July 18, 2013 6:52 pm

Japan: Abe’s next shot

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Sunday’s election is considered by many to be a turning point for both the country and Abenomics
Archer on horseback

At the gallop: the first two arrows of Mr Abe’s reforms have centred on fiscal and monetary policy. The third arrow of structural reforms will require a detailed follow-up plan in September

This Sunday’s election for the upper house of Japan’s parliament ought to be the most boring political contest imaginable. A moderately powerful institution that does not determine who governs is about to be reorganised in a way that, if the polls are even close to being right, is all but preordained: with a big majority for the ruling Liberal Democratic coalition and its leader, Shinzo Abe.

Yet as a turning point in the heady experiment that is “Abenomics”, the nickname for Mr Abe’s effort to re-energise Japan’s economy, the election looms large. Many see it as the moment when the curtain will open on the main event of the prime minister’s rule – the first seven months having been a kind of warm-up act to make voters comfortable in their seats.

Japan economy and politics

Japan economy and politics

Backstage, the thinking goes, the true Mr Abe – more conservative than the average citizen, but possibly more committed to painful economic change – is preparing to make his appearance. “The job really starts on the 22nd of July”, the day after the election, says Alastair Newton, senior geopolitical analyst at Nomura. “It’s time for the real Mr Abe to stand up.”

A lot is riding on his performance. Since the LDP won control of parliament’s more powerful lower chamber in December, Mr Abe has drawn the world’s attention – and investors’ cash – to Japan in a way that has not been seen in years. The stock market is up 40 per cent this year, having mostly recovered from a setback in late May and June. Last quarter’s economic growth, at an annualised 4.1 per cent, was the fastest among Group of Seven countries.

But faith in Mr Abe remains shaky. For all the energy that he has poured into economic policy so far – launching a Y10tn stimulus package, engineering a dramatic monetary expansion at the Bank of Japan, embarking on growth-promoting reforms – the near-universal assumption is that his true passions lie elsewhere. His own advisers admit, in private, that he is more of a culture warrior than an economic one: he wants to rewrite the US-imposed, anti-war constitution and free Japan from what he sees as a chafing “postwar order”.

That has created a fear among economically minded observers – not to mention Japanese social liberals – that Mr Abe will lose interest in Abenomics after the election, once he has a comfortable majority in both houses. A change of focus would be devastating for a project whose most difficult decisions, on everything from deregulation to taxes, still lie ahead. A more nationalist cultural agenda could also worsen relations with Japan’s neighbours, South Korea and China, and even raise hackles in Washington, which is wary of being drawn into regional disputes.

“Everything he’s done so far is pain-free,” says Gerry Curtis, an expert on Japanese politics at Columbia University, referring to the fiscal and monetary stimulus that has comprised the first two “arrows” in Mr Abe’s three-part growth strategy. “The big question is, does he believe in the kind of economic reforms that the markets think the third arrow should put forward?”

On a personal level, a win on Sunday would bring Mr Abe’s redemption story closer to completion. The LDP lost control of the upper house in 2007, during his first, shortlived stint as prime minister. He resigned soon after and many thought his political career was over. “By winning this upper house election, he will in a sense win his honour back,” says Hiroshi Hoshi, a political columnist at the Asahi Shimbun, one of Japan’s largest newspapers. Even with the LDP’s poll lead – its support ratings are multiples of other parties’ – he has campaigned hard.

Another winner would be political stability itself. When Mr Abe quit, he became the first of what would be six premiers to last only about a year – three from the LDP and three from the now-struggling Democrats. Now, with parliament unified and no new elections planned for three years, he would stand a good chance of breaking the streak. That should add much-needed follow-through power to his initiatives.

So what of the real Mr Abe? Concerns of a fundamental pivot from Abenomics to the constitution look overdone. There is a reason the basic law has not been amended in the 67 years since its introduction. Most of its core provisions are popular, and any change requires approval by two-thirds of both houses of parliament and half of voters in a national referendum.

A proposal to revise it in stages, by first lowering the threshold for parliamentary approval to half, was floated this spring but soon withdrawn, after the public and the media turned up their noses.

Even in parliament, Mr Abe will not have the votes. Although most surveys show support for his administration running at 60 per cent or more, largely thanks to Abenomics, only half of the upper house’s 242 seats are being contested, making it mathematically impossible for the LDP to win the sort of supermajority it enjoys in the lower chamber. It is likely to have to rely on its anti-revision coalition partner, the Buddhist Komeito, even for a majority.

“The constitution has been put on the shelf for now,” says one Abe adviser, who like others in the premier’s circle insists that the next two years, at least, will be devoted to the economy. The implosion of the populist Restoration party, whose leader was quoted defending sexual abuses by Japan’s wartime military, has both deprived the LDP of a potential pro-revision ally to replace Komeito and provided an object lesson about the public’s tolerance for rightwing crusading.

An early sign of intent will come on August 15, the anniversary of Japan’s second world war defeat, when many LDP parliamentarians will visit Yasukuni, the controversial war shrine and rallying ground for the Japanese right. The adviser believes Mr Abe will mark the day elsewhere.

. . .

The more pressing question, then, is what the next phase of Abenomics will entail. Mr Abe has set many long-term goals, such as boosting per capita incomes by 40 per cent in a decade. But some believe the fate of his economic programme – and the hopes that investors have placed in it – could be decided in a matter of months.

That is because several big policy milestones are looming. The first is a detailed follow-up plan for “third-arrow” structural reform, due in September. Mr Abe’s pronouncements on the subject so far, distilled in a policy outline in June, have been greeted sceptically by the markets. The Nikkei’s recent dip probably had as much to do with “tapering” talk by the US Federal Reserve as anything that happened in Tokyo, but the trigger was a limp speech by Mr Abe about reform.

“The arrow didn’t fly,” says Columbia’s Mr Curtis.

Part of the problem is a scarcity of detail: there are lots of targets – in addition to the income pledge, Mr Abe wants to double farm revenues, tourist numbers and foreign direct investment – but little real indication of how they will be reached. Some important subjects have been addressed in only the vaguest terms, presumably out of pre-election caution. Lower corporate taxes and a relaxing of Japan’s unusually strong worker protections are two items on many economists’ wish lists, but ones that Mr Abe may have judged would not be big vote-winners. Contentious reforms will be harder to avoid once he has won – but will mean fighting special interests in his own party.

The other milestone is a decision on whether to raise Japan’s national sales tax, from 5 per cent to 8 per cent, part of a planned two-phase increase that would take it to 10 per cent by October 2015. The relevant law was passed under the previous government, but Mr Abe’s administration must give final approval, and can reverse course if it judges that the economy is still too weak. The decision on phase one needs to be made by October, if an increase is to implemented as planned next April.

Some have questioned the wisdom of raising taxes while simultaneously trying to stimulate growth. Koichi Hamada, a Yale academic who is one of Mr Abe’s closest economic advisers, has suggested postponing the rise or proceeding in smaller increments, perhaps 1 percentage point a year. Legislators, meanwhile, are haunted by Japan’s last sales-tax rise, in 1997: a recession followed and the prime minister who approved it resigned.

Many analysts believe that Mr Abe will press ahead regardless of such concerns. Japan’s gross public debt is at more than two years’ economic output, the highest ratio in the developed world. The massive increase in government bond buying by the BoJ since April – the central bank is, in effect, underwriting most of Tokyo’s borrowing – has made markets more sensitive to signs of fiscal recklessness. The stimulus elements of Abenomics have been sold, in part, as a way to prepare the economy for a gradual fiscal housecleaning. Fairly or not, investors could read a U-turn on the sales tax as a signal that the entire programme is a sham.

“If they duck this, then external investors are going to say, ‘Oh my God, these guys are never going to get serious about fiscal consolidation,’ ” says Mr Newton at Nomura.

. . .

Other hard choices are also on the horizon, including a draft 2014 budget, due in December, that will reveal how far Mr Abe is willing to cut support payments for the elderly and other social expenditures.

Mr Abe has spent much of the election campaign reassuring farmers that he will protect them in talks over the Trans-Pacific Partnership trade pact, but some concessions are bound to be necessary.

“The next few months will be a test for Japan as a whole,” says Mr Hoshi, the Asahi columnist. “Can the LDP push through with painful policies? And will the Japanese people tolerate those painful policies?”

There is, of course, still the question of whether Abenomics will work. Mr Abe is thinking long-term, by all accounts – of a government buoyed by an economic revival that it will one day be able to leverage for grander purposes. Data suggest his policies are starting to lift parts of the real economy, such as consumption, lending and exports, and not just the stock market. But many Japanese say they support him out of hope, rather than an actual improvement in their living standards.

By the time Mr Abe faces voters again, most likely in 2016, he will have passed through an even longer gauntlet. The core of the Abenomics experiment will have played out, its promises fully tested: steady growth; deflation turned into stable inflation of 2 per cent – with price increases matched, crucially, by rising wages; a primary budget deficit reduced by half. Even with full control of parliament, it will be a treacherous road.

“This is a set of commitments that no politician in the world would want to be held to,” Mr Hoshi says.

Parties: In search of an opposition

The lower house of Japan’s parliament chooses governments and approves national budgets. The upper house, by contrast, is better known as a magnet for celebrity candidates – fading pop stars, professional wrestlers and the like – and as a cause of political gridlock. Too weak to attract the most ambitious politicians, it is still strong enough to block legislation when it is not controlled by the governing party, as has been the case for most of the past six years.

True to tradition, the present upper house contest contains elements of farce. New Party Daichi, a tiny group based in Hokkaido, has recruited a candidate whose name is identical to that of its leader, Muneo Suzuki, who is barred from running because of a bribery conviction. The hope, apparently, is that simple name recognition will win it a seat.

As for gridlock, that should ease with the expected victory for Shinzo Abe’s Liberal Democratic party and its coalition partner, Komeito. It would end the so-called “twisted” parliament, in whose most recent manifestation the LDP has held the lower house and a collection of opposition parties the upper one. Its bill-killing power was on display until the end: a censure motion against Mr Abe passed by the upper house on its last day before the election stymied several pieces of legislation, including one on electricity reform. They will have to be resubmitted in the next session.

For all the benefits of an untwisted legislature, some fear the LDP’s renewed grip on power – and the matching collapse of the opposition – would end an all-too-short experiment with competitive politics in Japan. The LDP ruled almost uninterruptedly from 1955 until 2009, but now the party that beat it four years ago, the Democrats, is in disarray and polling in single-digits. Having turfed out two governments in two lower-house elections, voters may be enjoying their new-found power. But to exercise it again, they will need a viable opposition to which they can transfer their loyalties.

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