Japan's prime minister has been obsessing over defense policy and international affairs, at the expense of his country's lackluster economy.
- By William SposatoWilliam Sposato is a Tokyo-based writer who has been following Japan's economy and financial markets for more than 15 years.
TOKYO — Japanese Prime Minister Shinzo Abe has had a busy few months. After a summer of pushing through controversial new defense policies, he held a successful and strategically important trilateral summit with South Korea and China and crossed visiting all of Central Asia off his bucket list — becoming the first sitting Japanese prime minister to do so. What is missing from his list of recent accomplishments, however, is any tangible progress on what he has called his No. 1 priority ever since taking office in December 2012: the Japanese economy. While growth has picked up slightly in the past two years, Japan again finds itself in an economic downturn. Third-quarter GDP figures released on Nov. 16 were negative, with a fall of 0.8 percent on an annualized basis. After a 0.7 percent downturn in the second quarter, that means Japan is back in recession — just six months since the last one ended.*
For Abe, political success abroad has proved easier than economic success at home. His penchant for bolstering Japan’s defense posture may have come at the expense of his much-vaunted “Abenomics” program, designed to pull the economy out of its long slump. “Since resistance to reforms can be strong in Japan, the government often focuses on only one policy issue at a time,” said Martin Schulz of the Fujitsu Research Institute, an economic research and consulting group. In this case, that means the “structural reform” legislation that would make the economy more efficient has taken a back seat to the bitterly contested defense agenda.
Indeed, Abe faced heavy resistance to win even a relatively modest change in the way Japan’s military can operate. The country’s post-World War II constitution renounces military force to solve disputes. (Though that has not stopped the development over the last few decades of the Japan Self-Defense Forces, one of the world’s largest and best-equipped military forces.) The recent debate focused on “collective self-defense” — a seemingly basic concept. Previously, if U.S. and Japanese forces were on a joint patrol in, say, Iraq, the Japanese could not get involved even if U.S. forces were to come under attack. That has now changed — a seemingly logical move for a force that is supposed to be the United States’ closest security ally in Asia and to the delight of Japanese conservatives.
Nevertheless, the idea brought out protestors at levels not seen since the Vietnam War and scuffles in Japan’s parliament, known as the Diet, producing memorable photos and a field day for headline writers: “Japanese Politicians Fight Over Pacifism,” quipped the Wall Street Journal. Abe managed to push his legislation through the Diet after a late-night session that dragged into the early hours of Sept. 18. Given his coalition’s 150-seat majority in the more important 475-member lower house, even that seemed like a small victory.
Yes, Washington was pleased (some cynics would say that’s all that really matters in Japan’s official circles). And some analysts have risen to Abe’s defense, saying that it was indeed time well-spent — a necessary first step to go beyond the question of collective defensive and toward the establishment of a new security framework. “The new legislation opens the way for Japan to make a broader international commitment,” said Narushige Michishita, a Japan scholar at the Wilson Center in Washington, D.C. “When it comes to the defense industry, this will be a major reform measure,” he said.
With that battle over, Abe appeared ready to try to get his economic program back on track. When he first took office, Abe framed Abenomics around “three arrows”: Arrow 1 was a flood of easy money from the Bank of Japan in a quantitative easing program that made the U.S. Federal Reserve’s famed QE look tame. Arrow 2 was a straightforward spending program, while Arrow 3 was the elusive structural reforms. In late September, Abe announced that he was relaunching his economic agenda, dubbing it “Abenomics 2.0.” Like many upgrades, however, it proved to be less than a roaring success.
Largely dropping any reference to his first set of arrows, Abe launched three new ones: an ambitious plan to raise GDP 20 percent to roughly $5 trillion in five years, requiring a nominal annual growth rate of around 3 percent, roughly double what Japan has been able to do since its economic collapse in 1991; greater child care support to help boost the birth rate in a country whose population is expected to shrink 15 percent from current levels by 2050; and enhanced social security benefits to help families care for elderly relatives. Business leaders and economists are skeptical, especially about the new GDP target. “It is not controversial; it is just an unrealistic number,” said Hiromichi Shirakawa, Credit Suisse’s chief economist for Japan, at a Sept. 28 press briefing on the state of the Japanese economy.
And his first three arrows, especially the third one, seem like they’ve missed their mark. “For the third arrow, the things you need to have are not getting done,” said analyst Naomi Fink, who heads the economic research firm Europacifica Consulting. There has been far too little basic work done on wringing out more efficiencies in the key areas that have been lagging in overall productivity, Fink added.
It has not been all bad economic news for Abe, however. On Oct. 5, the 12 nations negotiating the Trans-Pacific Partnership (TPP) trade pact managed to reach agreement, after five years of negotiations and several brushes with death. The clear winners in this will be Japanese consumers, who pay exorbitant prices for food due to high tariffs protecting Japan’s farm sector. The GDP impact will be minor — agriculture accounts for just 1.2 percent of the total. But the symbolism is strong, since it shows that Abe is taking on entrenched power bases. “They were anchoring their economic reforms on TPP,” said Fujitsu’s Schulz, though he notes that some of the benefits are years down the road, with some tariff phaseouts taking 25 years. And the job market remains strong: Overall unemployment was just 3.4 percent in September — just slightly higher than in April, when Japan hit an 18-year low of 3.3 percent. The closely watched ratio of available jobs to job seekers is at 1.24 to 1, the highest since February 1992.
But that has not translated into wage inflation and larger pay packets: Real wages have risen only modestly, up 0.1 percent in August and 0.5 percent in September from year-ago levels, figures that are unlikely to help spur more spending. And expectations of a new recession, even if mild, could lead to a general “sell Japan” feeling among foreign investors, even if other indicators are holding up a bit better. In a bid to get more money into the hands of the average household, Abe called in business leaders on Nov. 5 for a scolding over high profits and still-stingy wage hikes. But the prime minister tried the same tactic last winter — and it didn’t work then, either.
Abe will need to spend a lot more time and legislative muscle on economic reforms if he wants to be remembered as the prime minister who broke the 20-year stretch of a slow but steady decline — instead of the first prime minister to visit all of Central Asia.
* Editor’s note: This article was updated Nov. 16.
Photo credit: Asahi Shimbun via Getty Images