Published in the Nikkei Asian Review 15/12/2014
Fortune favours the brave. Japanese Prime Minister Shinzo Abe’s political gamble has come up trumps. His convincing victory in Sunday’s election allows him to extend his mandate to December 2018. If Mr. Abe does indeed stay in office until then, he will become Japan’s third longest-serving leader in the post war era.
The low turnout ratio – actually higher than in that model democracy, Switzerland – shows that the anti-Abe sentiment flagged up by the opinion polls was wide but not deep. A large portion of the public are anti-nuclear and unenthusiastic about Mr. Abe’s moves on collective self-defence, but feelings about the issues are not strong enough to override concerns about daily livelihood and jobs.
More to the point, the scale of the Abe victory reinforces the message that the remarkable changes which have occurred in Japan over the last two years represent no mere blip in a trajectory of relative decline, but a major turning point.
Abenomics, the radical reflationary policy package that bears the prime minister’s name, will be given the time it needs to succeed. Corporate managements, investors and households will eventually get used to the idea that deflation and an ever-appreciating currency are no longer part of the economic scenery. Likewise, neighbouring countries will have to get used to a more self-confident Japan ready to assert its own interests and unwilling to be guilt-tripped over events that took place seventy or eighty years ago.
The election was important and necessary precisely because of the policy inconsistencies and inward-looking inertia of the previous twenty years. Mr. Abe needed to show the opposition who is boss – the opposition in question being not the fissiparous political entities he faces off against in the Diet, but the fiscal hawks and deflationists lurking in the ranks of the Ministry of Finance, the Bank of Japan, the Keidanren business association and his own Liberal Democratic Party. In this he has been wholly successful.
The most serious mistake Mr. Abe made in the first two years of his term was to show too much respect to the austerity merchants by going ahead with a sales tax hike legislated by his predecessor, the hapless Yoshihiko Noda. The result was a near-death experience for Abenomics as support for the administration leached away and the economy rapidly lost momentum.
Fortunately, there are good grounds for believing that the doldrums are temporary and 2015 will be a much better year for the Japanese economy. Indeed, it is quite possible that Japan is about to enter a virtuous cycle of growth, rising asset markets and positive change, led by a resurgent and highly profitable corporate sector. With the yen at its most competitive level in forty years in real terms, companies should choose to expand production at home, rather than overseas, thereby creating jobs and getting the factories humming.
Consumption should recover too. The greatest damage to household purchasing power occurred in mid-2014 when the combination of the sales tax and high energy prices delivered a swingeing blow to real household incomes. But by the late spring of next year, these adverse factors will wash out of the numbers and the rise in the headline CPI will slide to 0.5% from a peak of 3.7%.
Furthermore there is every reason to expect a gradual acceleration in wage growth, currently around 0.7%. The key factor is the tightness of the labour market. Companies have continued to add jobs through the weak patch, but all the new workers have been part-timers and mostly women. But with the rate of female participation in the workforce having soared nearly to the US level, it is just a question of time until Japan runs out of non-working women At that point growth in full-time jobs will take off and wages too.
As Japan moves into a structural labour shortage, companies are likely to become more progressive in their employment policies. Promotion of able women will become vital to competitiveness, likewise the recruitment of foreign talent. Companies in labour-intensive industries such as construction will lobby for loosening of restrictions on immigrant workers. All such changes will work to dilute the corporate monoculture.
Already significant improvements are apparent in corporate governance, thanks in part to the prodding of Team Abe. Examples are the introduction of a UK-style Stewardship Code for institutional investors, the eye-catching surge in companies buying their own stock back from the market – announcements up 60% this year – and the increase in external directors, of which two or more are now present on the boards of 60% of major listed companies. Put this together with the introduction of individual savings accounts and the asset allocation shift at the Godzilla-sized Government Pension Investment Fund and you have the genesis of a distinctive Japanese equity culture in which risk-takers will finally be rewarded
Other reforms – to corporate taxes, liberalization of agriculture and the overly rigid employment laws – are, to put it politely, a work in progress. It is to be hoped that, as the economy improves, Team Abe will start to focus on such long-term obstacles to growth.
Mr. Abe has taken a strong lead in Japan’s foreign policy, visiting an extraordinary fifty countries in his first two years in office. Key achievements have been the forging of strong relations with India and Australia, which have the potential to develop into de facto alliances, and reinforcing Japan’s commitment to the nations of South East Asia.
Relations with China are likely to remain edgy – due not to perceived historical issues, but to real present-day conflicts of national interests. Even so both parties are pragmatic enough to understand that there is no upside in any escalation in tensions. The recent deal in which Japanese trading house Itochu agreed to take a stake in Citic, a Chinese state-owned enterprise, suggests that behind the scenes economic relations are on the mend.
Mr. Abe’s emphatic victory signifies that the new assertive Japan is here to stay. Does it give him enough of a position of strength to embark on the controversial but necessary process of constitutional reform? Probably not, though he can argue that the changes he has made to the Japanese security posture – increasing interoperability with the US military, exchanges with Australia and India – have broad public assent and should be taken further. At the least he should be able to set the great constitutional debate into motion.
Regime shifts take time to gain traction, since expectations formed under the previous, discredited regime continue to drive behaviour long after radical changes in policy have occurred. Famously, two years after Margaret Thatcher took over from a disastrous Labour government 364 economists sent a collective letter to The Times newspaper demanding that the experiment in “Thatcherism”, as it later became known, be stopped forthwith. She ignored them and stayed in power for another ten years.
Abenomics is a kind of “reverse Thatcherism.” Instead of breaking an inflationary psychology, Mr. Abe is trying to banish the ghost of deflation. Instead of quelling union demands for higher wages, Mr. Abe is encouraging employers to pay workers more. Instead of attempting to restore long lost faith in government bonds, Mr. Abe is trying to bring an end to a multi-decade bear market in corporate equities.
It takes more than two years to roll back trends that have been in place for decades, but clear signs of improvement are already visible – which is why Mr. Abe, like Mrs. Thatcher through most of her remarkable career, is a proven vote-winner despite the controversy he generates. In fact the scale of the controversy is a backhanded compliment to the scale of what is being achieved.
This election has confirmed that Mr. Abe and his Abenomics are not going away any time soon. Largely due to his initiatives, Japan is back at the centre of global attention. In such varied areas as corporate strategy, foreign relations, economic reform and investment, it’s very definitely game on.