Japan’s Most Significant Year

PM Abe has inspired debate on reforms but the country is still waiting for its transformation. By Joseph Caron.
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January 13, 2015
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Former ambassador to China and Japan and High Commissioner to India

On Dec. 24, 2014, Japanese Prime Minister Shinzo Abe was re-elected by the House of Representatives as Prime Minister, having secured a strong electoral victory 10 days earlier, albeit with only 52 percent of eligible voters casting their ballots in the lower house elections.

Importantly, his Liberal Democratic Party (LDP) coalition with the New Komeito Party, a long-term parliamentary ally, further expanded its majority in the House, to 325 of 475 seats, opening the possibility of four years of governing stability and, most importantly for Abe, strengthening his hold on the LDP, famous for tossing out PMs when they show signs of weakness. Abe and his Komeito ally also have a majority in the House of Councillors, the upper chamber. The opposition parties, for their part, are weak and in disarray.

Abe has stated that the election results are an affirmation of public support for his signature Abenomics economic revitalization plan, first outlined in 2013, following his return to power, and in full implementation mode for the last year and a half.

Abenomics is based on a series of premises, starting with the view that deflation, which has persisted since the early 1990s, is at the origin of Japan’s anemic economic performance and that monetary measures can be used to reverse course and ratchet up inflation to 2 percent per annum; that economic growth can be stimulated by a combination of direct government injection of funds in the banking system and in equity markets, coupled with infrastructure spending and financial transfers to designated consumers and other groups; that a weakening of the yen will encourage exports; that liberal market reforms can generate future growth opportunities; and that the meaningful engagement of women in the work force will un-tap a human resource that Japan needs to build its future.

The metrics of success of this combination of strategies include sustainable economic growth, increased domestic investment (including by foreign firms), the re-establishment of Japanese technological leadership such as it enjoyed in past decades, and confidence in the Japanese government’s long-term ability to pay its debts.

At the ground level, where most Japanese people live, the success of the strategy would translate into much improved disposable income, better jobs with more benefits, and the confidence and strength necessary to face a very different Asia from the one that once made Japan’s name synonymous with cutting edge modernity and high-tech prowess.

Abenomics: still waiting for results

Election results notwithstanding, the impact of the attendant ‘Three Arrows’ of Abenomics policies – monetary and fiscal policies, with a dosage of broad-based economic reforms – has not yet produced the outcomes that have been promised.

The two percent inflation target has not been met. Japan is now in a technical recession, the last two quarters showing a decline in economic activity, shaking off the effect of pumping close to three quarters of a trillion dollars into the economy through fiscal and monetary measures. Despite a 12 percent decline in the value of the yen, the export response has not been commensurate, as much of Japan’s manufacturing capacity is now based outside the home islands and of course, imports have become more expensive. Foreign investment in Japanese equity markets has essentially collapsed. Disposable income for working families is down six percent year over year.

It can be argued that, in the grand scheme of things, the 18 months since the launch of Abenomics is too short a period to achieve the level of transformation that Japan so obviously requires. And it must be acknowledged that even within the confines of the reforms that Abe and his government favour, the gap between what is feasible in the shorter term, say regulatory changes, and the social changes that must accompany them to have impact, is enormous.

Take the issue of ‘Womenomics’, the full engagement of women in the Japanese economy and society. Abe is demonstrably sincere in his determination to provide more economic space for women in Japan, promoting tax and social policies in line with his rhetoric. For example, to allow women greater facility in managing professional work and child-rearing, his government is committed to supplying, by 2018, 400,000 new places in nursery schools to meet existing shortages. There is now a national debate on the state and private roles in providing day-care facilities, especially rare in Japan. His government is debating tax reforms that would eliminate the built-in bias in favour of households with single income earners and stay-at-home moms.

Even the best tax treatment and availability of child care won’t make a significant macro-economic difference if corporate Japan does not embrace women as a human resource as valuable as their male counterparts. Productivity issues aside, white collar corporate employees are still overwhelming male, and they continue to be expected to work long hours, well into the evening, often culminating in after-work socializing. Paid maternity leave is very rare. Many Japanese male professionals – in their cups and out – will openly express the view that women are not made for the corporate world.

Abe has revived an earlier objective of having 30 percent of supervisory positions occupied by women by 2020 and is pressing, but not requiring, listed corporations to have women on their Boards. But adjusting society to meet these kinds of objectives is, and not only in Japan, a long-term thing, and takes a generation to achieve. In matters of gender equality, the fact that Japan is rated by the World Economic Forum as the 105th out of 136 countries is one indicator of the distance that must be travelled.

Abe and his government have pinned a great deal of hope that inflationary expectations and a lower yen will boost demand for Japanese goods and services, with a knock-on effect on disposable income. That, however, has yet to happen, and structural issues are also to blame. For example, under long established labour legislation, it is very difficult for medium and large companies to dismiss workers. One result is that temporary workers – who do not have to be compensated under equal-pay-for-equal-work – have been the largest growing segment of the labour market in Japan. Fully 38 percent of Japanese employees today are temps or work in other, similarly low-paid jobs. Furthermore, this sector is the one that is expanding in Japan: regular employment has fallen by over three percent. A significant product of this decade-long state of affairs is demographic: 70 percent of Japanese men in their 30s and in full-time employment are married. The proportion falls to 25 percent for those without traditional employment.

These types of fundamental challenges call for equally far-reaching changes. Abenomics however, in its reality if not its rhetoric, presents a classic set of traditional LDP policies, in line with the types of initiatives that, it must be said, lay behind Japan’s tremendous expansion and success, from the 1960s to the collapse of the ‘bubble economy’ in early 1990s: government-directed intervention in financial markets; support for rural development (where its votes have traditionally been concentrated); infrastructure spending, often unrelated to improving economic productivity; direct transfers to individuals in support of consumption; and protection of interest groups – doctors and their pharmacies, construction companies, Japan Agriculture – whose roles are deemed essential to economic, social (and political) stability. One doesn't have to go far to find these abiding principles in Abe’s statements: they were amply expressed in the PM’s press conference of Dec. 24, following the swearing-in of his Cabinet.

For decades, these policies worked. Abe, no one will be surprised to read, is first and foremost a conservative, not hard right but steeped in the success of Japan’s past and anxious to keep its traditional social values, at least those firmly held within the LDP and viewed by conservatives as quintessentially Japanese, largely intact.

But whether this overall approach can work for Japan in the future remains unproven, to say the least.

The year ahead: engaging Japanese society

True, Abe has a number of things working for him in this new year. Among developed economies, Japan reaps the greatest advantage from today’s energy prices, much improving its balance of trade and lowering input costs in manufacturing and transportation. The longer energy markets remain at low levels, the better off Japan will be. Should the Trans-Pacific Partnership Agreement be concluded, it will provide the foreign pressure that Abe needs to liberalize, however modestly, the agricultural sector which, were it to be open as, say, Canada, has tremendous potential to become a significant exporter. Corporate tax rates will be reduced in the coming regular Diet session to more internationally competitive rates.

These initiatives, however promising, won’t work their way into improved productivity and output for years. And, at the end of the day, real transformation has to fully and enthusiastically engage the Japanese people themselves. Even the most brilliant politicians and the most effective policies will be of limited effect if the spirit of change and the excitement of challenge is not embraced by Japan’s institutional and corporate and educational leaders and their counterparts throughout Japanese society. In the face of pressures for conformity and consensus, they need a license to undertake their own transformation and that of their institutions.

The Japanese people participated directly in the rebirth of their nation following WWII, embracing the income-doubling policies of the 1960s to redesign and rebuild itself into the world’s most modern economy of the 1970s and 80s. Next door, in a similar fashion, Chinese entrepreneurship was unleashed by Deng Xiaoping’s modernization and the ‘license for reform’ rhetoric of post-WTO China. India’s PM Modi is telling Indians that they have to bring changes to society themselves, going so far as to go out into the street and sweep the garbage himself, as a model of do-it-yourself initiative.

Fortunately, Abe does not have to go quite that far, Japanese streets being the cleanest in the world. But unfortunately, Abe has yet to embrace this kind of public leadership, of providing the vision and language essential to the transformation that he no doubt wants and Japan needs, and socially authorizes Japan’s embattled initiators and disrupters to bring these changes themselves. In typical LDP fashion, the Prime Minister’s focus remains within the confines of what government, however well intentioned, can do. As recently as Jan. 1, when he addressed the Japanese people, all he asked of them was their “understanding and support.”

I was recently interviewed by the Asahi newspaper and asked what I thought was the most significant year in Japan’s post-war period: I answered that it would have to be 2015. From the 1950s onward, Japan provided for itself, and Asia for that matter, a vision of economic rebirth and development, and the tools to achieve it. But that era is over, and looking to the post-war period for solutions to today’s problems will not be productive.

Rather, Abe and his Abenomics must help set a broad agenda that directly addresses the challenges of economic and social development unique to its current dilemmas: a demographic profile going dramatically south, a loss of confidence in its technological leadership, an educational system that does not help young Japanese face globalization, a structure of barriers to entrepreneurship, and the full engagement of all of its formidable human resources. In this effort, he and his government have to fully engage the Japanese people.

If he can begin to do that in 2015 and set a new course for a renewed Japan, it will be the most significant development in the post-war era. Otherwise, Japan will be back to a future designed for the 1960s, and not the one that it needs for the 21st century.