As economic downturns go, Japan’s has been remarkable for its length. This is a country that has struggled to grow for some 20 years. It says something about how much wealth it accumulated that it remains the world’s third largest economy. The question on everyone’s lips in Tokyo is whether Shinzo Abe, in his second round as Prime Minister, will be able to resurrect the first Asian economic miracle.
In the hushed interiors of the Hotel Okura in downtown Tokyo, bellboys and elevator maids give a thumbs up to Abe. “Occupancy is up,” they say. The latest economic statistics point to a growth rate of 3.5% in annualised terms. The stock market has soared, notionally driving up the wealth of the average household by 40%.
But the inefficiencies that hobble Japan are still evident: the foreign exchange booth uses four people when two would have been enough, the airport bus has five doing the job of one. Most importantly, capital investment has fallen for the fifth consecutive quarter. Japanese shoppers may be thronging the malls, but the captains of industry prefer to watch and wait.
Their caution is sensible. Abe uses the metaphor of “three arrows” for the swathes of reform he is planning. The first two were big and loud, but politically easy. These included a $109-billion fiscal stimulus and then persuading the central Bank of Japan to agree to doubling the money supply. These have been, as one of his aides noted “big bazookas rather than an arrow.” Japan, as a proportion of GDP, has carried out quantitative easing roughly three times greater than even the recent mammoth printing exercises of the US Federal Reserve. Unsurprisingly, this has meant people have fat wallets. But it has also driven Japan’s public debt to a staggering 220% of GDP.
Which is why industry waits. All of this has been done before by Abe’s predecessors. And the results have faded away. As India itself is learning, running up debt and printing money is like drinking heavily in a bar to get happy. The smiles last a night, but the hangover goes on and on. So everyone is waiting for the “third arrow” — the structural reforms of the economy that will mean opening up the protected farm and service sectors, taking on vested interests in everything from construction to education, and otherwise inflicting a fair amount of short-term pain. Further down the road, which even Abe avoids talking about, are even more sensitive topics like pension reform.
Abe’s accomplishment has been to inspire enough public confidence to make his reforms almost palatable. His aides say they were initially nervous when he began to talk about reforms. After all, he may have swept the general elections earlier this year but without control of the upper house of the Diet, which goes to the polls in late July, he won’t have the ability to convert his reform talk into legislative reality. But the Japanese public, wearied by decades of economic stagnation and increasingly worried by their country’s low-level entanglementss with China, are open to change.
When Abe declared Japan would begin talks to join the Trans-Pacific Partnership, a comprehensive trade pact being pushed by the US to isolate China, his government waited for a backlash. Joining the partnership would turn Japan’s heavily protected farm and service sectors inside-out. Instead, Abe’s poll ratings soared into the high 70s. Since then, the Japanese prime minister has proposed a new swathe of reforms every week. Polls show his Liberal Democratic Party and their allies will easily secure a majority of the 121 upper house seats which will come up for grabs in July.
It helps Abe has been a perpetual motion machine on two legs. He has travelled to nearly a dozen countries to boost exports: offering reactors to Turkey, taking sushi chefs to Moscow and otherwise making the case that Made in Japan is not dead yet. “Like riding a maglev train,” said a tired diplomat about having to keep up with the prime minister.
The prime minister has even signalled his support for unpopular policies. For example, he will have Japan’s Nuclear Regulatory Commission decide which of the dozens of reactors shut down after the Fukushima disaster should be reopened — even though a majority of Japanese want them closed forever. Senior officials of Tokyo Electric say as many as half the reactors may be restarted as a consequence. But none of this has dented Abe’s support. The Prime Minister has also made no bones about his intention to increase Japan’s military profile. “Abe is not unhappy that China is poking his country in the eye,” said an Indian diplomat as this makes remilitarisation an easier sell. Nonetheless, remilitarisation remains unpopular in Japan. But, again, it has not made a jot of difference to Abe’s ratings.
Economists say Abe’s enormous fiscal and debt blow-ups have in effect locked Japan into a path of radical reform. If he fails to fire the ‘third arrow,’ the Prime Minister may have doomed his country to a path of permanent decline. “It’s now or never,” said the head of a Japanese think tank. Commentators like Anatole Kaletsky believe Abe may have piled up the red ink to ensure his country has no choice. “We have to change the very metabolism of the Japanese economy,” admitted an official from the Ministry of Economy, Trade and Industry.
Abe’s vision is arresting. He speaks of making Tokyo “an Asian New York City” — a financial and cultural hub, he wants to double the number of tourists, make Japan easy for foreigners to visit. Some speak of the third big revolution in Japanese society: following Commodore Perry’s opening the country to the West in the 19th century and the US’s defeat and conquest after World War II. That may seem excessive. But his advisors say the appetite for even more change is increasing in the Abe government. “This will be a cabinet that will do several things, each of them the sort of policies that would have consumed the political capital of entire governments before.”