Japan: Renaissance? Guest blogger: Walter Hamilton

After two decades mired in largely self-made problems (post-bubble depreciation; political instability; aging population; nuclear meltdown), Japan is suddenly feeling much better about itself. Anyone observing events could not fail to register the shift in the national mood. Are we witnessing a Japanese renaissance, a return to economic expansion? Will economic recovery ease the way for long-debated constitutional and political reforms?

Japanese have a name for it: Abenomics. It hardly matters that Prime Minister Shinzo Abe is neither an economist nor the principal driver of the stimulus plan (that role is performed by the new central bank governor, Haruhiko Kuroda), what makes the slogan important is that it trumpets one identifiable hero to a public that has long craved a strong leader, someone with a capacity to exercise power.

I don’t say this on the basis of shopworn historical references to shoguns and samurai; I say so because opinion polls over the past several years have made it abundantly clear. The ousted Noda Cabinet, and those that went before it, did not lose public confidence because of unpopular policies. Japanese voters ditched them because they perceived they were unable to exercise power. Abe himself succumbed in 2007; an ineffectual leader, he stepped down as Prime Minister the first time around due to “illness”. In a stunning comeback, he appears energized, decisive and focused.

Previous attempts at stimulating the Japanese economy relied on public works spending and near-zero interest rates. Abenomics involves a more dramatic form of monetary stimulus aimed directly at currency depreciation and igniting inflation: two conditions Japanese governments have usually shunned as dangerous, even unpatriotic. Since Abe’s patriotic credentials are not in doubt, what is going on?

The central bank has undertaken to buy back huge volumes of government bonds, creating what appears to be another layer of debt for a country already burdened with massive public sector liabilities. But since Japan’s public debt is covered largely from domestic private savings, the strategy is not as reckless or contrived as it may sound – as long as confidence in recovery can be maintained. Abe and his team want to prod and coax the Japanese public to save less and spend more, and people tend to bring forward spending if they think prices will rise and/or they feel more assured about the future. This calculation lies at the heart of the government’s inflationary monetary policy.

The other part of the calculation is currency depreciation. If a country starts printing money at an unprecedented rate, as Japan is doing, its currency can be expected to fall. The yen has dropped from 80-something to the US dollar to about 100 yen to the dollar. That trend is supporting the third pillar of Abenomics. A cheaper yen immediately benefits Japanese exporters, driving up profits and share prices. The Tokyo stock index has rebounded from 9,000-something to 15,000 in a short time.

These circuit-breaking developments have made one class of Japanese much better off (on paper at least); and, for the rest, people’s hopes are raised about a flow through to higher wages. For someone earning $9 or $10 an hour, as do many part-time workers in the retail sector, the prospect is desperately appealing. The mainstream media, so recklessly negative about the former centre-left Noda government, finds nothing but virtue now in Abe’s Liberal Democratic Party. The Abe “magic” seems to be dazzling even practiced eyes. An Upper House election, due in July, may deliver a triumphant LDP the numbers necessary to push through constitutional change.

Conservatives have long wanted to be rid of the “American” constitution presented to Japan during the postwar occupation, which renounces the right to wage war as a means of settling disputes. They intend to start by making it possible to rewrite the basic law through a simple parliamentary majority of votes, instead of the current two-thirds. Since it can be argued the constitution has formed the most effective political “opposition” to one-party rule in Japan for the past 66 years, such a move would severely weaken checks and balances within the system.

Standing up to China over a long-running territorial dispute is the most conspicuous foreign policy manifestation of the Abe doctrine. Another important strand is Tokyo’s willingness to accept a significant deterioration in relations with South Korea for the sake of pandering to Japan’s right-wing nationalist fringe. Abe has set a low standard for public discussion of historical facts, effectively licensing other politicians and commentators to utter increasingly outrageous remarks on “comfort women” and other inflammatory issues.

These are risky self-indulgences for a leader whose daring economic strategy depends upon building and maintaining confidence in markets, among consumers and with strategic partners. Abenomics is still only a slogan and a starting point. Unless and until it delivers to the real economy higher wages, improved competitiveness and a genuine sense of security for ordinary Japanese, nothing is assured. A grab for power by weakening the constitution and indulging in historical revisionism can still undo it all.

Walter Hamilton spent 11 years as the ABC’s Tokyo Correspondent. He is just back from a six-week visit to Japan.

 

 

 

 

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