Author: Peter Drysdale, Editor, East Asia Forum
Yesterday, Prime Minister Shinzo Abe had a sweeping victory in Japan’s House of Councillors election, delivering a majority in both houses of the Japanese Diet that will allow him to press ahead with his popular new economic policy strategies that have already given a substantial boost to confidence domestically and a welcome lift in perceptions of Japan’s growth prospects internationally.
While there is anxiety in the neighbourhood, and even among Japan’s closest allies, about how Mr Abe might be encouraged by his new mandate to let his recidivist nationalist inclinations run wild and move quickly to revise Japan’s pacifist constitution, his electoral victory gives him no such mandate. The Abe administration’s standing in the polls is rather a consequence of the high expectations among Japanese that Abe’s programs offer a real chance for revival of the economy, stagnant as it has been under the two decades of the ineffective revolving-door leadership. There is also no strong opposition to the LDP after the three year experiment with the DPJ ended in failure.
The sense of resurgence in Japan is palpable. The international economic policy community, from Beijing to Brussels, has also responded positively if cautiously to the re-direction of Japan’s economic policy strategy. It’s far better to have Japan as a positive growth element in the global economy, despite the impact of its monetary expansion on exchange rate competition, the logic runs, than a drag.
Yet there are also deep worries among analysts about whether the full policy strategy will be delivered. The three arrows of Abenomics involve pressuring the Bank of Japan into launching unprecedented aggressive monetary easing and setting a target of 2 per cent inflation by 2015 to support a target of 2 per cent real GDP growth (4 per cent nominal growth); a blowout of the fiscal deficit; and a program of reforms to achieve growth through stimulating private investment. Certainly with the election out of the way, Abe can now go ahead with the legislated consumption tax hike that at least addresses the longer term fiscal problem. But the ‘third arrow’ of revitalisation is absolutely critical for the success of all these measures. If there is no deep, effective reform program for promoting private sector investment-led growth, the chances of a bond market collapse and a fiscal mess will increase dramatically. So far there has been little detail on reform commitment, apart from signing on to joining the negotiation of the Trans-Pacific Partnership, the uncertain outcome of which is peripheral to Japan’s economic reform agenda, except for symbolics.
At the core of the Japan problem is the need to lift potential, efficiency and productivity in an economy that has a shrinking population and workforce. Much of the reform agenda that would deliver higher economic potential in Japan has to do with fixing the fiscal and service sectors that relate to managing an ageing society: social benefits; the health sector; the pension system; the tax system; and migration policy. As Alexandra Harney pointed out in Foreign Affairs earlier this month, the election passed with barely a mention of any of these issues. That is no wonder. The percentage of Japanese voters over 60 years old is 44 per cent, having doubled over the past three decades. In the United States the proportion of over 60s is less than half that number and in Australia the share is still lower. The share of Japanese voters in their twenties has fallen from 20 per cent to 13 per cent today. As if that were not enough to inhibit changing things, the turnout of older voters is much higher than the average turnout. Commonly their vote is worth twice as much or more than that of younger voters because of the geographic gerrymander in the electoral system that favours older (namely rural) constituencies.
In this week’s lead essay, Iwao Nakatani argues that anything short of a major reversal in Japan’s population growth will see Japan’s population decline dramatically over the coming decades and that ‘desperate reform’ of Japan’s immigration policy is necessary to deal with the adverse impact of demographics on the Japanese economy and society. Japan’s population of 127 million is projected to fall to 84 million in 50 years. The working-age population (15–64) is projected to fall by nearly half from 80 million today to 42 million. The number of people aged 65 and over will account for 40 per cent of the population, putting substantial strain on Japan’s workers to sustain the non-working population.
Why is migration policy so central to overall reform? It is certainly not because it will quickly change Japan’s principal demographic features. Migration is seen as central to overall reform and lifting Japanese economic potential because it offers a way towards economic and social rejuvenation; effective participation in the global economy; and openness to foreign investment and technologies. Nakatani argues that ‘policy innovation around these most-important and difficult of questions is nowhere to be found within Abenomics, even if it has captured the attention of the Japanese people and the world’.
Japan does have a ‘points-based’ skilled and professional migration program (actually based on the Australian system) but it has dismally failed to attract migrants in significant numbers. Changing policy at the border on migration, of course, is not the only or the main element in developing a successful migration program. That requires deep institutional reform that would put migrants on exactly the same legal and institutional footing as Japanese-born, Japanese-ethnic residents. To be credible that would have to be inclusive of the significant Japanese-born Korean population residing in Japan.
That is the nub of the issue. Can Japan do it? Commonly even liberal, reform-minded Japanese despair of their country’s ability to embrace such change. A group of Japan’s future business leaders was in Australia last week on a mission to study how Australia had transformed its White Australia policy with an eye to immigration policy change in Japan, wondering about the national will. It won’t be easy, but if there is growing understanding that success requires deep domestic legal, institutional and economic reform: yes, Japan can do it. As Nakatani says, ‘if Japan does not halt its falling birth rate and at the same time drastically increase immigration, it will, unquestionably, come to walk the path of a nation in decline’.
Peter Drysdale is Editor of the East Asia Forum.