Foreign Policy

Abenomics can thrive with out Abe

Japan's new prime minister, Yoshihide Suga, could easily be dismissed as the overhaul of his predecessor Shinzo Abe, but with his focus on the problems of rural Japan and his backroom skills to get things done, he could be a stronger force in pushing through economic reforms. Its success will determine whether Abenomics, the package of measures that Abe put together in early 2013, becomes Suganomics.

When Abe took office in December 2012, he made a big impression of a tripartite approach to revitalizing the country's long-stagnant economy. He did quite well in getting the central bank to inject huge sums of money into the economy to break out of a deflationary spiral in which lower asset prices and profits weighed on consumption. While the Bank of Japan failed to meet its much-lauded target of 2 percent annual inflation, it has managed to prevent prices from falling. Abe was also able to hike government spending to create fiscal stimulus, though still double that of the US per GDP at the cost of further increasing Japan's already record high national debt.

For Abe, however, these were relatively straightforward measures using tools that were already in the hands of the government. Structural reforms proved far more difficult. Japan's myriad of restrictions have long been blamed by economists for the slowdown in the economy, but the bureaucracy proved difficult to stir. In some ways, this wasn't a surprise. Government and industry in Japan have always worked together, resulting in interlocking ties that are difficult to break.

Abe, like most high-ranking Japanese politicians, is a product of the system. Most of the politicians, including 16 of the country's prime ministers, come from the elite University of Tokyo, although Abe studied at similarly exclusive Seikei University. Many, like Abe, come from famous political families – Abe's grandfather was the prime minister and his father was foreign minister. In addition, Abe seemed more emotionally committed to a conservative agenda of greater military strength and an end to the postwar excuses that were a mainstay of Japanese relations with other Asian nations than economic reform.

Suga, on the other hand, is an outsider. He grew up in northern Japan as the son of strawberry farmers. He did not enjoy a farming career and moved to Tokyo after high school. He enrolled in night classes at the slightly less prestigious Hosei University (he would later say this was the cheapest choice) while working in a cardboard factory. He then worked for a legislature, was elected to the Yokohama local assembly, and then became a MP for the Yokohama region, a seat he now holds.

As number 2 in government during Abe's more than seven years as Prime Minister, Suga has been a major player in government politics, including the Abenomics program. One of his goals was the sprawling Japan Agricultural Cooperative, a network of cooperatives that controlled virtually every part of the Japanese agricultural sector. It arranged the loans (it owns Japan's fifth largest bank), sold the seeds and fertilizers at high prices, and did the national marketing of almost all agricultural products.

Most importantly, it offered a powerful lobby to protect farmers and the sky-high tariffs that made Japan one of the most protectionist nations. With 85 percent of Japanese farmers growing rice, the Japanese import tariff for rice from abroad has been set at 778 percent. However, as the agricultural population continued to decline and the ruling Liberal Democratic Party no longer relied on rural votes to stay in power, the political clout of the Japan Agricultural Cooperative began to wane. Under Abe, monopoly powers over local cooperatives were reduced, and a reform-minded leader of the association came to power in 2015. Within a few months, Japan was able to reach an agreement on the Trans-Pacific Partnership with 12 nations by greatly reducing tariffs on a number of imported foods. Even after the United States pulled out of President Donald Trump dramatically in January 2017, Japan tinkered the remaining nations into a revamped trading group. Japanese officials like to emphasize that the United States can come back anytime.

With Suga at the helm, the farming lobby is concerned that more is to come. "The JA Group is concerned when Prime Minister Suga, a farmer's son, is ready and determined to deregulate," the influential news magazine Diamond wrote in a report.

Suga has wasted no time taking up the stick for reform more broadly. He has targeted some ingrained government habits, including the use of personal Hanko seals on documents and the associated use of fax machines, which are considered necessary to send documents with the correct seals, and which is still 95 percent used by the company.

"I will go to great lengths to implement regulatory reform by breaking down bureaucratic sectionalism, interest groups and the notorious habit of following precedents," Suga said at his first press conference.

He has appointed a cabinet minister responsible for administrative reform, who is removing the lively Taro Kono from the Ministry of Defense. The new role was initially seen as a downgrade (Kono previously had the same job), but given Suga's reform drive, Kono has become a prominent figure. "Kono declares war on fax machines," read the headline of a Japanese newspaper. One of his first steps was to announce an email hotline for ideas on how to cut red tape. It received so much traffic that it closed after 4,000 ideas were received.

"Silos in Japan's ministries have often hampered private companies in new business and export," said Hiroshi Ugai, chief economist at J.P. Morgan in Japan. "As Suga is familiar with running the bureaucracy and has shown his full support for Kono's approach, we expect progress in this area."

Suga has also created a Minister for Digitization, an initiative made even more urgent by the rise in teleworking in the wake of the COVID-19 pandemic. The aim is to update the government's notoriously lagging and fragmented IT systems and encourage companies to take a leap forward in how they use technology or not. "This is an important way Suga wants to steer the economy," said Arthur Mitchell, a lawyer with years of experience in Japan who specializes in technology. "It affects everything: industrial revitalization, artificial intelligence, a legal framework that enables innovation, protection of privacy." Suga has already announced plans for a new digital agency to coordinate efforts. The problem, Mitchell said, is whether a single office under the prime minister can effectively resolve such a big problem with other departments and stakeholders. "Will Suga be able to bring some coherence to it?" he asked.

While he is still starting his reform program, Suga has an immediate concern that all heads of state and government have in common: How can the economy be brought back to normal during the course of the pandemic? With its key trading partners, China and the United States, Japan was down to record levels in the second quarter on an annualized basis, with a record 28 percent decline – although the country avoided the severe lockdowns noted elsewhere and managed to maintain GDP death rate from COVID- 19 at 10 percent of the global average. The economy has recovered somewhat since then, supported by the renewed growth of main trading partner China. The September trade figures showed that exports to China were up 16 percent compared to the same period last year. Domestically, the government's economic sentiment survey showed a strong recovery in August and September, with household sentiment now reaching its highest level since December 2017. In addition, unemployment remained muted and rose slightly to 3 percent in August.

All of this assumes that Suga will be around long enough to implement his economic or other policies. He won the top job not by referendum, but by being elected head of the long-ruling Liberal Democratic Party of Japan. Even that selection was a less than democratic process. The simple members of the party were not allowed to vote. Instead, it was elected by senior officials and 394 legislators within the party. Even that was largely an illusion, as most of the votes were effectively controlled by the five major factions within the party in the best tradition of smoke-filled room negotiation.

Suga was able to prevail even though he is not a member of any of the factions himself, which is possibly why he was able to find common support. He might as well be shown the door if the party's kingmakers found a new figure. This, in turn, could bring Japan back to the revolving door of heads of state and government. From 2006 to 2012 there were no fewer than six new Prime Ministers, including Abe's first unremarkable term in office.

Indeed, voters could have a say in all of this pretty soon. New parliamentary elections must be held by October 2021, with the Prime Minister free to set the exact date. With Suga's new government poll with an approval rating of around 60 percent despite the relative lack of charisma, that could come sooner rather than later. Suga won't lose sight of the fact that for most Japanese prime ministers in recent years the support rate has been a fairly straightforward downtrend since taking office, with Abe being a notable exception.

Another structural problem for Suga could also play a big role as he tries to get the economy going: What growth can a shrinking country actually achieve with the added pressures of COVID-19? The chief economist of Deutsche Bank Group in Tokyo, Kentaro Koyama, believes the government needs to lower what is known as the "potential growth rate" for Japan, the growth rate that is seen as the likely maximum in the long term. The potential growth is now only 0.9 percent.

"It may be an uncomfortable truth for the government that the decline in potential growth among Abenomics has occurred," Koyama said in a recent report. "We believe a downward correction is inevitable at some point." That will give Suga even more food for thought as he tries to juggle the electorate, the backroom powers in the party, and the numerous bureaucracies that don't want to see the fundamental structural changes Japan needs.

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