Not
beyond hope: Japan and TPP By
Matthew P Goodman
George Bernard Shaw
called second marriage "the triumph of hope over
experience". In restoring the Liberal Democratic
Party (LDP) and its leader, Abe Shinzo, to power
last month, Japanese voters seemed to be sending
the opposite message: after three years of vesting
their hopes in the Democratic Party of Japan (DPJ)
with disappointing results, they opted to fall
back on the LDP's greater experience in governing.
Abe himself seems to have learned from his
previous, unhappy experience as prime minister in
2006-2007. In his first public remarks after
taking back the job in late December, he said,
"There is no future for a country which has given
up on growth."
The sentiment marked a
refreshing change not just from the DPJ's focus on
austerity, but from Abe's own disinterest in
economic affairs during his earlier tenure in
office. An older and wiser Abe is
right to pay more attention
to Japan's economic health - and right that more
growth is what the patient needs - but his policy
prescriptions to date will not be enough to
produce the lasting recovery he is hoping for.
Abe has declared war on deflation and
promised to use all the macroeconomic firepower he
can find to fight it. He instructed his new
finance minister to ignore the 44 trillion yen
(US$500 billion) annual debt issuance ceiling
established by the previous DPJ government and to
prepare a new fiscal stimulus package this month.
He also effectively ordered the Bank of Japan
(BOJ) - under threat of taking away the central
bank's statutory independence - to flood the
economy with liquidity until a new 2% inflation
target is reached.
Analysts have
questioned both prongs of Abe's strategy. In a
thoughtful report, Paul Sheard of Standard &
Poor's argues that haranguing the BOJ is unlikely
to work until the central bank itself adopts an
aggressively reflationary posture - enough to
create real public expectations of future
inflation.
Moreover, threatening the BOJ's
independence risks undermining the central bank's
credibility, a fragile asset that may someday be
needed when prices are rising again. As for fiscal
stimulus, skeptics argue that the new spending
will once again go to wasteful infrastructure
projects while driving up Japan's already
world-high debt.
Some of the criticism of
Abe's approach is unfair; he is right that
tackling the scourge of deflation will require
forceful use of macroeconomic tools. The real
problem is that, while necessary, these tools will
not be sufficient to sustain growth in Japan over
the medium term. With a sharply declining labor
force - the United Nations forecasts Japan's
working-age population to drop from 85 million in
1995 to only 55 million by mid-century - the
country needs more productivity, not just more
liquidity, in order to sustain growth.
Only structural reforms that result in
more efficient use of agricultural land, more
flexible labor markets, and fewer regulatory
burdens on business will produce these
productivity gains. To use an overused metaphor,
monetary and fiscal stimulus can act as morphine
to ease the patient's pain, but it will only have
a lasting effect if it serves as anesthesia to
facilitate the needed structural surgery.
Representing the US Treasury in Tokyo in
the mid-1990s, I dutifully delivered forceful
talking points to the Japanese government on the
need to keep the macroeconomic spigots open
(warning of what we termed a "fiscal abyss"). The
advice was right but incomplete: in hindsight, it
was clearly not lack of stimulus but lack of
structural reform that accounts for what has now
become the country's two lost decades of growth.
To be sure, structural reform is painful.
There would be losers, including many in the LDP's
rural base of support. And with important Upper
House elections approaching in July, it is
understandable that Prime Minister Abe would find
monetary and fiscal painkillers more politically
expedient than surgery. The problem is that by
summer it could be too late for Abe to use the
most potent tool he has to push through structural
reform: getting Japan into the Trans-Pacific
Partnership (TPP - a regional economic pact under
negotiation by nine nations across the
Asia-Pacific).
If the 11 existing TPP
members are serious about wrapping up the trade
negotiations within this year - and Tokyo should
not underestimate the Obama administration's
resolve in this regard - Japan needs to be at the
negotiating table no later than this spring or
risk being unable to shape the final agreement. As
a practical matter, acceding to TPP after the
basic contours had been settled would be
politically untenable for any Japanese government.
Abe should take a strategic view of TPP -
in all senses of the term. From the perspective of
political strategy, a decision to join the talks
would enable him to pin the blame for needed
structural reforms on external forces, such as
Japan's need to be more competitive in a
globalized market or, if he prefers, American
bullying.
In terms of economic strategy,
joining TPP would allow Japan to have a seat at
the table in shaping the rules that will govern
international economic behavior in the 21st
century. Foreign policy interests would also be
served: participating in TPP would bind Japan more
closely to its partners in the region, starting
with the United States. And there is a further
strategic incentive to move quickly: signals are
emerging that South Korea's new administration
under President Park Geun-hye may be interested in
joining TPP - something that would make Japanese
non-participation unthinkable.
If Abe
signaled his desire to join TPP and willingness to
offer sufficient "confidence-building measures",
this would likely be welcomed by the Obama White
House, despite the undeniable complications it
would create for the negotiations.
Japanese participation is strongly in US
economic and strategic interests - because a TPP
agreement without Japan is of limited economic
value and because Washington needs a growing,
confident Japan to help address a plethora of
regional and global challenges. Let's hope that
Abe really has learned from experience and
embraces TPP as a central pillar of his economic
strategy.
Matthew P Goodman
(mgoodman@csis.org) is the William E. Simon Chair
in Political Economy at CSIS. This article
originally appeared in the CSIS Global Economics
Monthly January 2013 issue.
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