Is that as good as it gets for Abenomics?

Author: Tobias Harris, Teneo

As the second year of Abenomics progresses, Prime Minister Shinzo Abe’s program of coordinated monetary and fiscal stimulus and structural reform has lost some of its lustre. Not only have Abe’s approval ratings fallen below 50 per cent for the first time since he took office in December 2012, but a recent poll in the right-wing Sankei Shimbun found that, for the first time, disapproval of Abe’s economic policies had exceeded its approval ratings, with 47 per cent opposed and 39 per cent in favour. Coming amid reports of slowing inflation following the consumption tax rate increase in April and weak export data, slumping public support for Abe and Abenomics suggests that the Japanese government’s policy experiment could be losing steam.

To the extent that Abenomics depends on Bank of Japan (BOJ) Governor Haruhiko Kuroda’s quantitative and qualitative easing program, the experiment is insulated from the vagaries of public opinion. However, from the beginning, the BOJ’s radical measures to defeat deflation were only a first step towards a broader revitalisation and transformation of the Japanese economy that would strengthen Japan’s global competitiveness and raise its long-term growth potential. Restoring inflation would create the right economic and political environment to implement extensive reforms to the labour market (including increasing the role of women in the workforce) and the inefficient agricultural and service sectors, foster a new system of corporate governance to generate greater returns for investors, and reshape how the public and private sectors invest in next-generation technologies.

To realise these policy changes, which have in many cases been pursued by Japanese prime ministers for decades, Abe would have to overcome resistance from entrenched interests in the bureaucracy, the ruling Liberal Democratic Party (LDP) and in the economy more broadly, wielding strong public support — and the vote of confidence in Abenomics from foreign investors in the form of buoyant equity markets — as a weapon against defenders of the status quo.

Despite his rhetoric, Abe has proven to be a reluctant reformer, unable to translate his political capital into concrete policy outcomes. His 2013 and 2014 growth strategies, the centrepieces of the so-called ‘third arrow’ of Abenomics, have disappointed, signifying more a return to old-style industrial policy than a dramatic break with past practice. When it comes to difficult structural reforms like labour market reform, the growth strategies have offered only modest changes and do little to introduce more flexibility or reverse the growth of low-paid part-time and other temporary employment.

More significantly, in setting lengthy implementation timelines, the Abe government has allowed bureaucrats, LDP backbenchers and lobbyists to fill in the details of the strategy’s skeletal proposals, further watering down the government’s reform agenda. With most of the 2014 growth strategy’s legislative items delayed until the 2015 regular session of the Diet, Abe continues to show no great urgency in his pursuit of structural reform.

Why have Abe’s achievements thus far lagged behind his promises?

The reasons are numerous. First, structural reform is difficult. Were it easy, one of Abe’s reform-minded predecessors would surely have found a way to achieve it. But in practice, structural reform means uprooting economic institutions that have endured since the 1930s, when they were introduced by Japan’s militarist government and then were retained by the post-war US occupation.

As the leader of a messy, pluralistic democracy populated by interest groups that have profited from existing institutions, Abe cannot simply change the Japanese economy by decree. Of course, Abe’s pursuit of structural reform is further complicated by the fact that his LDP has profited from the status quo more than most. The LDP is at best ambivalent about structural reform and, despite Abe’s personal popularity and the broader power shift to the prime minister’s office, the party is still capable of undermining the government’s agenda, as happened when Abe’s regulatory reform council floated a proposal to abolish JA-Zenchu, the national council of agricultural cooperatives. The reform council’s trial balloon met with fierce resistance from LDP backbenchers who forced the government to back away from outright abolition and allow JA-Zenchu to participate in the reform process.

Finally, Abe may himself be ambivalent about reform or, at the very least, be reluctant to engage in open conflict with members of his own party about structural reform. It is significant that one of Abe’s first decisions when he became prime minister for the first time in 2006 was to readmit LDP members who had been expelled from the party in 2005 for opposing the postal system reforms of the then prime minister, Junichiro Koizumi. Abe appears to prefer stability to reform, which may make for durable government but which makes economic transformation less likely.

If Abe’s popularity has in fact peaked, it is even less likely that he will be able to deliver the long-term economic revitalisation he has promised. Instead, as his political capital declines—and as his government prepares for local elections in April 2015 and legislative elections sometime in 2016—he may be tempted to pursue politically expedient policies rather than difficult but necessary reforms. This logic may guide the prime minister’s decision to devote the forthcoming extraordinary session of the Diet to revitalising uncompetitive rural regions, which could potentially bear fruit in next year’s nationwide local elections.

But if Abe shrinks from the challenge of structural reform, it raises an uncomfortable question about whether Japan’s economy can be reformed at all. If a prime minister with historically high levels of public support, command of both houses of the Diet and the approval of foreign investors and international organisations cannot prosecute anything more than incremental changes to long-standing economic institutions, can anyone?

Tobias Harris is an analyst at Teneo Intelligence, the political risk arm of strategic consultancy Teneo.

A longer version of this article appeared in the most recent edition of the East Asia Forum Quarterly, ‘A Japan that can say ‘yes’‘.

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