Will Japan revive under the LDP government?

S P SETH

The return to power of Japan’s long reigning Liberal Democratic Party (LDP), after a brief hiatus of three years, is unlikely to charter the country into calmer waters. After the US restored Japan’s sovereignty in the Fifties, the LDP was the vehicle of its post-war reconstruction, recovery and economic miracle. So much so that, in the eighties, it looked like that Japan might overtake the United States as the world’s leading economy.

There was so much hoopla about Japan as ‘the number one’ that US-Japan relations started to come under serious strain with the US demanding correction of trade imbalances between the two countries. The economic miracle had the Japanese stock market skyrocketing, and the real estate market went berserk. But the bubble burst towards end-1989 and the Japanese economy has never been the same again. Over the last two decades, it has spluttered around recording very little or no growth. This should give us an idea of the vast task that faces the new conservative Prime Minister Shinzo Abe of the LDP.

Abe’s first and foremost task, therefore, would be to resurrect the country’s economy. And he has committed to do this. For this, he is promising economic stimulus, with the help of the country’s central bank, the Bank of Japan. The Bank of Japan has already been doing its best by keeping interest rate at zero to facilitate borrowings and by injecting more liquidity into the system. Which is another way of saying that the country’s central bank has been printing more money. So far, it hasn’t been working.

Abe is going to push the central bank into doing more of this. It has reportedly already announced an expanded program of buying more assets to a total of over $1trillion. And still more might come with pressure from the new government. Among other things, an expanded program of quantitative easing (more money floating in the system) is designed to make yen cheaper against the US dollar, and make Japanese exports competitive. Hopefully, an export-driven economic recovery will pull Japan out of its economic morass to start its economic recovery.

Will it work? It hasn’t so far. Japan has the biggest debt of any advanced country in the world at over 200 per cent of its GDP and rising. It hasn’t so far got into real trouble, like the indebted European countries, because much of this debt is domestically raised. But with Abe’s promise to stimulate the economy with more debt, it might at some point come under the gaze of credit rating companies with further pressure on its economy. Therefore, if the new Abe government is not able to kick-start the economy, Japan’s increased debt might prove counter-productive sinking is economy further, and with it the fortunes of the LDP government. Looking at the story of the past few decades, Japan’s economic recovery doesn’t seem promising, even more so because of the extreme fragility of its relations with China.

China-Japan relationship has been rocked by their competing claims to sovereignty over Senkaku/Diaoyu islands in the East China Sea, with near misses in military clashes. Both sides are adamant on their respective ownership, with neither showing any sign of compromise. The islands are in Japan’s control and China keeps testing its resolve. Japan’s new conservative government is even more determined to safeguard its maritime boundaries, and favors revising the country’s US-imposed pacifist constitution to build up its armed forces against the backdrop of the perceived China threat.

Indeed, while China’s national mood is quite confident to assert its control over large swathes of the waters in the South China Sea and over the disputed islands in the East China Sea, Japan is keen to revive its national spirit, having lost its number two global economic spot to China and now having to ward off its push into the East China Sea. The sovereignty issue between the two countries is also strongly motivated by the prospect of oil and gas riches and the harvesting of fish stocks in the waters around the disputed islands.

It would appear, though, that while there is some brinkmanship involved in China-Japan relations, both sides are keen to avoid military conflict. In the case of Japan, the territorial issue also has a great bearing on its economy because not only is China Japan’s biggest trading partner, it also has considerable investments in China. And Beijing is likely to push the economic button of punishing Japan by cutting on Japanese exports to China as well as adversely affecting the investment climate.

Indeed, during the recent public demonstrations in China against Japan over the islands’ issue, Japanese businesses were targeted, and trade measures were initiated to highlight the seriousness of the Chinese position. China is not happy about the political turn around in the Japanese politics to LDP with a strongly nationalist Prime Minister in Shinzo Abe. But considering the high stakes involved, Abe is likely to tread cautiously and pragmatically in Japan’s relationship with China. Having said that, the scope for maneuver in China-Japan relations is rather limited.

Prime Minister Abe will also have the unenviable task of dealing with the aftermath of the Fukushima nuclear power disaster in 2011, with thousands of people swept away by the tsunami and vast areas of the land made uninhabitable. The then ruling Democratic Party of Japan didn’t acquit itself well during the crisis that contributed to its massive defeat. The effect on Japan’s nuclear industry and its energy sector has been devastating, with most of the nuclear power plants shut down.

Japan is dependent on nuclear power for about 30 per cent of its electricity. With the national opinion set against revival of nuclear power--though the initial anger seems to have subsided--the Abe government, believed to be keen on re-setting the nuclear power button, will need to tackle this issue with great sensitivity. While the tsunami and its Fukushima aftermath have been terrible humanitarian and economic disasters, the expected economic reconstruction has failed to rehabilitate the region. In other words, this has been a drag on Japan’s already sclerotic economy.

With so many problems and so much wrong with Japan’s once stellar economy, the country’s political paralysis has only compounded the situation. Japan has seen a number of prime ministers come and go in the last few years. The landslide victory of the LDP under Shinzo Abe’s leadership does give it an impressive mandate to overhaul the country’s affairs and institutions. But the LDP has been there before for five decades and during the last couple of decades, it simply presided over the country’s decline. Will it acquit any better under Prime Minister Abe? We will wait and see.

Note: Contact me at: sushilpseth@yahoo.com.au