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.
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