Thursday, May 16, 2013

Japan-Prime Minister Abe’s master plan

Shinzo Abe has a vision of a prosperous and patriotic Japan. The economics looks better than the nationalism

WHEN Shinzo Abe resigned after just a year as prime minister, in September 2007, he was derided by voters, broken by chronic illness, and dogged by the ineptitude that has been the bane of so many recent Japanese leaders. Today, not yet five months into his second term, Mr Abe seems to be a new man. He has put Japan on a regime of “Abenomics”, a mix of reflation, government spending and a growth strategy designed to jolt the economy out of the suspended animation that has gripped it for more than two decades. He has supercharged Japan’s once-fearsome bureaucracy to make government vigorous again. And, with his own health revived, he has sketched out a programme of geopolitical rebranding and constitutional change that is meant to return Japan to what Mr Abe thinks is its rightful place as a world power.

Mr Abe is electrifying a nation that had lost faith in its political class. Since he was elected, the stockmarket has risen by 55%. Consumer spending pushed up growth in the first quarter to an annualised 3.5%. Mr Abe has an approval rating of over 70% (compared with around 30% at the end of his first term). His Liberal Democratic Party is poised to triumph in elections for the upper house of the Diet in July. With a majority in both chambers he should be able to pass legislation freely.

Pulling Japan out of its slump is a huge task. After two lost decades, the country’s nominal GDP is the same as in 1991, while the Nikkei, even after the recent surge, is at barely a third of its peak. Japan’s shrinking workforce is burdened by the cost of a growing number of the elderly. Its society has turned inwards and its companies have lost their innovative edge.

Mr Abe is not the first politician to promise to revitalise his country—the land of the rising sun has seen more than its share of false dawns—and the new-model Abe still has everything to prove. Yet if his plans are even half successful, he will surely be counted as a great prime minister.

The man in Japan with a plan

The reason for thinking this time might be different is China. Economic decline took on a new reality in Japan when China elbowed Japan aside in 2010 to become the world’s second-largest economy. As China has gained confidence, it has begun to throw its weight around in its coastal waters and with Japan directly over the disputed Senkaku/Diaoyu islands. Earlier this month China’s official People’s Daily even questioned Japanese sovereignty over Okinawa.

Mr Abe believes that meeting China’s challenge means shaking off the apathy and passivity that have held Japan in thrall for so long. To explain the sheer ambition of his design, his people invoke the Meiji slogan fukoku kyohei: “enrich the country, strengthen the army”. Only a wealthy Japan can afford to defend itself. Only if it can defend itself will it be able to stand up to China—and, equally, avoid becoming a vassal of its chief ally, the United States. Abenomics, with its fiscal stimulus and monetary easing, sounds as if it is an economic doctrine; in reality it is at least as much about national security.

Perhaps that is why Mr Abe has governed with such urgency. Within his first weeks he had announced extra government spending worth ¥10.3 trillion (about $100 billion). He has appointed a new governor of the Bank of Japan who has vowed to pump ever more money into the financial system. In so far as this leads to a weaker yen, it will boost exports. If it banishes the spectre of deflation, it may also boost consumption. But printing money can achieve only so much and, with a gross debt of 240% of GDP, there is a limit to how much new government spending Japan can afford. To change the economy’s long-run potential, therefore, Mr Abe must carry through the third, structural, part of his plan. So far, he has set up five committees charged with instigating deep supply-side reforms. In February he surprised even his supporters by signing Japan up to the Trans-Pacific Partnership, a regional trade agreement that promises to force open protected industries like farming.

Bad blood

Nobody could object to a more prosperous Japan that would be a source of global demand. A patriotic Japan that had converted its “self-defence forces” into a standing army just like any other country’s would add to the security of North-East Asia. And yet those who remember Mr Abe’s first disastrous term in office are left with two worries.

The danger with the economy is that he goes soft, as he did before. Already there are whispers that, if second-quarter growth is poor, he will postpone the first of two consumption-tax increases due in 2014-15 for fear of strangling the recovery. Yet a delay would leave Japan without a medium-term plan for limiting its debt and signal Mr Abe’s unwillingness to face up to tough choices. The fear is that he will bow to the lobbies that resist reform. Agriculture, pharmaceuticals and electricity are only some of the industries that need to be exposed to competition. Mr Abe must not shrink from confronting them, even though that means taking on parts of his own party.

The danger abroad is that he takes too hard a line, confusing national pride with a destructive and backward-looking nationalism. He belongs to a minority that has come to see Japan’s post-war tutelage under America as a humiliation. His supporters insist he has learned that minimising Japan’s wartime guilt is unacceptable. And yet he has already stirred up ill will with China and South Korea by asking whether imperial Japan (for which his grandfather helped run occupied Manchuria) really was an aggressor, and by allowing his deputy to visit the Yasukuni shrine, where high-ranking war criminals are honoured among Japan’s war dead. Besides, Mr Abe also seems to want more than the standing army Japan now needs and deserves. The talk is of an overhaul of the liberal parts of the constitution, unchanged since it was handed down by America in 1947, Mr Abe risks feeding regional rivalries, which could weaken economic growth by threatening trade.
Mr Abe is right to want to awaken Japan. After the upper-house elections, he will have a real chance to do so. The way to restore Japan is to focus on reinvigorating the economy, not to end up in a needless war with China. The Economist

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