Shinzo Abe: Japan's Savior?

Shinzo Abe: Japan's Savior?

After a strong electoral showing, can the prime minister break Japan out of the lost decades?

Throughout his career, Japanese prime minister Shinzo Abe has made no secret of his desire to be a transformational figure in Japanese history. Regularly appealing to the example of his grandfather, Nobusuke Kishi, the prime minister who solidified Japan’s postwar alliance with the United States, as well as the Meiji-era oligarchs who forged the modern Japanese state and laid the groundwork for empire, Abe has presented himself as a visionary determined to rebuild Japan to compete in the twenty-first century.

Although better known as a national-security hawk that helped raise public awareness of North Korea’s abductions of Japanese citizens in the 1970s and 1980s, Abe took a page from Japan’s Meiji leaders when he returned to the premiership in December 2012. Just as the Meiji leaders argued that a strong economy was the indispensable foundation for Japan’s national security—their slogan was “rich nation, strong army”—Abe argued that unless Japan’s economy is strong it would not be able to meet regional and global challenges. On this basis, Abe embraced unorthodox measures to overcome deflation and economic stagnation, the multipronged program that quickly became known as “Abenomics.”

On July 21, Japanese voters rewarded Abe’s determination to fix the economy by giving control of the House of Councillors, the upper house of the Japanese Diet, to the coalition of Abe’s Liberal Democratic Party and the centrist New Komeito Party. Abe’s electoral victory was not as overwhelming as one might think, since the LDP fell short of winning an absolute majority of its own, but it did guarantee government control of the legislative process for at least the next three years.

It would appear that Abe is finally in a position to leave his mark on Japan. The reality, however, is more complicated. Abe may be in control of the government, but he is hemmed in in every direction, and his government rests on a narrow foundation. Abe may, as he told an audience in Singapore on July 26, make “revolving door politics…a thing of the past,” but durability alone will not guarantee a legacy.

First, both the upper-house election returns and months of public-opinion polling reveal one central fact about the second Abe government: its support rests largely on the belief that Abe is serious about restarting the stagnant Japanese economy. Since February 2013, in tracking polls conducted by the Asahi Shimbun newspaper, roughly half of respondents who support (and oppose) the prime minister have said they do so because of the government’s policies. Comparatively few respondents, approximately 10 percent, support or oppose the government because of their opinions about Abe. Interestingly, Abe has won public support for Abenomics even though most poll respondents admit that they have not personally experienced economic recovery since Abe took office. A poll conducted by the Asahi Shimbun in early June found that only 18 percent of respondents said they really felt the economic recovery; 78 percent said they did not. Abe appears to have tapped into a sense of hopefulness that the economy might finally improve, at least enough to bring people out to vote on July 21 despite the air of inevitability surrounding the Abe government’s victory.

But the flip side is that Abe’s fate is now tied to Abenomics. If and when doubts about Abe’s economic policies emerge, it seems inevitable that support for the Abe government will fall, which will in turn make it difficult for Abe to make progress on economic policy. And there are plenty of reasons why public belief in the efficacy of Abenomics could falter. While considerable attention has been paid headline indicators like economy’s 4.1 percent annualized growth rate in the first quarter and a 0.4 percent increase in consumer prices in June, most Japanese households are still not feeling an “Abe boom.” Most significantly, wages have not yet begun to rise, suggesting that the upward tick of prices in June may be driven more by higher import costs related to the weak yen than by more robust consumer demand. And because the vast majority of Japanese households do not directly own equities or other financial instruments, they have not benefited from this year’s stock-market rally.

More importantly, from henceforth Abe will find it harder to win easy victories in economic policy. Beyond his appointment of Haruhiko Kuroda as president of the Bank of Japan with a mandate to expand the money supply, implement an inflation target and launch a quick burst of stimulus spending—the first two “arrows” of Abenomics—Abe has spent most of the year making the case for structural reform in Japan and around the world. Thus far this third arrow is wholly rhetorical. His government approved a growth strategy in June that will serve as the blueprint for a legislative program, but the growth strategy was widely criticized for being risk averse and comprised of recycled proposals from Abe’s first premiership, while failing to include significant reforms to the labor market, corporate governance, the agricultural sector or the healthcare sector. If Abe could not muster the political courage to outline bolder reforms at the height of his popularity, it is difficult to see how he will convince skeptical or hostile members of the LDP to follow his leadership when his approval ratings slip.

These dynamics are perhaps most visible in the fight over Japanese participation in the Trans-Pacific Partnership (TPP). TPP is perhaps the hardest decision facing the Abe government. Abe has thus far been resolute on the need to bring Japan into the burgeoning trade agreement, and immediately after the election Japan formally joined the round of TPP talks underway in Malaysia. But depending on the outcome of negotiations, Abe could face significant opposition from within the ranks of the LDP and find himself trapped between other TPP participants (most notably the United States), his intraparty opponents and his rhetorical commitment to economic openness. If Abe is unable to bring home a deal that includes exemptions for major agricultural products, his government’s negotiating position, he could face open rebellion within his party. The Central Union of Agricultural Cooperatives (JA), Japan’s leading agricultural organization, asserted earlier this year that 121 of the 294 LDP parliamentarians in Japan’s lower house opposed Japanese participation in negotiations, joined by another twenty-five members of the upper house. According to a joint survey by the Asahi Shimbun and the University of Tokyo, the post-election LDP caucus in the upper house is actually more opposed to TPP than it was before the election.

Abe may ultimately get full Japanese participation in TPP, but it is hard to imagine a scenario in which the prime minister is not at least bruised by the process. Even the best-case scenario entails a difficult process of bargaining with members of his own party and interest groups to offset the costs of participation, and even after Japan joined it could still take years before the agreement comes into force and the Japanese economy realizes any gains from joining.

Meanwhile, the consumption tax poses a more immediate challenge to Abe’s mission to save Japan’s economy. While still in opposition in 2012, the LDP and New Komeito forged an agreement with the then-governing Democratic Party of Japan to raise the consumption tax to 8 percent in April 2014 and then again to 10 percent in October 2015 as a step towards shifting Japan’s public finances to a more sustainable trajectory. Raising the consumption tax prematurely, however, could undermine efforts to stimulate domestic demand, which, after all, is the goal of Abenomics. It also risks spurring more opposition to the Abe government, as opinion polls have consistently found majorities opposed to the tax hike. Abe has floated a plan to lower corporate tax rates to compensate for the consumption-tax increase, but the politics of lowering corporate tax rates are no less tricky. As leading government and LDP officials have repeatedly indicated there will be no backing down from the tax hike, the Abe government may be returning to the stop-and-go fiscal policies of the 1990s that stymied Japan’s early attempts to recover from stagnation.