Suganomics: Abenomics Minus Yasukuni?

“Abenomics minus Yasukuni.”

That is how one analyst sees the economic policy of Japan’s new Prime Minister Suga Yoshihide, suggesting continuity, minus his predecessor’s nationalistic urges.

(Yasukuni is the controversial Tokyo shrine that enshrines Class-A war criminals; Suga reportedly cautioned former Prime Minister Abe Shinzo against visiting it while in office).

Can 71-year-old Suga get the world’s third-biggest economy back on track, as the nation battles the coronavirus pandemic, mounting debt, and adverse demographics?

Abe’s Mixed Legacy

Abe’s shock resignation on August 28 on medical grounds rattled financial markets, with the benchmark Nikkei Stock Average dropping by 2.5 percent and the yen advancing against the U.S. dollar. Just days earlier, the Liberal Democratic Party (LDP) leader had set a new record as Japan’s longest serving prime minister, with almost eight years in office since his re-election in December 2012.

The center-right politician had pursued both economic and national revitalization, famously urging investors at the New York Stock Exchange in 2013 to “buy my Abenomics.” Based on the so-called “three arrows” of fiscal and monetary stimulus together with structural reform, Abe sought to kick-start Japan’s economy after two decades of deflationary downturn following the bursting of Japan’s economic bubble in the 1990s.

Supported by a massive monetary “bazooka” fired by the Bank of Japan, Abenomics pushed Japanese stocks higher along with corporate profits, feeding through to higher wages and record low unemployment of close to 2 percent, alongside faster economic growth.

The Nikkei Stock Average surged almost threefold, rising from around 8,000 to its highest level in 26 years of around 24,000, on the back of the longest streak of uninterrupted economic growth in more than two decades.

Abe also won favor from investors for his market-friendly reforms, such as the introduction of Japan’s first stewardship and governance codes, which gave shareholders a greater voice and forced higher dividend payouts.

In trade policy, Abe succeeded in driving through the Trans-Pacific Partnership even without Washington’s involvement, while also signing a number of free trade agreements with the European Union, the United States and other nations such as Australia.

Significantly, gross domestic product (GDP) growth under Abe was “higher than in the Eurozone and Britain, and roughly the same as in the U.S.,” once adjusted for the working age population, according to Capital Economics.

Morgan Stanley’s Asia strategist Jonathan Garner described Abe’s achievements as “similar in scale to that of the transformational leaders of the 1980s – Ronald Reagan and Margaret Thatcher – and equally unlikely to be reversed.”

However, Abe failed to achieve his desired constitutional reform – his dream to amend the war-renouncing Article 9 – and left office on the back of the lowest poll ratings of his term amid various scandals and intensifying criticism of his handling of COVID-19.

Japan’s economy was already in recession even prior to the COVID-19 pandemic, due to the impact of an increase of the country’s consumption tax in October 2019.

Abe’s “Womenomics” policy also failed to force significant change at the highest levels of business and government, while a long list of structural reforms including labor market changes, pro-competition deregulation and privatization were left on the backburner.

Asked about Abe’s legacy, WisdomTree Japan’s Jesper Koll pointed to a re-injection of national confidence.

“When Abe took over, Japan was at rock bottom. There was despair, there was disillusion, there was deflation – the national spirit after the Fukushima disaster [of 2011] was at an all-time low,” he said.

“And whatever you think of Abe, he brought confidence back into the system…that ability to pull the government together, to get big business, finance, media and the technocrats working together, that was a big cornerstone of what Abe was able to do.”

Deregulation Agenda

The son of strawberry farmers in rural Akita Prefecture, the unassuming Suga secured the nation’s highest office without the backing of a family political dynasty such as Abe’s. However, his long stint in the spotlight as Abe’s chief spokesman earned him public recognition, which increased further still after he announced the name of the new imperial era, Reiwa, in April 2019.

After winning the internal LDP race to replace Abe, Suga declared that “regulatory reform is my agenda.”

“During my seven years and eight months as chief cabinet secretary, I noticed that when policies are slow to move forward, it’s usually because of bureaucrats’ sectionalism and a penchant for sticking with precedents,” he said at a press conference.

Suga pointed to digitalization as one of his first major reforms, with a new agency to be established to ensure that the bureaucracy embraces digital transformation.

This followed criticism over the slow distribution of cash handouts provided in response to COVID-19. Reports of health ministry bureaucrats faxing COVID-19 data rather than using email, and delays caused by the use of “hanko” stamps rather than electronic signatures, have only added to the pressure on Kasumigaseki to embrace change.

Suga entered office with an approval rating of at 74 percent, one of the highest for a new cabinet, and his move to slash telecommunications fees should further boost his popularity.

The new leader also sparked a surge in regional bank shares after commenting that Japan “had too many regional banks,” resulting in speculation of a wave of mergers in the troubled sector.

However, Suga’s immediate priority is “responding to the coronavirus and working hard to put the economy back on track.”

Talks have reportedly commenced on a new economic stimulus package to support the country’s recovery, expected in 2021, along with other key legislation including a Japan-Britain economic partnership agreement.

Suga’s Cabinet lineup also points to a continuation of Abenomics, with the retention of key ministers including Finance Minister Aso Taro.

One minister to have already made his mark is former Defense Minister Kono Taro, who was appointed minister in charge of regulatory and administrative reforms.

The English-speaking Kono has already signaled some of his plans, declaring a war on fax machines and tweeting that he had “checked 800 most often used government procedures with hanko… and found few of them need to continue.”

Pro-Third Arrow

Yet aside from such micro reforms, can Suganomics deliver Japan a much-needed productivity boost?

Among the optimists are John Vail, chief global strategist of Nikko Asset Management, who described Suga as “likely the most pro-Third Arrow reform PM [prime minister] in Japan’s history.”

“More than anything else, his long-held commitment to reform and the ability to implement such is what Suga is famous for, beyond his work-ethic and policy expertise,” Vail said in a September 18 research note.

“Indeed, he is likely feared more than loved by politicians and bureaucrats, while of course being highly respected.”

Vail also suggested that Suga would benefit from not being overly concerned about changing the constitution – a factor that may have constrained Abe from making unpopular reforms.

Naoki Kamiyama, chief strategist at Nikko Asset Management, also sees Suga focusing on “sectoral issues rather than macro issues. Monetary policy and fiscal policy will be unchanged, since micro issues are the priority of the new administration.”

“From an investors’ perspective, corporate governance reform is also important and this will continue… These things aren’t slowing, but going forward as per the Abe administration.”

Capital Economics does not expect major labor market reform under Suga, given the continuing popularity of the “lifetime employment” system among regular workers.

However, he could make his mark on other areas.

“All told, while economic policy under PM Suga won’t stray far from the Abenomics path, there are some areas where significant changes are possible. Suganomics could include a much faster reorganization of the regional banking sector, higher immigration and more aggressive hikes to the minimum wage,” Japan economist Tom Learmouth said in a September 15 research note.

Suga’s term as LDP leader will last until the end of next September, with lower house elections due by October 2021. Although Suga has suggested there are no plans for an early poll “for the time being,” pressure may mount to test his popularity.

Already, the new leader may be grooming his successor, Koll suggests.

“Suga is 71, he’s very fit, but if you look at the Cabinet he’s grooming the next generation of politicians and these are people in their 50s,” Koll said.

He pointed to the newly appointed chief cabinet secretary, Kato Katsunobu, “a brilliant administrator but shy in public,” and Kono, who is “brilliant on the international scene” but less influential domestically.

Both key ministers will be tested in their new portfolios under a taskmaster who is considered focused on “getting things done rather than talking a big game.”

“I think Suga will be in power until 2023, and then you will get the next round of LDP elections and get genuine generational change,” Koll added.

For a public that tired of Abe but desired political continuity, Suga offers a seemingly safe pair of hands. Yet with the global coronavirus pandemic continuing to wreak a costly human and economic toll, the new leader has little time to enjoy his sudden rise to the top.