On July 21st, Shinzo Abe faces his first electoral test since his landslide victory in last December’s general election. If the polls are any guide, Mr. Abe’s Liberal Democratic Party will gain effective control of Japan’s Upper House, providing him with a solid platform for governing without having to face the voters for another three years.
In Japanese politics that is an eternity.
Over the past forty years Japan has had twenty five prime ministers – twelve of whom are still around – and only two lasted more than a couple of years. Like Mr. Abe, both Yasuhiro Nakasone and Junichiro Koizumi were heterodox conservatives who used their popularity to challenge vested interests and bring new economic ideas to the table. They also favoured strengthening the US-Japan security alliance and a more assertive diplomatic posture.
Mr. Abe’s plans are much bigger and bolder than the privatizations and deregulation associated with his two illustrious predecessors. If Abenomics does what it says on the tin, Japan will finally emerge from twenty years of deflationary stagnation and increasing irrelevance. That in itself would rank with the Thatcherite reconfiguring of the UK economy in the 1980s.
Mr. Abe may not stop there. His long-term plan is to reformulate Japan’s pacifist constitution, bringing it into line with twenty first century geopolitical realities.
The process of constitutional reform could be as significant as the content. The required referendum would give Japanese citizens a voice in the shaping of their governance for the first time since the Emperor Jimmu was led to the land of Yamato by a three-legged crow.
Opinion polls show majority support for the concept of constitutional reform, yet sensible scepticism about scrapping Article 96, which mandates a two thirds Diet majority for any changes. But all that lies well in the future. Only after economic revival has been secured will Team Abe have the time and the political capital to expend on such an enormous, epoch-defining project.
In a world in which the leaders of both emerging and developed counties appear to be struggling helplessly against the economic tides, Mr. Abe stands out for the boldness of his agenda. Not coincidentally, he is the first conservative leader to embrace the politics of reflation.
In the aftermath of the global financial crisis of 2008 conservatives elsewhere have committed themselves to austerity and tended to view expansionary monetary policy, let alone fiscal policy with deep suspicion. By default, the case for growth has been left to American Democrats, European socialists and left-leaning commentators such as Paul Krugman.
The distrust of Keynesian pump-priming is in the conservative DNA. It is an article of faith that small government is preferable to big government, and in most of the developed world government has never been bigger. Yet the traditional recourse to tax cuts has largely been abandoned. Such has been the obsession with public debt burdens that some conservative-led governments have even raised taxes in recessionary conditions. David Cameron’s coalition government hiked the value added tax in 2011 and now creams off one fifth of the value of every final sales transaction in the UK.
The animus against monetary activism in some conservative quarters is harder to understand. Quantitative easing a la Bernanke, Mervyn King and now Haruhiko Kuroda follows directly from the analysis of US monetary policy failings in the 1930s by Milton Friedman, the doyen of free market economists. Friedman himself published an article in the late 1990s castigating the “ineptitude” of the Bank of Japan for not pumping enough money into the deflating Japanese economy. Surely he would have been pleased that fifteen years down the line his advice has finally been heeded.
Conservatives have also been transfixed by the idea that sovereign debt crises were lurking around the corner, ready to be triggered by bond market vigilantes. Even before the recent brouhaha about the Rogoff-Reinhardt paper, there was no evidence from the markets that such fears were justified. Plunging bond yields – even in countries with no QE – suggested that the supply of government paper was actually insufficient to meet the surge in demand generated by private sector deleveraging.
So far there has not been so much as a tremor of a sovereign debt crisis anywhere (the PIIGS countries are not sovereigns in monetary terms). Instead the world has faced a growth and jobs crisis with a strong deflationary undertow. By rejecting the obvious remedies, conservatives have left themselves with little to offer except pessimism and belt-tightening that was appropriate for the age of inflation.
Japan plumped for Abenomics because the failure of the conventional wisdom had become too obvious to ignore. Or, as Mr. Abe put it in an impressive recent speech at the London Guildhall, quoting the late Margaret Thatcher, “TINA – There Is No Alternative.”
When the bubble burst in 1990, Japan had barely any public debt on a net basis. It took the two lost decades to drive it up to a Godzilla-esque 160% of GDP. But the idea that the Japanese government has been spending like a drunken sailor is wide of the mark. The share of public works spending in Japanese GPD has more than halved since its high point in the mid-1990s. The real cause of the flood of fiscal red ink was deflationary stagnation, in particular the collapse in tax revenues.
Only by growing nominal GDP at a rate higher than the average interest rate can Japan start to shrink its debt mountain.
It is a familiar idea from the age of inflation that politicians lack the guts to take painful decisions. Reflation, by contrast, should be politically popular. Rising consumer confidence, higher wages, stock and real estate prices recovering from multi-decade lows, belt-loosening instead of belt-tightening – unless you actually enjoyed the two lost decades, what’s not to like?
The extent to which the Japanese public buys the story will be tested in the upcoming election. Conservatives are supposed to be pragmatists, not ideologues. They go with what works and abandon what doesn’t. Ultimately they know that, in the words of the Tancredi Falconeri in di Lampedusa’s The Leopard*, “if we want things to stay as they are, things will have to change.”
If Abenomics proves to be a successful electoral strategy, conservative politicians elsewhere are likely to take note and follow suit.
* Burt Lancaster and Claudia Cardinale star in the Visconti film