There is a confidence, almost a swagger, about Shinzo Abe. After 10 months in office, the good news just keeps coming.
Since Japan’s prime minister launched his “ Abenomics” plan to reflate the economy, inflation is up, the yen is down and share prices are higher by nearly two-thirds. In the first half of this year, Japan grew at a pace of roughly 4 per cent, making it the best performing Group of Seven economy by some way. Business confidence is at a seven-year high and Mr Abe’s popularity rating is above 60 per cent. Victory for his party in July’s Upper House elections means, barring the unexpected, he should be in power until at least 2016 – nothing to sniff at in a country where recent prime ministers have come and gone without trace.
Even the bad news could have been worse. Tensions remain high with both China and South Korea, former wartime enemies who mistrust Mr Abe’s hawkish leanings. Yet, for now at least, the rhetorical heat in the row with Beijing over disputed islands is on simmer. Likewise, the grisly aftermath of the Fukushima nuclear disaster rumbles on as radioactive water spills incessantly into the sea. The disaster could have ended Tokyo’s ambition to host the 2020 Olympic Games. Yet here, too, Mr Abe has been lucky. Flying to Buenos Aires to make Japan’s case in person, he returned triumphantly with the games secured.
It is all quite a change from Mr Abe’s first, aborted, stint as prime minister in 2006-07, which was marred by a farcical procession of missteps and his sudden resignation. In an interview with the Financial Times on Friday, Mr Abe appeared to be basking in his new-found success. Dressed in a snazzy pinstriped navy blue suit, with a red charity-appeal feather in his lapel, he was animated yet relaxed. Referring only occasionally to prepared notes – the conversation-killing prop of many Japanese leaders – he spoke fluently about the progress of his programme. “The economic results speak for themselves,” he boasted. “Our policies have produced real results and I am convinced that our road is the only way.”
His willingness to gamble on bold – some say reckless – policy action marks a big shift from recent leaders who have appeared paralysed by Japan’s legendary economic problems. Stuck in deflation for the best part of 15 years, the economy has shrunk from its 1997 peak in nominal terms. While unemployment has remained low, many young people have been pushed into low-paying “McJobs”. Meanwhile, the population is ageing rapidly and public debt, now at a dizzying 230 per cent of national output in gross terms, has piled ever higher. Some former corporate titans, including Sony and Panasonic, are a pale shadow of their former selves.
Mr Abe’s plan revolves around reflating the economy through massive monetary stimulus with the aim of reaching 2 per cent inflation by March 2015. The idea is to revive the “animal spirits” that have been sapped by years of deflation. With modest price rises and growth of, say, 1-2 per cent, the theory goes, business profits, wages and tax income will rise, the nation’s finances will improve and people will be more prepared to spend.
Critics of Abenomics see it as little more than a con-trick based on cheap talk and printed money. It will, they say, fizzle out. Worse, it could end in high inflation, falling real wages or default. One of the biggest sceptics is Noriko Hama, an economist and professor at the Doshisha University Graduate School of Business. She has coined the term “Stupidnomics” – in Japanese “Ahonomics”, a mildly offensive play on Mr Abe’s name – to describe his reflationary policies. “Abenomics is just bad economics,” she says. “I think it is intentionally to cause a bubble – and all bubbles end in crises.”
To his detractors, Mr Abe’s confidence is that of the man jumping from a skyscraper who, on his way down, shouts: “So far so good.” There is an element of bravura about Abenomics, which has gained traction primarily by changing investor sentiment. That has created a wealth effect among the minority of Japanese who hold shares and, through a weaker yen, improved the competitiveness of Japan’s still formidable industrial sector. Along with Haruhiko Kuroda, new governor of the central bank, Mr Abe has played an important role in selling the story. In a speech to the New York Stock Exchange last month, he brimmed with chutzpah as he urged Americans to “buy my Abenomics”.
In his interview, Mr Abe addressed questions about what comes next and what might go wrong. One risk is the potential impact of a consumption tax rise from 5 to 8 per cent, which begins next April. Many economists have praised what they regard as the prime minister’s refusal to blink by pressing ahead with the tax rise as a first step in repairing Japan’s parlous finances. Others worry that the economy is too fragile to withstand the shock. If consumers stop spending, they say, tax revenue could shrink and the economy slip back into recession.
Mr Abe brushed aside such concerns, pointing to a Y5tn ($51bn) stimulus package to counter any negative impact. “I am sure we can weather the effect of the consumption tax rise and keep the economy growing. We’ll do all in our power to achieve that.” He said he was confident the government could meet its goal of halving the primary deficit – before debt service payments – to 3.3 per cent of gross domestic product by fiscal 2015. If the economy does stall, Mr Abe hinted that he still had firepower in reserve. “Governor Kuroda and I are of exactly the same opinion when it comes to the necessity of escaping deflation. The Bank of Japan will do what is needed to fulfil its mission.”
There are at least two concerns about the inflation policy, though. The first is that the recent rise in core consumer prices – to 0.8 per cent in August – is due almost entirely to elevated energy prices, the result of a weaker yen. Stripped of energy and food costs, consumer prices were still falling 0.1 per cent. Japan thus has what is called “cost-push” inflation rather than the “demand-pull” variety that would indicate a healthy economy.
A related problem is wages. One of the virtues of deflation has been to preserve living standards. Inflation could simply make Japanese consumers feel poorer and less willing – or able – to spend. Mr Abe has acknowledged that, for his plan to work, wages must rise. He has sought to persuade companies to increase workers’ pay, but with so far only limited success. In the interview, he said it would be difficult to incentivise wage increases by linking them directly to a planned corporate tax cut. He hoped instead to create an understanding between companies and unions such that the benefits of an improving economy could be shared. “Company profits are going up. Naturally, with a tax cut, they’ll go up even more. If that influences wages, then consumption should rise, expanding economic growth further. With that, corporate profits can rise and we’ll have entered a virtuous circle.”
That happy scenario, say sceptics, is all very well, but it will not mean much unless Japan can enact structural reforms. Economists argue that the country will need to raise productivity more swiftly if it is to counter the effects of an ageing workforce. This is where Mr Abe’s so-called “third arrow” – a “growth strategy” to complement the first two “arrows” of monetary expansion and fiscal flexibility – comes in.
So far, in this department, Mr Abe has underwhelmed. In June, he presented a shopping list of largely abstract ideas to boost innovation, attract more women to the workforce and cut deregulation. Japan watchers have been hearing the same things for years. Markets reacted badly: shares fell precipitously and bond markets gyrated. Calm has since returned, but many investors are waiting to see what will come of the third arrow when Mr Abe fleshes out his plans.
The prime minister told the FT that structural reforms were “absolutely vital”, but he acknowledged progress might be slow. One crucial area is labour reform where he wants to make it easier for companies to hire and fire. Those who support a relaxation of strict labour laws say it would help switch workers more quickly to growth industries and level the playing field between job-for-lifers and the rising numbers of casual workers. Mr Abe, however, conceded that making it easier to shed workers was very “sensitive”. He would need more time, he said, to explain such policies.
Instead, he proposed to press ahead with legislation to establish “deregulation zones”, which would allow companies to sidestep national laws. These zones would be different in both scale and scope from previous efforts, he said. Junichiro Koizumi, another prime minister who promised drastic structural reform a decade ago, tried and failed to make such zones an engine of policy change.
Another of Mr Abe’s priorities is to join the Trans-Pacific Partnership, a “high-level” trade agreement linking 12 countries, including the US. In the age-old tradition of “gaiatsu”, the idea is to put external pressure on Japan to reform. Mr Abe has braved the wrath of farmers and other TPP opponents by taking Japan into negotiations at the eleventh hour. He will have to steer a tricky course between making necessary concessions and fulfilling his promise to protect sensitive products such as rice and sugar. Yet conclusion of the complex negotiations is largely out of his hands. Although he said he would join efforts to conclude the TPP by the end of the year, progress is likely to be slower.
Mr Abe’s next big push is to lower corporate taxes, currently at 38 per cent. He mentioned Germany, where the level is 30 per cent, as a possible benchmark. “I am conscious of our need to compete internationally,” he said. Here, he will face opposition not only from those who argue that Abenomics favours corporations over consumers, but also from his supposed allies at the fiscally conservative finance ministry who do not like tax giveaways of any kind.
The expected fight over corporate tax foreshadows the battles that lie ahead. Paradoxically, with the Liberal Democratic party now more secure, opposition to Mr Abe from within his own party could mount. The LDP has ties to many of the vested interests, including farmers and doctors, that Mr Abe wants to take on. With the bold unveiling of Abenomics completed, part of the prime minister’s task from now on will be to maintain the momentum of his grand plan. Another, though, will be the daily slog of policy implementation in the face of politicians who may think Japan has already done enough.
Abe tones down assertive rhetoric
Abenomics is not the only thing for which Shinzo Abe is famous. In Beijing and Seoul he is regarded as an unreconstructed nationalist who seeks to whitewash Japan’s war record and restore its military prowess.
Mr Abe has made no secret of his wish to make Japan a “normal” country by amending its constitution so that Tokyo can drop the fiction that it lacks an army, navy and air force. Under Article 9 of the 1947 constitution, drafted by the Americans during the occupation, Tokyo is forbidden from maintaining forces.
However, unlike his first bite at the premiership in 2006-07, when he pressed such issues hard, this time around Mr Abe has prioritised restoring Japan to economic health.
Still, he has not entirely abandoned hope of a more assertive Japan.
For the first time in 11 years, he raised defence spending, though this still hovers close to a low 1 per cent of gross domestic product. He has also approved legislation to establish a National Security Council and eventually wants to overturn a self-imposed ban on collective self-defence, which prevents Japan from aiding allies.
Mr Abe has also recently unveiled the idea of “active pacifism”. In the interview, he explained that his country should play a bigger role in keeping the rest of the world safe.
Mr Abe has riled neighbours by suggesting that historians should discuss whether it is right to say Japan “invaded” China, a definitional quibbling that has added to the impression he wants to deny wartime atrocities.
In the past he raised hackles by suggesting that brothels organised by the Imperial Army employed regular prostitutes rather than forcing young women into sexual slavery.
But in the main, Mr Abe has been fairly pragmatic. He has put off plans to amend the constitution, saying he does not have enough parliamentary votes. So far, he has also refrained from visiting Yasukuni shrine, a controversial memorial to millions of war dead that also commemorates 14 Class A war criminals.
Mr Abe has failed to secure a meeting with Xi Jinping, China’s new leader, because of a rumbling dispute over the Japanese-administered Senkaku Islands, known as Diaoyu by Beijing. Although he has insisted that the issue over who owns the islands is non-negotiable, he has said that his door is “always open” for China’s leader.
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