Shinzo Abe made a striking claim in the weeks leading up to December’s snap election. There was, he said, “no alternative” to his stagnation-busting Abenomics cocktail of monetary easing, fiscal stimulus and structural reform.
It was no empty boast by Japan’s prime minister. Faced with a lackluster opposition, almost half of the country’s voters effectively downed their tools by staying away from polling stations. But those who did vote handed the prime minister an overwhelming mandate.
The lowest turnout since World War II took the sheen off the governing coalition’s landslide victory. Even so, it is hard to remember a time in recent years when a Japanese leader has secured such a strong endorsement for his plans to revitalise the country’s 500 trillion yen economy.
During his first two years in office, Abe had been credited with restoring confidence in Japan’s anemic economy after successive administrations had seemingly accepted the inevitability of decline — amid a shrinking workforce and the soaring costs of a growing elderly population.
The Nikkei share index — all too often an object of derision among those who remember its zenith during the bubble era (mid-1980s to early 1990s) — had gained roughly 70%; the yen sank against the dollar by about 30%, boosting overseas profits for long-suffering exporters in the auto and consumer electronics markets.
But now, analysts say, Abe must follow through with structural reform to keep alive any hope that consumers will return to spend their way out of stagnation.
The prime minister even faced down fiscal hawks in his own LDP party who believed he should be placing more emphasis on repairing Japan’s precarious public finances than on growth.
On the same day he called the snap poll, Abe said a second-stage rise (of 2%) in the consumption tax would be postponed for 18 months, until April 2017. A three-percentage-point rise in the same tax this past April was blamed for sending Japan back into recession in the third quarter of the year.
Instead, this year, there will be more stimulus in the form of a supplementary budget worth as much as ¥3 trillion, along with other measures designed to make Japan more appealing to investors — and to meet Abe’s inflation target of 2%.
For now, Japan is unlikely to make much of a dent in its public debt, which is currently 240% larger than the economy.
Robert Feldman, chief Japan economist at Morgan Stanley MUFG Securities in Tokyo, believes the election victory has given Abe’s policies “legitimacy, longevity and authority”, and secured him an uninterrupted run as prime minister until 2018. “Attention will likely now turn to implementation of Abenomics,” said Feldman, in a paper published just after the election.
“The short-term policy agenda focuses on budgets and the consumption tax, and may disappoint investors looking for growth policy. However, come spring, we expect the growth agenda to accelerate,” added Feldman.
There are potential bumps in the road, however. Abe wants to make it easier for companies to retain temporary workers for longer periods to lower costs yet maintain employment levels. But relaxing employment regulations looks unlikely while wages remain stagnant, particularly among the majority of Japanese workers employed by small and medium-sized firms. As it stands, Abe has secured agreement from major employers that they will “strive” to unshackle some of the $2 trillion they have in reserve and raise wages in 2015.
“The problem is that companies remain reluctant to further boost investment as long as the future course of policy-and-demand in Japan remains unclear,” said Martin Schulz, chief economist at the Fujitsu Research Institute in Tokyo.
“Cancelling the additional tax hike in such a situation might have been a necessary step to stabilise demand trends in the short run, but it won’t help to put more long-term policies on a sounder footing.”
The “shock” news in November that the growth juggernaut had momentarily derailed in the second and third quarters — sending Japan back into recession —was hardly surprising, given the timing of the consumption tax increase, added Schulz.
“Abenomics has already had some success in terms of agricultural reform, gradually changing the energy market, slowly capping healthcare costs, and shifting the country towards more liberal free trade agreements,” he said. “All this should bear some fruit over a horizon of about 10 years, but would be hard to measure as a success indicator on a year-to-year GDP basis.”
Abe is virtually assured of being re-elected LDP president this year, but he has no time to sit back and ponder his political longevity after almost a decade of revolving-door leadership.
Japan, and indeed the rest of the world, is waiting to see if he can deliver the third arrow (regulatory reform to boost competitiveness) of Abenomics. Hiring practices aside, that means increasing women’s participation in the workplace and joining various free trade deals, including the FTA/EPA with Europe and the Trans-Pacific Partnership.
“For the foreseeable future, I expect there will be little more than incremental change,” said Tobias Harris, a Japan analyst at Teneo Intelligence in Washington, D.C. “Nothing has really been outlined on the labour market front, and policies to empower women have a long way to go to full implementation.
Officials close to Abe believe he has been given carte blanche to proceed with his growth-oriented economic policy.
“The Japanese economy has a blank canvas for the next 27 months, until April 2017, during which there doesn’t need to be a debate over the desirability of the consumption tax hike,” said Tomohiko Taniguchi, a special adviser in the prime minister’s office.
Since taking office in December 2012, Abe has become the most peripatetic Japanese leader in recent memory, racking up 354,200 miles (570,030km) and more than 50 countries to deliver his “Japan is back” mantra everywhere from New York to New Delhi.
Now that he can claim a new mandate, might Abenomics still offer an alternative to austerity for policy makers in Europe and elsewhere?
“Without the election, brand Abenomics would have gotten rusty”, said Taniguchi. “I imagine that the investment community in the UK, Europe and the US is looking anew to see if Shinzo Abe will deliver.”© Japan Today