Argument

Abenomics Can Flourish Without Abe

Japan’s new prime minister has the skills to take on the country’s bureaucrats.

Then-Chief Cabinet Secretary Yoshihide Suga (right) presents flowers to Japan's Prime Minister Shinzo Abe
Then-Chief Cabinet Secretary Yoshihide Suga (right) presents flowers to Japan's Prime Minister Shinzo Abe after Suga was elected as new head of Japan’s ruling party at the Liberal Democratic Party's leadership election in Tokyo on Sept. 14. Eugene Hoshiko - Pool/Getty Images

Japan’s new prime minister, Yoshihide Suga, could easily be dismissed as a retread of his predecessor Shinzo Abe, but with his focus on the woes of rural Japan and his backroom skills to get things done, he may be a more potent force in pushing through economic reforms. His level of success will decide if Abenomics, the package of measures that Abe put together in early 2013, becomes Suganomics.

When Abe took office in December 2012, he made much fanfare of a three-prong approach to reviving the country’s long-stagnant economy. He was quite successful in prodding the central bank to inject huge amounts of money into the economy in order to break out of a deflationary spiral where lower asset prices and earnings sapped consumption. While the Bank of Japan has failed to reach its much-vaunted target of a 2 percent annual inflation rate, it has managed to keep prices from falling. Abe was also able to push up government spending levels to provide fiscal stimulus, although at the cost of further increasing Japan’s already record-high government debt, still twice as much per GDP as in the United States.

But these were relatively easy measures for Abe, using tools already in the government’s hands. Structural reform proved far harder. Japan’s myriad restrictions have long been blamed by economists for slowing the economy, but the bureaucracy proved difficult to budge. In some ways, this was not a surprise. Government and industry in Japan have always worked together, resulting in interlocking ties that are hard to break.

Abe, like most senior Japanese politicians, is a product of the system. Most politicians, including 16 of the country’s prime ministers, come from the elite University of Tokyo, though Abe studied at the similarly exclusive Seikei University. Many, such as Abe, are from storied political families—Abe’s grandfather was prime minister and his father a foreign minister. In addition, Abe seemed more emotionally committed to a conservative agenda of greater military strength and an end to the postwar apologies that have been a mainstay of Japan’s relations with other Asian nations than to economic reform.

Suga, on the other hand, is an outsider. He grew up in northern Japan, the son of strawberry farmers. Not relishing an agricultural career, he moved to Tokyo after high school, enrolling in night classes at the somewhat less prestigious Hosei University (he would later say it was the least-expensive choice) while working in a cardboard box factory. He then worked for a lawmaker, was elected to the local assembly in Yokohama, and then became a member of parliament for the Yokohama area, a seat he holds today.

As the No. 2 in the government throughout Abe’s seven-plus years as prime minister, Suga was already a key player in government policy, including the Abenomics program. One of his targets was the sprawling Japan Agricultural Cooperative, a network of co-ops that controlled virtually every part of Japan’s farming sector. It arranged the loans (it owns Japan’s fifth-largest bank), sold the seeds and fertilizer at high prices, and handled the national marketing of nearly all farm produce.

Most important, it provided a powerful lobby to protect farmers and the sky-high tariffs that made Japan one of the most protectionist nations. With 85 percent of Japanese farmers cultivating rice, Japan’s import tariff for rice from abroad was set at 778 percent. As the farming population continued to dwindle, however, and with the ruling Liberal Democratic Party no longer dependent on rural votes to stay in power, Japan Agricultural Cooperative’s political clout started to decline. Under Abe, its monopoly powers over local co-ops were reduced, and a pro-reform head of the association came to power in 2015. Within a few months, Japan was able to reach a deal on the 12-nation Trans-Pacific Partnership by offering sharply reduced tariffs for a range of imported food. Even after the United States pulled out in a dramatic January 2017 move by President Donald Trump, Japan cobbled together the remaining nations into a revised trade grouping. Japanese officials like to stress that the United States is always welcome to come back.

With Suga now at the top, the agriculture lobby is concerned that more is coming. “JA Group in trepidation as Prime Minister Suga, a farmer’s son, stands all ready and committed to execute deregulation,” the influential newsmagazine Diamond wrote in a report.

Suga has wasted no time in taking up the cudgel for reform more broadly. He’s targeted some ingrained government habits, including the use of hanko personal seals on documents and the related use of fax machines, which are seen as necessary to send documents with the proper seals and are still used by 95 percent of companies.

“I will make utmost efforts to conduct regulatory reform by tearing down bureaucratic sectionalism, vested interests and notorious habit of following precedents,” Suga said at his inaugural news conference.

He has appointed a cabinet minister in charge of administrative reform, moving the feisty Taro Kono from the defense ministry job. The new role was at first seen as a demotion (Kono had the same job previously), but given Suga’s drive for reform, Kono has taken a high profile. “Kono declares war on fax machines,” was the headline in one Japanese newspaper. Among his first steps was to announce an email hotline for ideas on how to cut red tape. It received so much traffic he shut it down after 4,000 ideas poured in.

“Silos within Japan’s government ministries have often hindered private businesses in the areas of new business and exports,” said Hiroshi Ugai, J.P. Morgan’s chief economist in Japan. “Since Suga is quite familiar with guiding the bureaucracy and has demonstrated his full support for Kono’s approach, we expect to see progress in this area.”

In addition, Suga has created a minister for digitalization, an initiative made more urgent by the increase in teleworking amid the COVID-19 pandemic. The goal is to update the notoriously backward and fragmented IT systems used by the government and to encourage corporations to take a leap forward in how they use—or don’t use—technology. “This is a key way that Suga hopes to steer the economy,” said Arthur Mitchell, an attorney with long experience in Japan who specializes in technology. “It affects everything: industrial revitalization, artificial intelligence, a regulatory framework that allows for innovation, privacy protection.” Suga has already announced plans for a new Digital Agency to coordinate the efforts. The problem, Mitchell said, is whether a single office under the prime minister can effectively handle such a big issue with other ministries and stakeholders. “Will Suga be able to bring some coherence to this?” he asked.

Even as he launches his reform program, Suga has a more immediate concern common to all leaders: how to get the economy back to some semblance of normal as the pandemic continues. With its top trading partners, China and the United States, hit hard, Japan saw its GDP fall at a record 28 percent on an annualized basis in the second quarter—even though the country avoided the severe lockdowns seen elsewhere and has managed to keep the mortality rate from COVID-19 at 10 percent of the global average. The economy has recovered somewhat since then, helped by renewed growth in chief trading partner China. September trade figures showed that exports to China were up 16 percent from the same time last year. Domestically, the government’s survey of the economic mood showed a sharp rebound in August and September, with the mood among households now at its highest since December 2017. In addition, unemployment has remained subdued, rising slightly to 3 percent in August.

All of this assumes that Suga will be around long enough to implement his economic—or for that matter any other—policies. He didn’t win the top job by popular vote but through being elected as head of Japan’s long-ruling Liberal Democratic Party. Even that selection was a less-than-democratic process. The rank-and-file members of the party were not allowed to vote. Instead the balloting was by the senior officials and 394 lawmakers within the party. Even that was largely an illusion, as most votes were effectively controlled by the five major factions within the party in the best tradition of smoke-filled-room bargaining.

Suga was able to come out on top even though he is not himself a member of any of the factions, which may be the reason he was able to find common support. He could just as easily be shown the door if the party’s kingmakers come up with a new figure. That could in turn bring Japan back to the revolving door of leaders. From 2006 to 2012, there were no fewer than six new prime ministers, including the first unremarkable stint by Abe.

The voters may actually get a say in all this fairly soon. A new general election must be held by October 2021, with the prime minister able to fix the exact date. With Suga’s new government polling remarkably well with an approval rating around 60 percent despite its relative lack of charisma, that could come sooner rather than later. It will not be lost on Suga that for most Japanese prime ministers in recent years, the support rate has been a fairly straight downward trend from the time they took office, Abe being a notable exception.

Another structural issue for Suga may also loom large as he tries to get the economy moving: What level of growth can a shrinking country actually achieve with the added burdens of COVID-19? Deutsche Bank Group’s Tokyo chief economist Kentaro Koyama contends that the government will need to cut what is called the “potential growth rate” for Japan, the rate of growth that would be considered the likely maximum over the long term. The potential growth is now pegged at just 0.9 percent.

“It may be an inconvenient truth for the government that the decline in potential growth occurred under Abenomics,” Koyama said in a recent report. “We believe a downward revision at some point is inevitable.” That will give Suga even more to think about as he tries to juggle the electorate, the backroom powers in the party, and the numerous bureaucracies that will not want to see the fundamental structural changes that Japan needs.

William Sposato is a Tokyo-based writer who has been following Japan’s economy and financial markets for more than 15 years.

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