Time and again since the end of the financial crisis, economic and political bigwigs have lamented the mysterious inability of monetary and fiscal policy to galvanize moribund economies. I don’t need to mention which economies. You know who you are.

Nowhere have these lamentations been heard more frequently than in Japan. (Oh, I did mention one of you.) The debate has raged in Japan over the last year. Interest rates are tweaked down as low as they can go. Should the Bank of Japan try negative interest rates? Maybe -0.1%? How about a little lower? Should Kuroda increase his pace of bond purchases? Maybe $733bn p.a. (the current rate of purchases, worth about 16% of GDP) is not enough? What about a tranche of helicopter money? And, yes, there has been a fiscal stimulus package of some sort every year since 1993, but maybe just one more will do the trick? How big should it be? Is $273bn “bold” enough?

How hard have Japan’s authorities tried to make these policies work? Very hard.

Since the beginning of 2012, when things really got going, total assets at the Bank of Japan have risen 3-fold to $4.4trn or just over 100% of GDP and right around the level of assets at the Federal Reserve, a central bank in charge of an economy four times as big. Meanwhile, on the fiscal policy side, the government of Japan has been running a very generous budget deficit of between six and nine percent of GDP, every year over the last seven.

Have these policies worked? No, they have not.

GDP growth in Japan has averaged 0.6% p.a. over the last four years. Industrial production has been shrinking at a rate of 1.4% p.a. since 2014. The CPI ex food and energy, last seen at 0.3% in July, is on a downward path. Real incomes growth, after enjoying a brief period in positive territory in 2015 as a result of the weak yen, recorded a decline of 1.8% in July. Wages are growing, but at a modest 1.4% rate.

The only qualified win for the Keynesian bigwigs has been the yen. The yen did respond very nicely to the expansion of the Bank of Japan’s balance sheet, falling from 78 to 125 vs. the U.S.Dollar mid-2012 to mid-2015, causing a significant increase in corporate profits growth over the same time period. Sadly though, Japan is also banker to the world (it is a net international investment surplus country) and as a result, the yen is a safe haven currency. Thus, from time to time, domestic monetary policy is overwhelmed by the exigencies of foreign investors piling into the yen because they are feeling rattled. And so it has been for most of 2016. Investors have felt rattled, the yen is back up to 102 and corporate profits growth is back in negative territory.

In our humble opinion, and in the opinion of many other free-market capitalists and maybe even Japan’s Prime Minister himself, but clearly NOT all the bigwig Keynesians, what Japan needs is not more monetary and fiscal stimulus, but deregulation. Abe’s missing Third Arrow. And in particular, it is perhaps Japan’s labor market, currently a most effective deterrent to investment and growth, which needs most deregulating.

Japan’s labor market quirks are well-known: long-term job security, seniority-based wages, company-based labor unions and a startling bias against women. Especially mothers. The impact of all these regulations is hard to measure, but we will have a go.

Labor productivity rates show that Japan’s workers produce about as much as Slovenia’s (where?) and 30% less than America’s in terms of GDP per hour worked. An under-class of non-regulated workers, who are paid badly and have no tenure, now account for over a third of total employment in Japan and are used, rather unfairly, as a buffer in recessions. The bias against mothers is a powerful factor behind Japan’s low birth-rate. Japanese women feel they have to choose between a job and a child. They cannot easily have both. Many choose the job. Only a third of mothers work in Japan and the birth-rate is 1.4 children per woman when the rate required to maintain a stable population is 2.1. As a result, Japan’s workforce is shrinking by 1m people per year.

A shrinking population is not good for growth.

Abe’s administration has dabbled in reforming other markets. The FT reports that there has been some success with agricultural co-operative reforms but we note that the price of rice in Japan is still 10x the world price and 4x the retail price in the U.S. Consensus is of the opinion that not nearly enough has been done about structural reform, even outside the politically prickly labour market, and we would have to agree.

Deregulation is tough to accomplish in any country. But in Japan, where mainstream thinking harks back to Japan’s golden age of economic growth and remembers how well Japan’s industrial policy and labour markets worked in the past, it is very difficult indeed.

Why did Japan’s unorthodox policies work so well in the past? In our opinion, serendipity had a lot to do with it. Post-war Japan was starting from scratch and if you don’t have a capital base, your capital base cannot suffer from misallocation. And that misallocation cannot then be set in stone and protected tooth and nail by wealthy, entrenched interests. Wages were very low (at the beginning of the period, at least). MITI’s focus on manufactured tradeables was perfectly timed, given the transformation of global transportation networks that was about to be turbo-charged by the fall in the price of oil.

Elsewhere, Europe was busy during this period putting in a welfare state and unionizing its labour force, thereby excusing itself as a competitor from many areas of the post-war explosion in trade. China was stumbling around in the darkness of communism and the Asian Tigers were just a sparkle in Lee Kuan Yew’s eye. That left just the US as an effective competitor. Between them, the U.S. and Japan carved up the world. By 1980, Japan and the US were the world’s two largest economies accounting for 47% of GDP. Today they account for just under 30%.

The economies of scale, access to capital, insulation from domestic competitive forces and shelter from shareholder pressure for short term profit maximization provided by the keiretsu certainly contributed powerfully to Japan’s success. So did a well-educated work force. However we cannot help thinking that none of these factors would have made a critical difference out of context. Could a mid-sized, war-torn economy today grow to be the second biggest economy in the world on the back of manufactured exports?

The world has changed. Industrial policy works (up to a point) if all you are doing is “catching up”. It has no place if your country has caught up and needs to innovate. The Japanese men and women trapped as lifers in dead offices of large corporations need to be “let go” so they can do the innovating. Japan should move to pay for performance. And if a country running a budget deficit worth 6% of GDP really wants a “shock and awe”-sized fiscal stimulus, it should try cutting the corporate tax rate to an internationally competitive 25% – and then to a game-changing 20%.

Those nostalgic for Japan’s “economic miracle” need to recognize that the policies that brought it about cannot engineer a second economic miracle in today’s world. No amount of fiscal and monetary stimulus can change that. Abe needs to aim at the labour market and let loose his Third Arrow.

And the Keynesians need to call it a day.