Japan’s New Prime Minister Takes On Abenomics’ Legacy

Abenomics was supposed to be the magic toolkit that revitalized the Japanese economy. But nine years and a couple of prime ministers later, growth remains sluggish, and wealth disparity has risen. Picking up on growing public anger over inequality, newly elected Prime Minister Fumio Kishida has laid out a populist economic policy that offers cash, seeks to bolster potential growth sectors, and prods companies into raising long-stagnant wage levels. While the ideas have their attractions, they also mean a greater state role in an economy that most experts agree needs less government intervention to succeed, not more.

The program, which Kishida touts as no less than a “new capitalism,” features tax incentives—and in some cases tax penalties—for companies, depending on whether they raise wages or not. His goal is to avoid becoming yet another revolving-door prime minister like his predecessor Yoshihide Suga, who lasted just over a year in office. Suga’s fate was no exception. Since 2006, seven Japanese prime ministers have been unable to last much beyond the one-year mark in office, brought down by gaffes, mini-scandals, and general public weariness with having them in charge.

To set himself apart, Kishida has turned his back on the Abenomics of former leader Shinzo Abe, the one man who managed to break the one-year curse (on his second try) with a record-breaking nine years in office, in two separate terms, before stepping down in 2020. Kishida’s move has popular support. In a survey by Japan’s Jiji news agency in October 2021, 62.5 percent of respondents said he should reexamine Abenomics, while only 14.7 percent said he should keep on the same road. While Abenomics did invigorate the top tier of Japan’s economy, with a rising stock market and strong corporate profits, lower-paid staff and small companies were largely left behind.

Defying Abe, who remains a powerful figure in the ruling Liberal Democratic Party, is a risky strategy. But Kishida sees an opportunity in trying to reorient economic policy from growth to fairness. “Abenomics clearly delivered results in terms of gross domestic product, corporate earnings and employment. But it failed to reach the point of creating a ‘virtuous cycle,” Kishida said in an October 2021 interview with the Financial Times. His Economic Revitalization Minister Daishiro Yamagiwa was more direct: “We do recognize there were insufficient parts to Abenomics,” he told reporters the same month. “There are limits to a trickle-down approach, and some things need to be done bottom-up.”

Some image building is clearly necessary. Kishida, a former foreign minister with a limited public persona, came into office this past October as a compromise candidate in the leadership election for the Liberal Democratic Party, blocking bids from both the liberal and right wings of the party. The initial reviews were not particularly good, with the first polling showing an approval rate for his cabinet of 40 percent, among the lowest for any administration in the past 20 years. The figure has since climbed to around 60 percent, but the Japanese public is notoriously fickle over how it rates its leaders.

A large part of the economic package involves throwing around large sums of money totaling 56 trillion yen (around $490 billion), about 10 percent of the nation’s GDP. The goal is to bring back some of the glory days of Japanese success in the areas of semiconductors, digitalization, and green technology. One area of focus is on “economic security” (code for “let’s make products here instead of in China”), and Kishida has appointed a new government minister to lead the initiative, a sure sign that concrete action will follow.

In the voter-pleasing camp, Kishida is also promising payouts of 100,000 yen (around $870) for every family with children. Government largess is by no means a Kishida invention. Previous administrations have assiduously invested and subsidized—leaving Japan with one of the heaviest levels of government debt in the world.

But Kishida’s biggest challenge rests in trying to create economic growth through rising domestic demand. Rising corporate profits would in turn lead to higher wages and fuel greater spending. It is basic to most economies, but in Japan has proven an elusive goal.

Ever since the collapse of the so-called bubble economy around 1990, Japan has been stuck in an economic time warp. It remains prosperous and profitable but has failed to keep pace with the growth it has seen around Asia and indeed in the rest of the world. Most telling is the fact that wages in Japan have barely shifted. Government data shows nominal wages rose just 1.2 percent from 2012 through 2020.

Corporate Japan, on the other hand, has been doing very well. Corporate profits rose to record highs in 2018 and are now back to near that level after a coronavirus-induced dip. Retained earnings (roughly equivalent to cash sitting around) has climbed to an estimated $6.5 trillion as of 2019. It’s not just the populists who see this as destructive to building growth.

“Despite the continued economic expansion since Abenomics, the government’s goals of economic growth above 2% and 2% inflation have not been realized,” Japan Research Institute senior economist Yosuke Yasui said in a March 2021 report. “While various factors can be considered, the major factor is that Japanese companies continued to hoard the value added they created as cash and deposits instead of sufficiently passing on to wage payments and capital investment.”

Even massive cash injections into the economy by Japan’s central bank, the Bank of Japan, have failed to make much of a dent in either total economic growth or in trying to end the deflationary mindset. Global policymakers suddenly worried about supply chain inflation becoming a more permanent part of their economies would do well to study Japan’s inverse issue: the psychology of deflation. In this environment, both corporations and individuals have become cash hoarders. As COVID-19 hit, cash handouts by the government ended up mainly in bank savings accounts.

Economists are skeptical that the new cash payments or the tax incentives to raise wages will have much real impact. Abe tried to pressure companies to raise wages during his term, but beyond lip service and some token payouts by big firms, little changed. Just as the deflation mindset has affected spending, Japanese labor has opted for job security over financial gain. From the boardroom perspective, just because you have money, it doesn’t mean you should spend it on your workforce when there is little chance that they would actually get fed up and leave. There’s no sign in Japan of the so-called great resignation sweeping corporate America: If anything, COVID-19 has made Japanese workers more cautious.

For many economists, the key is increasing job productivity so that higher wages are the result of greater economic value, not just a tighter labor market or government prodding.

“Abe had a lot of micro reforms in the corporate area that Kishida is not supporting anymore,” said longtime Japan economy watcher Martin Schulz, chief policy economist at the industrial group Fujitsu Ltd. “This frustrates companies because productivity gains become even more difficult to achieve,” he said, noting the structural headwinds of a fast-aging Japan.

Kishida has already found that that distributing money from government coffers is a lot easier than redistributing it away from those who already have it. When he initially floated the idea of a higher capital gains tax to claw back some of the money he wanted for spending, the stock market sank for eight straight sessions, prompting a quick reversal of the idea. And for the incentives on wages, the powerful employer’s group Keidanren has already signaled opposition, saying that such measures should not be forced upon small and medium-sized enterprises that are already facing difficult times due to COVID-19.

But excluding these enterprises would mean that those who are most in need are the ones likely to be left in the lurch. These smaller companies represent 70 percent of all domestic employment. As Deutsche Bank’s chief Tokyo economist Kentaro Koyama points out, the small and midsize businesses would have little interest in the tax breaks being offered, as more than 60 percent of them report a loss every year and therefore pay no tax today. He also pointed to government research that showed little benefit from the Abe programs. “We question both the effectiveness of, and the need for, such measures,” he wrote in an October 2021 note to clients.

Abe was unsurprisingly miffed that the new government is pouring scorn on his signature economic program, saying last month that Kishida should not change the fundamental direction, adding that the markets would “react very negatively” if Kishida’s economic policy is seen as a program of socialism.

For others, there are concerns that Kishida may be taking away the punch bowl just as the party gets started, as the saying goes about the role of central banks in regulating economies. While Japan has often been criticized for its slow pace of change, ranking last among 63 countries in terms of entrepreneurs in 2019, the perception also seems to be changing. One 2021 survey by the Wharton School of the University of Pennsylvania and consulting firm BAV Group actually ranked Japan as the best place in the world to start a business, a distinction that would shock most foreign executives in Japan.

But hard data also suggests that the entrepreneurial spirit is picking up. Figures from the Japanese mergers and acquisitions journal MARR showed there were 4,280 deals involving Japanese companies in 2021, up 14.7 percent from 2020 and resuming an upward trend seen from 2012 to 2019. “Japan may yet not be shoulder to shoulder with other Asian economies in terms of start-ups and ventures, but I think Abe’s corporate governance reform push did light the fuse in that respect,” cross-border mergers and acquisition advisor Yuuichiro Nakajima said.

The key question facing Kishida will be if he can continue to incentivize risk-taking while taking away some of the financial reward. If it could happen anywhere, it’s probably Japan.

Kathleen Benoza contributed to this report.