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Shinzo Abe

Shinzo Abe is president of the Liberal Democratic Party and was elected prime minister of Japan in December 2012. He also served as prime minister in 2006 after being elected by a special session of Japan’s National Diet, but resigned after less than a year.

CommentInsight & Opinion

Politics undermining Japan's economic rejuvenation

Dan Steinbock says Abe's reform plan, now in its critical phase, will be derailed if tensions persist

PUBLISHED : Monday, 24 March, 2014, 3:33am
UPDATED : Monday, 24 March, 2014, 3:33am

After two "lost decades", Japan began its bold but risky reforms a year ago. The new governor of the Bank of Japan, Haruhiko Kuroda, pledged to do "whatever it takes" to achieve the 2 per cent inflation target, seeking to double the monetary base by the end of this year.

That was the first tenet of Prime Minister Shinzo Abe's economic reform agenda. It was followed by a major fiscal stimulus focused mainly on infrastructure spending.

The combined fiscal and monetary policies created joy in the markets. Abe made the point last September, when he rang the closing bell at the New York Stock Exchange and declared that "Japan is back".

But after these initial triumphs, the reform agenda faced its third and toughest challenge - a slate of efficiency-enhancing structural reforms.

What made the situation even trickier was timing. Abe had hoped to start fiscal consolidation after barely a year of expansion. Then politics got in the way.

In Tokyo, the final 2013 parliamentary session was supposed to focus on reforms that would boost Japan's recovery. Instead, it was swept by a messy debacle over a controversial secrecy bill.

Further, Abe appointed assertive conservatives to Japan's public broadcaster NHK, including novelist Naoki Hyakuta, who announced that the Nanking massacre had never happened; and director general Katsuto Momii, who sparked another high-profile debacle by downplaying the tragedy of the "comfort women" who were forced to serve in brothels for Japanese soldiers during the second world war.

Last December, Abe himself visited the controversial Yasukuni shrine, which includes the graves of 14 Class-A war criminals. That escalated tensions further in the region.

Since then, Abe's strong 60 per cent approval ratings have dropped by some 10-15 percentage points.

The economic outlook has been similarly dim. During the last quarter of 2013, analysts expected Japan's growth to climb to 3 per cent. In reality, the economy grew at the tepid rate of 1 per cent.

Meanwhile, the US-led Trans-Pacific Partnership, which Abe needed to push structural reforms in domestic industries, is having to contend with increasing divisions, secrecy and popular concern for consumer protection.

In January, Japan's trade deficit widened to a record as surging import costs weigh heavily on Abe's efforts to foster growth.

The first defining moment of Tokyo's reform agenda will follow early next month, when the administration plans to implement its consumption tax hike. Much also depends on the spring wage talks, which should support nominal pay rises to achieve sustained inflation and faster growth.

The BOJ is likely to wait a quarter or two to evaluate the full impact of the tax hike. If the impact is marginal, Kuroda will continue to sit tight. If, however, it affects lingering growth, he may well increase the BOJ's quantitative and qualitative easing programme.

To Kuroda, BOJ's 2 per cent inflation target is a vital goal.

Whether he succeeds will depend in part on the political environment.

Political and military risks have escalated in the East China Sea among Japan, China and South Korea over the extent of their respective exclusive economic zones.

Since late autumn, tension has increased around the disputed Senkaku/Diaoyu Islands, which were purchased by the Japanese government.

If tensions translate into major incidents, this is all just a prelude to something more serious, which would cause damage to sovereign creditworthiness in the region. That, as Standard & Poor's has warned, could result in action on ratings. While the agency does not see imminent threats, it expects tensions to prevail.

In the absence of change, East Asia could witness new, adverse scenarios - "black swans" with low perceived probability but a high potential impact in the region.

It is amid these rising domestic and regional tensions that Japan is about to raise the consumption tax. An adverse scenario could penalise household spending more than anticipated, especially if the spring wage talks fail to achieve sufficient wage increases.

Japanese debt continues to worry. Today, a lmost 28 per cent of all long-term borrowing globally can be attributed to Japan - even though the economy represents only 8 per cent of the world total. Yet, its debt will continue to rise even as its economic role in the world continues to decline. That's an unsustainable equation.

A rejuvenated Japanese economy is in the interests of the region. Domestically, it requires accelerated reforms, which cannot be implemented without political support. Regionally, it needs reconciliation. Otherwise, Japan cannot achieve its economic goals.

Dr Dan Steinbock is research director of international business at India China and America Institute (US) and visiting fellow at Shanghai Institutes for International Studies (China) and the EU Centre (Singapore). See also: www.differencegroup.net

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P Blair
Japan's LDP together with Japanese PM Shinzo Abe have no good ideas about reinvigorating the Japanese economy which have been in a state of deflation for decades. With national debt at more than 2.5 times GDP, further stimulus measures will result in a bigger debt level without actually improving things. So as a side show, Shinzo Abe and the LDP fanatics and fascist are resorting to provocations of neighbouring countries like Korea and China to distract Japanese from the serious problems in the economy as well as the after effects of the Fukushima nuclear disaster. The gimmicks such as praying to war criminals and devils at the Yakusuni War Shrine will only make the problems faced by Japan worse not better.
baysidedweller
IMHO, Abe, the nationalistic revisionist is on the wrong path.
Even if he wants to achieve his economic and nationalistic goals, he should have proceeded with the economic goals first till it gains momentum before tackling the nationalistic goal.
As you pointed out correctly, by combining the two, Abe is in danger of stalling economic growth in Japan while the national debt explodes to dangerous level.
Russia's annexation of Crimea complicates the situation further since Abe wanted to have closer economic and political ties with Russia.
Abe already had to "swallow his pride" by affirming that he will not revise the Kono statement just to get Park to agree to participate in the upcoming trilateral summit at the Hague. Any positive outcome from the summit is still up in the air since there are other issues that will be brought to the table that needs to be resolved like Tokdo/Takeshima and compensation for comfort woman.
I just hope Abe sees the writings on the wall and come to his senses to abandon his nationalistic agendas, at least for now.
 
 
 
 
 

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