Suga Promises Continuity. But on Economics, He Can’t Possibly Deliver.
If the yen gets stronger, Japan’s new prime minister will have to come up with something new to protect exports.
When Shinzo Abe, Japan’s longest-serving prime minister, announced recently that he would resign, it seemed like the end of an era. Abe had dominated Japanese politics for nearly a decade, skillfully managing the ruling Liberal Democratic Party’s different factions and fending off pressure from opposition parties. He survived unscathed an array of corruption and influence-peddling scandals. Most impressively of all, Abe adroitly managed relations with U.S. President Donald Trump, no easy task given that Trump had spent much of his early career bashing Japan for supposedly taking advantage of the United States.
Abe’s successor as prime minister, Yoshihide Suga, has big shoes to fill, in other words. Like Abe, Suga spent his entire career in politics, serving for the last eight years as Abe’s chief cabinet secretary. Unlike the outgoing prime minister, however, he comes not from a political dynasty (Abe’s father was foreign minister) but from a humble farming background.
The fact that Abe and Suga have already spent years working together provides plenty of reason to expect policy continuity between the two leaders, not least because Suga played a role in devising the policies of the Abe years. And Japanese media have reported that many key ministers, including the finance minister and foreign minister, are likely to keep their jobs even after Suga takes charge.
The biggest question Suga will face is on Japan’s economy, which like the rest of the world faces a deep recession thanks to the COVID-19 pandemic. Japan has escaped the high infection levels seen elsewhere, but its economy has still been hit hard. What can Suga do?
Abe built his popularity on an economic program that he branded “Abenomics,” which included three prongs: fiscal easing, monetary easing, and structural reform to open markets. In practice, Abe did less fiscal easing than he promised, pursuing instead balanced budgets. Budget deficits declined (until this year) and taxes rose, although perhaps other prime ministers would have hiked taxes faster. When it came to structural reform, Abe took some steps to open Japan to trade, but he was less revolutionary than his rhetoric suggested. The prime minister did push the country’s central bank, the Bank of Japan, to experiment with new ultra-loose monetary policy, although in recent years it has edged away from more radical measures.
Suga has made no sign that he dissents from the legacy of Abenomics, which he helped create. But Abenomics is a contradictory set of policies, so even if Suga pledges continuity, it doesn’t say much about the direction of policy. There is little doubt that Japan’s government will continue to spend heavily as it seeks to support firms and individuals suffering from the coronavirus-related economic crunch. The incoming prime minister talks about structural reforms, too. But it is easy for politicians to promise reforms—and harder to deliver them.
One place Suga may well face difficult choices is on monetary policy. Japan pioneered many of the ultra-easy monetary policies that are now commonplace worldwide. For example, quantitative easing—the large-scale buying of financial assets by central banks—was begun by the Bank of Japan in 2001, roughly a decade before the United States tried it in response to the 2007-2008 financial crisis. The Bank of Japan followed this experiment with negative interest rates and explicit controls on the government’s borrowing costs, guaranteeing ultra-low interest rates for the long term.
After two decades of easy monetary policy, the Bank of Japan believes it is out of additional ammunition. Yet the U.S. Federal Reserve is just getting started, having drastically expanded its monetary toolkit to fight the coronavirus-induced economic crash. The U.S. deficit is now approaching levels unprecedented in peacetime. This augurs a weaker dollar—and therefore a stronger yen. That might sound like a good thing for Japan, but it will present a major challenge for Suga. Currency policy has always been a controversial issue in Japan, where exporters wield substantial political influence. The fiscal and monetary policies of Abenomics weakened the yen, benefiting Japan’s exporters. Suga may face a difficult decision if the dollar continues to weaken, the yen strengthens, and Japan’s exports become less competitive. Suga can promise continuity with Abe’s policies. But that doesn’t guarantee that he can deliver the same results.