Japan’s bold experiment
Japanese prime minister Shinzo Abe has achieved his goal to win control of the upper house of parliament in weekend elections. This gives him a secure majority for the next three years to test his ambitious economic expansion and reform programme known as “Abenomics”. Given his country’s position as the world’s third largest economy after the United States and China the experiment is consequential far beyond Japan. His hint on television that he wants to concentrate on economics rather than on his parallel platform of nationalist demands is a welcome indication of pragmatic intent.
Since coming to power for the second time eight months ago Mr Abe has overseen a substantial monetary easing by the Japanese central bank, introduced a €99 billion fiscal stimulus programme and promises to introduce a widespread package of structural reform. These “three arrows” of his economic programme are aimed at shaking up what is widely if misleadingly referred to as Japan’s stagnant economy and putting it back on a path of dynamic growth. Market buoyancy, improving quarterly growth rates and a falling yen were all positive signals ahead of this political victory.
His success provides a platform for the politically more difficult reforms that could consolidate his initial efforts. Mr Abe wants to make it easier to dismiss workers in the highly protective lifetime jobs sector of the economy. He says it is necessary to raise more taxes rather than pile on the already high government debt levels by more borrowing, but knows how unpopular it will be to double the existing five per cent consumption tax.
This is a broad and daring political agenda, but it now looks more capable of achievement. Japan’s opposition parties are fragmented and weak, while public opinion gives his government unprecedentedly high rates of approval. The economy certainly needs radical therapy, but has an underlying strength that often goes unrecognised. Japan, though heavily indebted, is still the world’s largest creditor in terms of net foreign assets and its debt is nearly all domestically owned. It remains an incredibly strong industrial manufacturing economy, notwithstanding the huge outsourcing of investment to China, where there are 22,000 Japanese firms, and now increasingly to Vietnam and India.
This economic interdependence with other Asian states on which Japanese prosperity relies would be jeopardised if Mr Abe persists with the nationalist policies for which he is also well known. He wants to rewrite the pacifist constitution, revisit post-war apologies and vows not to give an inch to China in territorial disputes. A sympathetic but volatile electorate would not thank him if these policies get in the way of economic recovery.