Straight talking: Shinzo Abe addresses the National Academy this month

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Shinzo Abe, the prime minister of Japan, is presiding over the riskiest and arguably most important economic experiment on Earth. Other countries need only keep inflation at 2 per cent, but Japan is trying to escape two decades of deflation. Its gross public debt is more than double that of the US and the fiscal time bomb of an ageing population is ticking louder than anywhere else.

The stakes for Abenomics — the prime minister’s three-pronged stimulus of monetary, fiscal and structural reforms — could not be higher. If Mr Abe fails, Japan could suffer more lost decades, even as the economic and military might of its Chinese neighbour continues to grow.

Yet after two years of Mr Abe’s programme, there is a growing impatience for results and a sense that time is running short. The joke among corporate leaders in Tokyo is that Mr Abe deserves an ‘A’ grade for his monetary stimulus, a ‘B’ for his fiscal policy and an ‘E’ for the limited progress on structural reform.

Sitting in his official residence, the prime minister, dressed in a navy suit, tasselled loafers and a natty pink-and-blue striped tie, rejects this marking scheme. He argues the world is underestimating his progress on the ‘third arrow’ of structural economic reforms.

“Maybe I was given the grade of E just to spell out my name A-B-E but we do attach great priority to the growth strategy,” he says. “For everyone to be able to share this common recognition and come to an understanding of how important this growth strategy is, maybe the E stands for ‘education’.”

When a pale and haggard Mr Abe quit in 2007 after his first, brief term as prime minister, he was sick and beset by scandal. His dream of reform to the country’s pacifist constitution had foundered on the indifference of the Japanese public. Not only did his political career seem over — it seemed like an embarrassment.

Timing is everything

The resurrected model is bouffant and healthy, with the twinkling self-
assurance of a political strongman who has just crushed his abject opposition at a second successive election.

“During this term what I have clearly identified is the order of priorities,” says Mr Abe, whose first spell in 2006-07 was marked by a frantic but futile wish to do everything at once. “I have made sure the desire of Japanese citizens coincides with the policies we are pursuing. We are attaching high importance to the economy.”

The politics have changed too. In his first administration Mr Abe was a figurehead for his Liberal Democratic party but this time around he has marginalised the LDP’s system of factions, which often made it ungovernable. Power is in the hands of the prime minister and his cabinet, marshalled by Yoshihide Suga, the fearsomely effective chief cabinet secretary.

The somewhat leisurely pace of reform reflects these lessons of Mr Abe’s ill-fated first term in office. It is a paradox of his government: the very changes — the economic focus — that have made Mr Abe strong enough to move aggressively have also made him cautious about getting too far ahead of the public or the LDP, and risking his grip on power.

The danger is that Mr Abe will go too slowly, missing the narrow window while the Bank of Japan is easing, his poll ratings are high and the baby boomers are still healthy.

His big achievements in 2013 and 2014 were on the monetary and fiscal arrows. But he did make some progress on corporate governance, and on the Trans-Pacific Partnership trade deal, which Mr Abe describes now as “entering the final stage”.

Since his re-election in December, the prime minister has notched up an important victory: a deal for agricultural reform. “In the current session of the Diet we will submit a bill to reform agricultural co-operatives, which is an area nobody has been able to touch for the past 60 years,” he says.

The symbolism of Mr Abe taking on the farmers, long a crucial power base for the LDP, is important. Weakening the farm lobby may also pave the way for future reforms.

The changes Japan needs most are in the labour market and social security system. The first to boost the scope and productivity of a shrinking workforce and the second to rein in costs as the population ages. In these areas, progress has been more incremental.

Mr Abe talks proudly of bringing “800,000 additional women” into the labour market in the past two years, and boosting the number of women in management positions, albeit from a very low base. It is less clear whether Mr Abe’s reforms brought about this rise, however, or whether it reflects the tighter jobs market brought about by monetary stimulus.

That monetary arrow is still the most effective part of Abenomics. Falling oil prices have dragged inflation down to 0.2 per cent for now. But consumer spending could yet recover, as the combination of cheap oil and higher wages bring the benefits of stimulus to regular households for the first time, and the effects of last year’s rise in consumption tax fade.

Mr Abe’s decision to postpone a second consumption tax rise has helped that short-term outlook, but does make his insistence that Japan is “firmly on track” to a primary budget surplus by 2020 less than convincing. It shows the need for the “concrete plans” he promises by summer.

The lack of those plans is one reason corporate Japan remains ambivalent about Abenomics, despite the enormous competitive boost from a weak yen. A sense that Mr Abe has yet to tackle the public finances, or offer a path to future growth, makes executives reluctant to invest at home.

“We don’t have any interest in becoming Japan’s number one. How can we set up a global position? That is our major concern,” says Hiroaki Nakanishi, the chief executive of Hitachi. Tomoko Namba, founder of the mobile games company DeNA, says: “If I put myself in the position of ‘Company Japan’ with this balance sheet, I wouldn’t be able to sleep. It’s so scary.”

By contrast, there are also corporate voices of support for his policy. “Without Abenomics, Japan could not get out of deflationary thinking. It was a good shock to the society,” says Shunichi Miyanaga, chief executive of Mitsubishi Heavy Industries. “Japan has experienced a very miserable 20 years. These days, the situation has changed.”

Global player

There is a separate question about Japan’s leader: will the deeply conservative Mr Abe ever return and overwhelm the pragmatic prime minister? Mr Abe clearly believes economic revival is the political and practical route to a strong Japan, but he is still the man who angered the country’s neighbours by visiting the controversial Yasukuni shrine in 2013, and who spends political time and energy on laws governing the use of Japanese military force overseas.

According to people who know him, Mr Abe has the best personal chemistry with his fellow ‘strongmen’ of global politics, such as Turkey’s Recep Tayyip Erdogan, India’s Narendra Modi, Tony Abbott of Australia and Benjamin Netanyahu of Israel. That makes him a sometimes frustrating ally for the US, which nonetheless welcomes Mr Abe’s efforts to revive Japan’s economy and national defence, making it a better counterweight to China.

Asked about Japan’s near-neighbour, Mr Abe consults his notes and takes special care. In November, he met Xi Jinping, China’s president, for the first time since taking power in 2012. While their handshake looked grudging, it has calmed bilateral relations, which had fallen to their worst state in years as China pushed territorial claims in the East China Sea.

Mr Abe frames his thoughts now as a careful one-two. Relations have improved, he says, pointing to progress on a mechanism for managing crises at sea. That would reduce the chances of an accidental confrontation around the Japanese-controlled Senkaku Islands, which China calls the Diaoyu. “I originally proposed this when I was prime minister in 2007,” says Mr Abe. “Subsequently there have been five Japanese prime ministers but China did not implement the mechanism.”

Ghosts from the past

But, Mr Abe also makes clear that his long-running concerns about China, which has overtaken Japan in economic terms as well as military strength during the past decade, have not gone away.

“If you look at China from a military perspective, their national defence expenditure has been increasing for 27 consecutive years at the rate of nearly double digits every year and, right now, China’s defence budget is 3.6 times larger than the defence budget of Japan,” he says.

Tokyo has been investing money and effort around the region to curb Beijing’s influence. Mr Abe says he wants to work with the US as well as the members of the Association of Southeast Asian Nations, “so that China will play a constructive role in meeting its international responsibilities”.

This summer, Mr Abe could reverse all of his progress with China in an instant when he makes a declaration on the 70th anniversary of the end of the second world war. His reputation as a rightwinger, and equivocal remarks in the past about defining “aggression”, have led many to wonder if he will water down past apologies. That would cause outrage among Japan’s neighbours and distaste in the US.

The prime minister insists that is not the plan. The Abe cabinet upholds the position outlined by past administrations “in its entirety”, he says, although that formula gives away little about what Mr Abe himself might say.

He does express a wish for a forward- looking statement, one reflecting on Japan’s past 70 years as a liberal democracy, and preparing for the “80th anniversary and 90th anniversary and 100th anniversary”.

So could the Abe declaration make a positive difference, and lay to rest some of the ghosts of the past — or are there too many people in Korea, China and Japan who have no interest in leaving those ghosts in peace?

“We can never erase events that happened in the past,” says Mr Abe. “But what we can do, at the same time, is to learn from them.” East Asia was able to develop after the war, he points out, because of the positive relationships Japan built with Korea and China. “That is an important fact,” he says.

His relentlessly upbeat tone marks the difference between the second term Mr Abe and other recent Japanese prime ministers. Whatever doubts may remain about the man and his programme, he has sold the Japanese public on a positive vision of their future and now has several more years in which to deliver it.

In 2020, Japan will host the Olympics, and Mr Abe describes his hopes for a country that is more open both in itself and to the world. He talks of job opportunities for women, the elderly and the disabled and pledges to make Japan “the most business-friendly country in the world in the eyes of foreign businesses”.

But almost none of this will be possible if his primary mission, to revive the world’s third-largest economy, is a failure. In 2020, he says, “Japan will no longer be an economic burden. That will be a thing of the past.” The experiment is well under way. It is on Abenomics that the man will be judged.

Copyright The Financial Times Limited 2017. All rights reserved.
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