "We got so much resistance," he says.

Japanese boards of directors are infamously closed, clubby and resistant to radical overhauls of flailing, unprofitable companies. Boards were often stacked with company managers, Mr. Shizuka says, and it would not be uncommon for boards to be made up of a company's separate divisions – making strategic shifts practically impossible. Outside directors were rare, and were often appointed from parent companies or trading partners.

If Mr. Shizuka seems cheerful, it's because he says things are changing – thanks to Mr. Abe.

Mr. Abe's government introduced a law that requires companies to appoint independent outside directors – or explain publicly why they did not. "In the West, independent directors generally prevent risk," he says. "But in Japan, the independent directors need to encourage it."

And now, 15 years later, the draft corporate governance code he championed has been created to reinvent corporate Japan – everything from demanding explanations of keiretsu-style cross-holdings of shares in related public firms and anti-takeover measures, to introducing codes of conduct and protection for whistleblowers. The foreign investors who first plowed money into Japanese stocks have been followed by Japanese investors – proof Japan believes in itself, he adds.

Broadly, the new rules seek to reinforce a sense that Japanese firms are not make-work projects for a declining nation, but dynamic firms working for shareholders. After decades of avoiding layoffs by implementing wage cuts, this is big change. Before Abenomics, Mr. Shizuka says, people only talked about redistributing wealth, not creating it.

"There's no doubt that this is very drastic reform," he says. "It's [now] their mission to improve the value of their companies. Before this, it was to secure the livelihoods of their workers.

"We have to understand that there is some risk involved, but if we don't take the risk and succeed, our children's generation will be burdened with debt."

The reforms touch almost every aspect of Japanese people's lives, from the food farmers provide and the wages Mr. Abe is trying to get raised, to the makeup of people's investments – which Mr. Abe is trying to shift away from government bonds and toward riskier assets such as stocks.

Tetsuya Inoue, a former secretary to Bank of Japan's deputy governor and now chief researcher for Nomura Research Institute Ltd., says Abenomics is working, particularly because of the deliberately weakened yen. But while this benefited multinationals, smaller firms that sell to domestic consumers and import materials will have to "suffer" through higher input costs, he said.

This uneven impact is similar to other aspects of Abenomics, and will inevitably lead to more tension. He notes that there will be resistance "on every aspect" of Abenomics, particularly with reforms to social security.

"It could change the structure of the society," Mr. Inoue says. "The general public will need to be be patient for the time being. But there is growing impatience."

One of those changes has been the soaring number of part-time and temporary workers, which numbered just 4 per cent in 1988 but now account for nearly 40 per cent of employees. Temporary employees are less likely to marry or have children, and have little job security. For the young, there is a crushing sense that – as elsewhere in the developed world – the future will be tough. And the government is piling up so much debt that people now refer to it as a generational transfer.

"I expect things will be worse in the future. There's no way we'll have a better life. We'll have to pay back all that debt," says Okinaka Haruki, 25, who works for an online book seller. "Right now, I don't have enough confidence in my financial situation that I could provide for a family."

Despite the see-saw nature of Japan's comeback, many think wrenching changes are necessary if Japan wants to maintain its quality of life – as well as regain its global stature in an insecure region. That means weathering tough reforms and perhaps even tinkering with immigration from other Asian countries to offset population decline, Mr. Inoue says, even if it's divisive. Over the next year, it will be crucial to see whether corporations spread wealth at home, and keep wages above inflation. That might happen. In mid-March, Toyota, Nissan and Hitachi and other major Japanese firms agreed to some of the biggest base pay increases in more than a decade as part of Japan's annual "Spring Offensive" salary negotiations.

"The government, companies and unions all share the feeling [about] the virtuous economic cycle," said Tatsuro Ueda, Toyota's managing officer.

If Mr. Abe's efforts fail to rejuvenate the economy and Japan's confidence, however, the burgeoning demographic crisis will only deepen the country's economic woes – shrinking GDP, and putting the country's future in doubt. That's why it's necessary to push through with reforms, refocus on high technology and new industries such as robotics, exploit Japan's long history of investing in Southeast Asia and hope its reputation for quality provides a competitive advantage, says Japan Institute of International Affairs president Yoshiji Nogami.

"People won't listen to an economically weak Japan," says Mr. Nogami, a former high-ranking dipolomat. "We can't compete with countries with younger people like India or a huge population like China. We have to aim for an economy of quality."



Monetary policy

The Bank of Japan is pursuing an aggressive policy of monetary easing, injecting liquidity into the economy with the hope of ending the country's two decades of deflation. With a firm target of pushing inflation up to 2 per cent, the central bank launched an unprecedented bond-buying program that saw the bank's assets reach 57 per cent of Japan's gross domestic product in 2014 – more than double the U.S. Federal Reserve's holdings. With the steep drop in the price of oil, inflation has fallen back a bit – but it is still rising faster than wages, putting a damper on household spending, which has declined for months.

Fiscal stimulus

The second "arrow" is massive fiscal stimulus spending mainly targeted at infrastructure projects and stimulating private investment. The government has spent more than $200-billion (U.S.) on a package the government said would boost GDP by two percentage points and create roughly 600,000 jobs by pouring money into new public works such as tunnels, bridges and earthquake-resistant roads. Although critics recall infrastructure projects tossed into rural areas from previous governments, Prime Minister Shinzo Abe's government won a snap election in December – and announced more stimulus.

Structural reforms

The third arrow – structural reforms of Japan's economy in order to spur long-term growth – is in many ways the most important, and will likely have the deepest impact on most people's lives. The reforms span nearly the entire economy: a new corporate governance code; dramatic agricultural reforms; policies to boost women's participation in the work force; health care and energy market liberalization; foreign worker programs in an immigration-adverse nation. The reforms have begun to roll out, and have had some impact: The stock market, for instance, is soaring. But many ordinary people fear the impact may increase disparities in an historically egalitarian society.

Iain Marlow

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