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     Jan 5, 2013

Abe blind to Japan's lost dynamic
By Yong Kwon

Japan is in dire straits. Its economy recently entered its fifth economic recession in 15 years, and Beijing's claims to the disputed Senkaku/Diaoyu Islands proved more serious and costly last year than in any other time since the end of the Second World War. In addition, the recovery effort following the disastrous earthquake and tsunami in 2011 remains a monumental administrative and economic burden. Despite these daunting challenges, the political environment in Japan has been plagued by endemic indecision.

The result of the December general elections revealed that the hope invested by the electorate in the Democratic Party of Japan (DPJ) has been exhausted. Since taking power in 2009, the DPJ's greatest accomplishment was arguably the deal between the Yoshihiko Noda administration and the now-ruling Liberal

Democratic Party (LDP) to double the consumption tax in exchange for an early election.

Despite the mandate that Shinzo Abe and the LDP won in the House of Representatives as a result of that early election (taking 294 seats out of 480), the fundamental problem that rendered the past three DPJ administrations ineffective remains in place.

The conventional arrangement between political players and entities that once proved efficient and effective in Japan's meteoric post-war recovery has waned as it no longer reflects the demands of today's political and economic realities. This is a natural and necessary process as the state and the public react to changes in the world, but in Japan, no new balance of power has taken the place of the old consensus to ensure government stability or effective economic leadership.

The absence of a coherent, long-term policy objective leaves various forces at play with very little room for compromise or cooperation. It is this disjointedness that lies at the heart of Japan's long stagnation.

In some parts, the breakdown is due to unexpected external factors. I noted in an earlier article (See Missile makes Japan twitch new muscle, Asia Times Online, April 13, 2012) that Tokyo's traditional foreign policy conception, long defined by the Yoshida Doctrine and upheld by a coalition of constitutionalists, pacifists, and economy-oriented hawks, has shifted as a result of the perceived decline of US influence in the Asia-Pacific.

The increasingly unchecked and vocal political movement to amend the Japanese constitution to allow for the establishment of the armed forces is indicative of this change. In addition, Tokyo faces the need to expand its diplomatic reach and implement new means to operate in an increasingly volatile global environment (see US faces sanctions dilemma in East Asia, Asia Times Online, July 21, 2012).

Foreign policy is only one facet of the imbalance. The biggest challenge for the new LDP government is confronting Japan's long economic stagnation and addressing the shortfalls of Tokyo's economic leadership. In the past, the close cooperation between corporations, civil servants and elected officials had made Japan an effective industrial power. However, continued collusion was dependent on positive reinforcement and a decline in economic growth has led successive governments to put forth new policy that often puts them at odds with the corporate sector and other key players in the economy.

The Noda administration in particular had serious issues with the energy corporations in the aftermath of the nuclear disaster in Fukushima - but even before the 2011 tsunami, the power companies expressed dissatisfaction over the DPJ governments' attempts to fully liberalize the electricity market. [1] Some point to the DPJ's lack of experience in power as the reason for many of the administrative challenges that it struggled with during its brief time at the helm; however, it is not just the DPJ with its lack of preparedness that has prompted friction between and within the public and private sectors.

The new Abe administration has started its tenure with a shot across the bow to the Bank of Japan, threatening to revise the 1997 law that granted increased autonomy to the central bank if it refuses to meet the two% inflation target recommended by the LDP. From the surface it appears as though Shinzo Abe is continuing the same policy that he tried to implement before he left his first term as prime minister in 2007, but in practice, the government's willingness to use the stick has become far more acute.

While some characterize the Bank of Japan's behavior as overly cautious and a source of the diminishing economic growth, its monetary policy is not without reason. Masaaki Shirakawa, governor of the Bank of Japan, recognized the deflation of the currency as a serious economic concern; and has noted that the solution to this problem should not be aggressive monetary easing which could "undermine confidence in Japan's fiscal discipline, resulting in higher interest rates that would make it much harder to finance the deficit". [2]

Considering the burgeoning public debt, which currently stands at over 200% of Gross Domestic Product, Governor Shirakawa has a valid point. His recommendation is for the government to engage in deregulation to make investing in Japan more attractive.

Good advice or not, there is little indication that the LDP will exercise its power with inclusion in mind. Even if the Bank of Japan decides to yield to Prime Minister Abe's demands, the government has made it clear that Governor Shirakawa will be replaced by someone who is more in favor of monetary easing in April. In effect, with or without changes in the law governing the central bank, the government is aggressively pursuing control over monetary policy.

Prime Minister Abe appears to believe that effective economic leadership means implementing unilaterally established policies at all cost. Living up to the image of the LDP as architects of Japan's post-war economy, the new government has called for "strengthening the national territory," proposing 200 trillion yen (US$2.28 trillion) in infrastructure spending over the next 10 years, vastly expanding the annual budget for public works.

While one of the key objectives of the project is to prepare against natural disasters, to achieve this, the government may have to exceed the 44 trillion yen cap on new bond issuance and 71 trillion yen spending limit imposed by the previous DPJ governments, placing the government in danger of a potential fiscal disaster. [3]

The LDP must recognize that they are not in the 1950s anymore. The nature of the global economy has changed as has the optimal industrial structure for the Japanese economy. The lesson that needs to be taken from the "architects of the post-war economy" is that effective economic leadership can only be practiced when there is a coalition of interests from both public and private sectors around the government. (And even then, delivering actual good for the public remains a struggle. See The economic consequences of Mr Brown).

Perhaps the most important feature to look for in 2013 is whether the LDP, with firm control of the national diet(parliament), will have the discipline to produce a long-term policy for growth that can be maintained by a multitude of interest groups, so that even if a new cabinet is formed by 2014 (as so often is the case in Japan) the people may still find stability. The behavior and rhetoric of the victorious LDP suggests that such a scenario is unlikely.

1. "Power industry outlasts DPJ." Japan Times, originally published in Sentaku Magazine, December 24, 2012.
2. "Japan's Abe issues ultimatum to BoJ." Financial Times, December 23, 2012.
3. "Holiday Gift: Asia Thinking Stimulus." The Diplomat, December 22, 2012.

Yong Kwon is a Washington-based analyst of international affairs.

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(Jan 3, '13)



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