Japan: back to the future

S P SETH

Japan is back to the future, with the country’s longest ruling Liberal Democratic Party (LDP), after brief interruptions, now in control of both houses of its parliament. Last year, Shinto Abe’s LDP won the elections to the country’s House of Representatives that made him Japan’s prime minister, defeating the Democratic Party of Japan  (DPJ) that had held power from 2009-12 with great expectations of a new political dawn in Japan. Even though LDP came to power last year, it still was politically hobbled, as it didn’t control the Upper House. This year, they also won control of the upper house of the parliament. With popular political mandate in both houses of parliament, Prime Minister Abe will have greater freedom to push forward his political agenda.

There are two areas, both of great significance for the country, that Abe has promised to overhaul and energize. The first is Japan’s economy that has been sluggish ever since Japan’s economic bubble burst in the nineties. And the second is to make Japan into a ‘normal’ country, with a regular armed force. That will require an amendment to the country’s US-imposed constitution, after Japan’s defeat in WW11. Article 9 of the constitution outlaws war as a means of settling international disputes and prohibits Japan from maintaining armed forces with potential to wage war; though, in effect, Japan has an armed force, called Self-Defence Forces. To put it differently, these forces are not meant to wage a war but to act in self-defence.

Both issues, the economy and defence, are important but it is the state of the economy that needs urgent attention. For the last two decades, Japan’s economy is in a stagnant state weighed down by deflation. People are simply not spending more than is necessary for their living. Business investment is lagging and confidence is a rare commodity. Japan has already lost its place as the world’s second largest economy to China. There was a time in the eighties when there was incessant talk that Japan might overtake the United States as the world’s number one economic power. Indeed, some Japanese were so cocky that they were even starting to lecture the United States about economic fundamentals. The relations between the United States and Japan were strained at times because the latter was running large trade surplus with the US. And then the bubble burst with the Japanese stock market diving and   real estate market collapsing. Japan’s economy hasn’t really recovered after that, especially the loss of confidence of its people.

Prime Minister Abe has ambitious plans to change all that, with measures already in place. The economy is being energized at two levels. First, Japan’s already soft monetary policy, with almost zero interest rate, is being further liberalized with more money pumped into the economy by the country’s central bank. At another level, the government is stimulating the economy with a spending program. This has already energized its stock market and there is a palpable increase in the confidence barometer. After all the gloom of the lost couple of decades, there is a sense that Prime Minister Abe is determined to give the economy a real push. And the businesses are excited. It is probably this feel good factor that is behind the economic excitement.

Otherwise, the consumers still remain cautious and there is not much happening on the ground that would suggest a medium or long-term trend to economic revival. Prime Minister Abe’s government seems to believe that the revival of confidence, with more money into the system and greater public spending, might do the trick. It might, in the short term, but whether the markets will buy the confidence trick for the medium or long term is another matter. There are also suggestions that structural reform of the economy in terms of labour market flexibility (of hiring and firing workers) and opening Japan’s economy to foreign competition, in the agriculture sector, for instance, will give it a much-needed boost.

These are sometimes remedies from self-serving outside interests that might not be practicing what they preach at home. For instance, the US wants the Japanese agricultural market to be opened up for their exports, with Japan constrained by its farmers’ lobby. By the same token though, the US spends fair bit on subsidies for its own agricultural sector.

The prescription for Japan is to deregulate its economy to make it more competitive. But a similar open-ended deregulation elsewhere in the world brought about the current global financial crisis, making governments the handmaiden of banks, financial institutions and stock markets. Which makes democracy, at times, look like corporate governance.

After its earlier boom and bust cycle, Japan’s new economic policy, called Abenomics, unless handled cautiously, might do more damage than good in the medium and long term. For instance, Japan already has public debt that is over 200 per cent of its GDP. The saving grace for Japan, compared to many other debt-ridden countries, is that most of this debt is internally raised and hence Japan is not hostage to foreign interests. However, to further increase this debt through an expansionary policy is not without risks, even though it has excited the business sector.

Another problem facing Japan arises from its maritime dispute with China over the sovereignty of some uninhabited islets, which Japanese call Senkaku and Chinese call them Diayoyu. The waters surrounding these rocks are said to be rich in oil, gas and fishery, and both countries are determined to push their claims. The Sino-Japanese islands’ dispute has at times bordered on a military confrontation. With China’s military power growing, and Japan feeling increasingly threatened, Prime Minister Shinto Abe’s government is seeking to deal with it at a number of levels.

First, Japan is increasing its defense budget. Second, it would like to amend Article 9 of the constitution to ease or remove constraints on its defence forces from a self-defence role to be able to confront an enemy force on its own, if necessary. Three, Japan has further strengthened its security alliance with the United States.

At the same time, Japan’s nationalist Prime Minister Abe is also engaged on a nationalist revival in the country to imbue its citizens with greater national pride and dignity. Prime Minister Abe has been unapologetic about his visits to the Yasukuni shrine memorial to its war dead—this year, though, he didn’t go personally--including some of the WW11 war criminals. And he also has a different take on Japan’s WW11 atrocities, tending to whitewash or dismiss them.

Such nationalist revival doesn’t go well in China, South Korea and some other regional countries. Indeed, sometimes, it is patently offensive when, for instance, Japan’s finance minister, Taro Aso, suggested that Japan should emulate Nazi Germany, which rewrote Germany’s constitution to overcome constraints on its armed forces.  Aso has since retracted his comments, saying that it was taken out of context.

While Abe is seeking to revive Japan’s economy, any patriotic revival re-kindling Japan’s wartime memories is likely to do more harm than good to Japan’s economy.

 Note: This article was first published in the Daily Times.

Contact: sushilpseth@yahoo.com.au