On Thursday last week, Japanese Prime Minister Shinzo Abe announced that he would be launching “three new arrows” in his bid to rescue the Japanese economy. These new arrows are a pledge to increase gross domestic product by 22 percent, another to increase government benefits for families in an effort to improve Japan’s woeful fertility rate, and a commitment to social security for the elderly. The phrasing of the announcement, delivered immediately after Abe was re-elected leader of his Liberal Democratic Party for another three years, was designed to sound like a reboot of Abenomics, the great three-arrowed experiment Abe launched when he came to power in December 2012.
But this was a very different type of announcement. The 2012 plan was a widely lauded and comprehensive strategy for attacking Japan’s deep-seated economic problems with substantive monetary and fiscal stimulus and an array of structural reforms. The 2015 iteration, by contrast, includes a GDP target without a time limit, a policy that pays lip service to improving Japan’s demographics with no mention of opening up immigration, and what seems like a nakedly political appeal to the elderly, the most dominant section of the Japanese electorate. Where Abenomics was a politically risky attempt to confront Japan’s problems, these new arrows look mainly designed to win votes.
Abe has been playing a risky game since coming to power. Japan had been stagnating for 25 years after an extended period of breakneck growth, and it arguably took that long for the public to recognize the need to change Japan’s society. Abe arrived in 2012 with ambitions to change everything at once. Monetary and fiscal stimuli would keep the economy buoyant while he shuffled its underlying structure; he also wanted to release Japan from the shackles of pacifism that have held it since the end of World War II.
But the monetary and fiscal stimuli have not done their job. A 2014 consumption tax hike that was part of the great rebalancing derailed both inflation and growth after initial gains. Meanwhile, Abe’s security reforms proved deeply divisive among the Japanese people, who have grown accustomed to not being a military force in the world. All of this, and the ostensible failures of Abenomics, has weighed on Abe’s popularity ratings.
From Abe’s perspective, progress is being made. The security bill passed the Senate, and he has succeeded in partially defanging the influential agricultural lobby. The Trans-Pacific Partnership, a multilateral trade agreement with economic benefits for Japan, has made progress recently. Corporate governance, another perennial Japanese idiosyncrasy, is being reformed. Thus he is achieving his goals, but there is more to be done. Next year he faces another popularity-risking struggle against Japanese pacifism as he attempts to alter the constitution first imposed by the United States immediately following World War II. On the Abenomics side, he must still tackle labor reform — an important part of the plan that is largely untouched.
Immigration and Japan’s aged
The political elephant in the room is immigration. Japan is the fastest aging country in the world, and its population has been shrinking since 2005. “You can print money, but you can’t print babies,” is the truism, and successfully reversing declining fertility rates is notoriously difficult for governments to achieve. At the other end of the landmass, Europe is beginning to solve the same problems with increased immigration (though more than it is comfortable with at the moment), but in Japan, 90 percent of the population is against encouraging immigration. Abe appears to have left this one alone for the moment, though the issue will continue to loom large in Japan.
Abe is now in a position where he has been able to hit some of his reform goals, but he needs more time to push the rest through. On his side is the fact that any opposition remains in disarray, both within and outside of his party, though this cannot be relied upon to continue indefinitely. His previous time-buying strategies — monetary and fiscal stimuli — are not working, though inflation may kick up toward the end of the year when last year’s oil price drops leave the data. Abe would welcome any good news on inflation or GDP growth at this stage. Japan’s ability to redouble monetary stimulus through quantitative easing, as it did last year, is somewhat limited by the quantity of bonds the Bank of Japan already owns, though an increase in the purchase of exchange-traded funds looks likely in October, which might give something of a boost. And more fiscal stimulus will not be an appealing option, since the government’s fiscal situation already looks stretched and will need to be repaired at some stage.
Abe needs to rebuild his popularity levels and get the public back on board for the next big reform push while keeping potential rivals at bay. Monetary and fiscal policy, the two previously preferred levers for doing this, now appear somewhat neutralized. Thus we return to Thursday’s announcement, which looks like a classic case of a politician returning to the only recourse that remains when their hands are largely tied: placatory statements. More growth, more babies and looking after the elderly are three ideas that could win votes, but ultimately they do not commit the government to any truly definitive action.
© 2015 STRATFOR GEOPOLITICAL INTELLIGENCE