What Now for Japan?

It seemed an odd time, on the face of it, to call an election. With two years still to run on his four-year term, Japanese Prime Minister Shinzo Abe was coming off a difficult autumn. His signature policies were largely unpopular. The ruling Liberal Democratic Party (LDP) candidate in the Okinawa gubernatorial election had just been defeated, complicating an interminable issue involving the relocation of a U.S. military base. Two members of his Cabinet had recently resigned over campaign finance scandals. His own approval ratings were falling. Most importantly, his signature program for reviving the Japanese economy, known as Abenomics, had been derailed by a disastrous consumption (tax) hike in April, and Japan was back in recession. Surely, then, better to wait?

Abe’s proffered reason for going to the polls was the need for a mandate to postpone the next increase in the consumption tax, originally scheduled for the end of 2015, by 18 months. Given that the vast majority of the country clearly wanted no truck with another tax hike in the foreseeable future, that excuse was unsurprisingly greeted with skepticism. No, the election was a political calculation. Such was the disarray of Japan’s opposition, Abe realized that even with all the bad news, he was still the only game in town. A snap election would more than likely produce record low turnouts, heavily favoring the LDP’s formidable party machine, and Abe would retain his large majority. It would in many respects be a repeat of the 2012 elections, when voter disgust saw millions stay home and Abe enjoy a thumping victory despite the LDP receiving more than a million votes less than it had in 2009, when it was soundly defeated. In short, Abe would ride the coattails of voter apathy to another four years.

And so it proved. When the votes were tallied after the December 14 election, the LDP had won 291 of the 480 seats in the Japanese Diet, down slightly from the 294 it held going into the election but still a very convincing majority. With its coalition partner New Komeito, the LDP also retained its two-thirds majority in parliament. The main opposition party, the Democratic Party of Japan, still reeling from the spanking it received in 2012 after three chaotic years in government, was able to make some modest ground, improving from 62 seats to 73, although the party’s uninspiring leader Banri Kaieda lost his seat. The Japanese Communist Party – often the party of choice for protest voters – also picked up seats, from 8 to 21. The Party for Future Generations, led by far-right former Tokyo Governor Shintaro Ishihara, had a disastrous election, falling from 20 seats to just two. As expected, voter turnout was easily the lowest on record, at 52 percent, compared to the previous record low of 59 percent in 2012. Heavy snow in Western Japan didn’t help.

Next Steps

Combine the low turnout with the small loss of seats and this was perhaps not quite the ringing endorsement that Abe might have sought. Nonetheless, it was politically a well-played hand, and the result theoretically gives Abe four more years in power, until 2018, when he will have to step down as LDP president, and hence prime minister, under party regulations.

Perhaps a more important question is whether the election strengthens Abe’s hand within his own party. As Aurelia George Mulgan, a professor of Japanese politics, explains in an excellent article on the East Asia Forum site, any reform plans that emerge from Abe’s office must run the gamut of special interests, which more often than not are represented by internal party committees within the LDP. This often creates a divide between the government and the ruling party, particularly backbenchers from conservative, rural constituencies. 

If Abe’s position within the party is stronger after his re-election, then that will naturally be a boost for his policy agenda. And what might that agenda be?

Doubtless, priority number one for Abe will be removing the Japanese economy from recession. Quite possibly this will happen naturally. Much of the downturn in the six months following the consumption tax hike can be explained as a backlash to consumers frontloading their spending before the tax increase took effect. Presumably, at some point consumers will once again reach for their wallets and the economy will improve. If it doesn’t, the government and the Bank of Japan will certainly be prepared to step in with fiscal and monetary stimulus. Abe is well aware that any mandate earned from this election will quickly evaporate if the recession persists. After all, his own Abenomics policy targets of tax hikes, inflation and currency weakening have combined to reduce real Japanese incomes.

Next, heading into the new fiscal year on April 1, Abe’s stated focus is the annual wage negotiations. The point of Japan’s unprecedented monetary easing – to date easily the most notable aspect of Abenomics – is to trigger inflation, which in turn produces a virtuous circle of wage increases and higher spending. It is a strange policy that merely tackles a symptom of Japan’s economic malaise – the root cause is the country’s dire demographics, which are shrinking both demand and the tax base, but addressing that would get Japan into the untouchable area of immigration. However, tackling deflation is the key plank of the government’s economic policy, and if it is to work, wages must rise next April. Expect substantial rhetoric on that score from Abe and his ministers.

Structural Reforms

The optimistic observer will be hoping that Abe’s win does indeed give him the political capital to drive through much-needed structural reforms – particularly in areas such as agriculture and labor – over the objections of special interests. In fact, structural reform was meant to be the “third arrow” of Abenomics, the one that was going to boost demand. To date, progress has been underwhelming.

For Japan to comprehensively address its demand problem it would need new policies for immigration, women’s labor rights, and productivity. Abe did briefly speak about boosting immigration, but quickly dropped the idea when it became clear that conservative Japan was not ready to countenance it. He has, however, been outspoken on improving the lot of Japanese women, for most of whom the birth of a child signals the death of a career. Hence, the term “womenomics” has entered the local lexicon. To date, actual policy has been strong on targets and weak on specifics, but some modest progress has been made in areas such as childcare.

Improving productivity – which means exposing hidebound sectors of the economy to competition – offers the best hope for short-term results, and unsurprisingly it is the area that gets the most attention. Alas, progress has again been disappointing. The signature initiative here is the Trans-Pacific Partnership, an ambitious free trade area that currently involves 12 countries in the Asia-Pacific. Here, the problem for Abe is the country’s tiny, inefficient, but politically powerful agricultural sector, well represented in Japan’s parliament. If Abe is able to use his political capital to wring concessions from this notoriously tough crowd, and so agree to the kinds of tariff reductions that other TPP members demand, then this election will have been significant indeed. This, however, is unlikely.

Reform in Japan tends to follow a pattern of overpromising and then under-delivering. It is hard to see how this election changes that pattern.

Fiscal End Game

As I have written elsewhere, absent radical change, the Japanese government will eventually reach a point where its next actions are dictated to it by its fiscal situation. Principally because of its shrinking tax base, Japan has by far the highest government debt of any OECD country, at well over twice GDP. As it discovered this year, any attempt at adopting the austerity measures that might correct its persistent deficits quickly derail an economy that is, for demographic reasons, set to contract anyway. There is, therefore, no realistic way that Japan is going to be able to repay its debt through conventional tax and/or growth measures.

To date, the government debt has not caused a crisis. There is little private-sector demand for investment in Japan, and so substantial savings are available to buy Japanese government bonds. And because the economy is naturally inclined towards deflation, the Bank of Japan’s aggressive bond buying program – essentially monetizing the debt – has not (yet) triggered a crisis.

It may well be then that if Japan can offer up just enough structural reform to retain some credibility and adopt some obvious fiscal measures, such as raising the retirement age, which it is in fact doing, then given its peculiar deflationary situation it may be able to get away with having the Bank of Japan write off its holdings of government debt.

Even if that is the case, though, don’t expect it to become public policy. Abe’s government will continue to make all the right noises about achieving the impossible: combining austerity with stimulus.

Constitutional Changes

While Abe acknowledges that the economy must be his first priority, he is also explicit in his intentions to pursue his true passion: changing the war-renouncing passages of the Japanese Constitution so that Japan can have a “normal” military. Abe sees this as essential for securing the Japanese people; the Japanese people themselves aren’t so sure. After all, even with the war-renouncing Article 9, Japan has managed to build one of the region’s most powerful militaries. 

Amending the Constitution will require two-thirds majorities in both houses of the Diet, as well as a national referendum. The prime minister pledges to win public understanding, but more than likely he will need to content himself with the creative reinterpretations that he has been pursuing, which allow Japan to export arms (most notably in a potential submarine deal with Australia) and exercise collective self-defense, the latter enabling it to come to the assistance of a close ally (the U.S.) were it to come under attack.

Even those measures are disturbing for Japan’s East Asian neighbors, which like to warn the world of the possible return of a militant Japan. Indeed, Abe’s hawkish brand of nationalism has not been good for relations with China and South Korea, which have deteriorated to their lowest point in decades, particularly following visits to the controversial Yasukuni Shrine and a flirtation with walking back the 1993 Kono Statement on wartime “comfort women.” Japan has territorial disputes with both countries in the East China Sea, and China’s probing of Japanese defenses near the contested Senkaku/Diaoyu islands have at times ratcheted tensions to dangerous levels. 

Faced with economic pressure and prodding from the U.S., Abe has been trying to improve relations of late, with some success. The chilly handshake he managed with Chinese President Xi Jinping at the recent APEC Summit in Beijing probably had little more than symbolic significance. Nonetheless, it was a step in the right direction, and given the importance of China’s economy, Abe will feel obliged to leash his more nationalistic tendencies to ensure that relations don’t worsen. He will continue his government’s efforts to build a more robust military – including a new amphibious force designed specifically with island defense in mind – and will pursue active diplomacy with other countries in Asia, many of them concerned about China’s growing assertiveness, but it is likely Abe will leave the more robust expressions of Japanese nationalism to proxies.

Policy Challenges

Policy headaches abound for Abe in his third term. There is, for instance, the question of nuclear power. In the wake of the 2011 disaster at the Fukushima Daiichi Nuclear Power Plant all of Japan’s 48 reactors were taken offline for safety inspections. That forced Japan to rely on fossil fuel imports to meet its energy needs, upsetting the balance of payments. The government and business sectors want to restart the reactors, but roughly two thirds of Japanese remain opposed. Convincing the public, or overriding its concerns, even as the bumbling cleanup at Fukushima continues, will be one of the more challenging tasks for Abe in the year to come.

And then there is Okinawa, home to a disproportionate U.S. military presence and a long-running dispute over the relocation of an air base. The Japanese government and its U.S. ally want to move the base to a less urban part of Okinawa, while local Okinawans want it moved off the island altogether. Several weeks ago, the LDP candidate was defeated in the gubernatorial election, and it appears that in the general election the party has lost all four of Okinawa’s districts to candidates opposed to the government’s base relocation plan. Abe insists that the base relocation will proceed as planned, but with such convincing local opposition it hardly seems set to go smoothly.

When the dust has settled, this election will likely be seen as a clever political move by Abe, potentially maximizing his time in office. It is possible that he will be remembered as one of Japan’s longest serving prime ministers, and in the context of Japanese politics, that is a success in itself. His legacy, though, will be determined by the success of his policies, and his re-election is unlikely to provide any more than a modest boost to his ability to overcome the many policy challenges that await him.