Until Christmas, Shinzo Abe’s eponymous Abenomics programme to rescue Japan from decades of deflation and low growth was an important success, according to most economic commentators, among them the International Monetary Fund, investors on the Tokyo stock market, who took it to a six-year high and 55 percent gain in 2013, and Japan hedge fund investors, who were the world’s best performers.
But then on 26 December, on the first anniversary of taking over as Japan’s prime minister, Abe in a fit of hubris or nationalistic fervor visited the controversial Yasukuni Shrine where war criminals are enshrined along with 2.4 million ordinary Japanese war dead.
In the space of an hour Abe changed the economic and political equation at the same time, from Abenomics to the risk of Abegeddon. He sparked a new verbal war with Japan’s neighbours, but with his visit he risked something hotter that could cause his economic programme to crash in flames.
One of Asia’s most respected former diplomats and commentators, Kishore Mahbubani, recognised the risk and declared that Japan and China “seem locked in an irreversible, dangerous downward spiral.” The title of his article, published by Bloomberg was, “How to prevent a war between China and Japan”. Unfortunately Mahbubani’s quite sensible suggestions seem far away from the agenda of either country.
Abe of course made light of any risks and claimed that his intention was entirely peaceful. He simply wanted to report to the souls of the dead on his first year’s achievements, and he claimed, “I made my visit to pledge to create an era where people will never suffer from catastrophe in war.”
His visit immediately provoked howls of protest from China and Korea. The US, Japan’s strongest ally, expressed its “disappointment”, a strong word for an ally to use in protest.
Washington is correct to worry that there are considerable dangers from the visit. One is that Abe has taken his eye off the economic goals that should be his priority. In spite of the successes of the first year of Abenomics, there are big challenges ahead.
The stock market rose sharply, in tune with the weakening yen, which has fallen to five years lows of 105 against the US dollar, helped along by the Bank of Japan’s determined quantitative easing to haul Japan out of deflation. This policy also seemed to be succeeding, with the core consumer price index for November showing inflation of 1.2 percent.
David Lipton, first deputy managing director of the IMF, has given his approval to what Abe and the Bank of Japan have accomplished so far. In an interview with the Financial Times, Lipton said that the policies had changed Japan’s economic trajectory.
But he cautioned that Abenomics is supposed to consist of three arrows – monetary easing, fiscal stimulus and structural reform – and that it is important to fire all three, not just the easy one of monetary easing. The IMF deputy was supportive of Abe’s policies so far and expects Japan’s growth to be 1.2 percent in 2014, though that might rise because of extra stimulus measures.
Some domestic critics are less supportive, and have coined puns on Abenomics to describe his policy. Some say it is “awanomics” – where “awa” means “bubble” – a fear that monetary easing is just helping Japan’s big corporations to enjoy the cream of bigger export earnings from the weaker yen and higher asset prices without real growth underpinning them. Others use “ahonomics” – where “aho” means “stupid” and predict that the policy will crumble from its own contradictions.
In April, Japan will raise its consumption tax from 5 to 8 percent, still low by the standards of the rest of the world, but the increase could stifle growth, anger consumers and derail popular support for Abenomics as well as for Abe himself.
Thus far the big gains from Abenomics have gone to corporate Japan, helped to export by the weaker yen and helped again by the government’s stimulus plans intended to offset the damage of the consumption tax hike. This is a potentially large redistribution to Japan Inc and away from Mr and Mrs Watanabe.
The average Japanese has seen few benefits. According to a poll of 16 economists by Bloomberg News, Japan’s labour cash earnings will rise by 0.6 percent in the year starting in April, whereas consumer prices will rise by 3 percent, or five times as much, thanks to the consumption tax increase.
Abe has asked companies to raise wages. But why should they? As Wolf Richter put it in his blog: Japanese companies are “sitting on the Abenomics gravy train: more government money, lower taxes, a devalued yen that inflates earnings from exports and overseas operations, and an asset bubble, particularly in the stock market. They get all this while paying their workers less. It’s corporate nirvana.”
Enjoy it while it lasts. Richter also notes that Japanese households have begun doing what they did before the last consumption tax hike, stocking up on purchases of big ticket items before the tax hits. Household purchases of durable goods rose by 25 percent in November from the years before, while spending on other areas was cut.
Abenomics is particularly vulnerable because there is little sign of the third arrow – structural reform – being prepared for release. If anything, Abe has shown signs of backing down before the vested interests, especially farmers, construction companies and medical interests that should be subject to competition.
In addition, he is being distracted by his nationalist agenda. One of his own aides claimed that there was a struggle going on inside Abe’s head between the nationalist and the economic reformer. In the last few weeks the nationalist Abe has had the upper hand, with a secrecy law rushed through parliament, with a new national defence programme, a plan to amend school textbooks to add patriotism, and then the visit to Yasukuni.
Abe does have apologists who claim that he is trying to appease his nationalist base before releasing the third reform arrow of Abenomics including agreeing to liberalisation measures in the ongoing Trans Pacific Partnership trade talks.
There are problems with this interpretation: giving in is more likely to energise the nationalists than assuage them to make concessions; and the fact that that there have been not one but several nationalist measures suggests that it is Abe’s authentic voice, not a political ploy.
The Yasukuni visit is ultimately dangerous for Japan because it has badly upset neighbours whose goodwill and good economic relations Japan needs. Trade with China accounts for 20 percent of Japan’s overall trade. China’s Global Times, not an unbiased observer, declared in August that “Abenomics’ fate depends on China trade.”
But Japan’s Asahi Shimbun last week said the same thing, claiming that business leaders had lobbied against the Yasukuni visit, but no one in business circles is big enough to challenge the prime minister. Japan waits with trepidation to see whether China will react with more than a verbal war.